Cerberus founder sees smaller funds, feels PE overpays

By Megan Davies

BOSTON, (Reuters) – Cerberus Capital Management’s co-founder Stephen Feinberg said he expects to reduce the firm’s fund size in the future since being smaller and more nimble means returns can be maximized, and that he was almost embarrassed at how much private equity overpays executives.

Large funds sometimes draw criticism from investors in private equity for being potentially less motivated to make money as the funds generate so much in fees.

“I do think there’s an issue here in funds that are too large and funds that have acquired too many assets under management,” Feinberg said at the SuperReturn private equity conference in Boston Tuesday.

“If your goal is to maximize your returns as opposed to assets under management, I think you can be most effective with a big company infrastructure and a little bit smaller fund size,” Feinberg said in a rare public appearance.

“In general, I think that all of us are way overpaid in this business. It is almost embarrassing,” he said, adding that even with a smaller fund incentive fees are quite substantial if the investments do well.

Private equity firms raised huge funds during the credit boom of 2005-07, using funds raised to strike multibillion-dollar leveraged buyout deals.

The credit crisis constrained investors’ ability to commit funds to private equity and reduced the firms’ ability to do large deals. Fund sizes have been shrinking since. Blackstone Group, for example, recently raised about $15 billion for its latest buyout fund — smaller than the mammoth fund of about $20 billion raised during the boom.

Firms typically charge a fee of about 1.5 percent to 2 percent of the fund size, and take about 20 percent of the profit, which means the larger a fund becomes the larger is the fee income.

Cerberus, founded in 1992 and named after the mythical multiheaded dog that guards the gates of the underworld, raised a $7.5 billion fund in 2007.

“Our goal is to significantly bring down our fund size, we’ll do that going forward,” Feinberg said. “It’s easier to be a little smaller.”

Feinberg did not give any specifics on how big he expects Cerberus’ next fund to be. He declined further comment on the sidelines of the conference

Asked whether having multiple funds — as opposed to just one flagship fund — encourages investment staff to secure better returns, Feinberg said they are compensated enough already. Once in a while, the firm raises a smaller fund that is outside its main investment fund, he said.

“The best way to do it is to have a large company infrastructure and have all the people that can really provide the breadth and depth,” said Feinberg, who gives interviews infrequently and has been photographed only a few times by news photographers.



Feinberg said he sees significant opportunities for investing around the world, such as buying loan portfolios from banks in Europe, middle market deals in the United States and potentially deals in Japan.

“For the first time, Europe is really starting to clean up some of the problems they have and there are a lot of large loan portfolios for sale, so we’re talking with a lot of the banks. There are many private middle market transactions in countries like Spain, Italy, Ireland and even in Germany,” he said.

In the United States, he said Cerberus focuses on the middle market where “there isn’t as much liquidity.” In that segment, the deal flow is starting to pick up, he said.

However, he sees corporate distressed opportunities as ”pretty fully priced” and said the opportunities for doing large buyouts “if not overpriced are very competitive.”



Cerberus became well known for a $7.4 billion deal it struck in May 2007, along with a consortium of co-investors, to buy a 80.1 percent stake in U.S. car maker Chrysler and its financing arm Chrysler Financial.

Chrysler was pushed to the brink of liquidation in 2009 before a bailout that was the subject of intense debate within the Obama administration. Cerberus lost control of the automaker during its restructuring.

In December 2010, Cerberus struck a deal to sell Chrysler Financial to Toronto-Dominion Bank for $6.3 billion. A source close to Cerberus said at the time that deal meant the private equity firm would end up close to break-even on its investment in Chrysler as a whole.

“We have made our mistakes and we’ve made our share and we’ve gone into some situations that are just too tough,” Feinberg said, without elaborating which situations he was referring to.

Cerberus has made many other investments besides Chrysler, however, in sectors such as banking, transportation, real estate and media. It has a number of investments in the United States, Europe and Japan.

Some of its investments have included film maker Spyglass Entertainment; insurer Scottish Re, bus manufacturer Blue Bird and aircraft leasing firm AerCap Aviation Solutions.

Feinberg, a Princeton graduate, worked at bond trader Drexel Burnham Lambert before co-founding Cerberus in 1992. (Reporting by Megan Davies, editing by Dave Zimmerman and Paritosh Bansal)