10/05/2011

Cerberus Vehicle Slow in Cashing Out LPs

A Cerberus Capital hedge fund is behind schedule in its plan to meet some $3 billion of redemption requests that limited partners submitted during the financial crisis.

The vehicle, Cerberus International, had some $5 billion of assets when investors headed for the exits in late 2008 and early 2009. Because the fund’s holdings are illiquid, Cerberus transferred some $3 billion of the assets to a special-purpose vehicle and set a timetable for gradually liquidating the stakes. Specifically, the fund operator told investors it would sell one-quarter of the assets each year beginning Oct. 1, 2009.

According to that schedule, half of the assets should have been liquidated by now. In fact, only about 35% of the vehicle’s positions have been sold. Instead of completing the liquidation process in four years, it now looks like the vehicle won’t be fully unwound for at least six years, assuming the recent market turmoil doesn’t get any worse.

The New York firm has blamed the delay on several factors, including the March 11 earthquake and tsunami in Japan, where it owns stakes in several companies. But some investors say they’ve heard enough.

“They’ve always got their excuses,” said one disgruntled LP.

Cerberus International, launched in the early 1990s, makes private-equity like investments in companies around the globe. But the financial crisis highlighted a liquidity mismatch between the fund’s underlying assets and the redemption schedule offered to investors.

Of the $2 billion of assets remaining in the original fund, about $1 billion represents profits the manager has accumulated over time. Despite the liquidity issues, the fund has continued to perform well — up about 8% so far this year, with an 11.1% average annual return. The fund apparently booked a hefty profit in June, when it sold its remaining stake in Talecris Biotherapeutics.

In moving redeeming investors into the special-purpose vehicle, Cerberus agreed not to charge a performance fee, and to lower its management fee to 0.5% of assets, from 1.5%. But even that’s too much for some limited partners. “I think it’s reasonable for them to charge no fees,” an investor said. “They’ve made plenty.”

Some investors have sought a quicker exit via the secondary market. In July, for example, HSBC brokered the sale of $100 million of Cerberus fund stakes, including shares of Cerberus International. An institutional buyer acquired the lot for 74 cents on the dollar.

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