Cerberus Left Other Investors Holding the Bag on GMAC and Chrysler

Cerberus, the private equity firm now notorious for making a host of lousy investments at the height of the private equity boom, has apparently grown tired of the relentless negative publicity. A mysterious report has somehow been leaked to the Financial Times revealing that Cerberus sold "significantly more than half" its equity stakes in GMAC and Chrysler to around 90 other unfortunate losers. While this may improve Cerberus' reputation as a shrewd investor, it may have dented its reputation as a trustworthy partner. In fact, some of those who purchased stakes were Cerberus's own investors. I would be interested in being a fly on the wall the next time Cerebrus attempts to raise capital for a new fund:

Cerberus partner: (calling former investor) Hello! Cerberus here. Can we count on you for a substantial contribution to Cerberus Capital Partners We'll-Make-It-Back-Fund I?

Former Investor: Ha ha ha ha ha ha! Hold on please. (puts phone down, rolls around on the floor clutching stomach) Ha ha ha ha! (picks up phone again) Um, no.

Cerberus partner: How about Cerberus Capital Partners We'll-Make-It-Back Fund II?

Former Investor: Click.

According to the Financial Times story, the investors in the GMAC deal extended beyond Cerberus's investors. Other private equity and hedge fund players were interested in piggy-backing on Cerberus's deal. Cerberus invited 50 hedge funds to its office for a presentation outlining the GMAC investment in 2006. Investors weren't given an opportunity to perform much due diligence if they wanted a piece of the deal but were told to "trust" Cerberus. Considered a "hot deal" at the time, many investors chose to trust Cerberus' due diligence and took part in the investment because they were friends of Steve Feinberg, the founder of Cerberus. If I were an investor in a fund where I was forking over management fee after management fee and I discovered that the fund invested in a deal based on a friendship, without performing any due diligence, I would immediately pull my money. Of course, that is easier said than done, as some of the investors on the list are having trouble figuring out where all the money went (Citigroup and DB Zwirn just to name two.) Once again, further evidence that all sorts of absurd activities occur at the peak of any bubble. Something tells me the stories are just going to get better and better...