Says the fast food vendor of financial journalism, BusinessWeek of the GMAC-Cerberus deal: "Feinberg [Cerberus' manager] won the day
in part by accepting risks that every major bank and marquee buyout
firm that GM approached about the deal turned down."
Oh? It is not entirely clear to me that Cerberus took on much risk here at all. I am not alone in this view either, it seems. The stereotypically yummy Abnormal Returns cites DealBook, citing an Institutional Investor article citing Clay Lifflander, President of New-York based hedge fund, Millbrook Capital Management who opines:
"Looking at it, people are having such trouble putting capital to work. It’s clear to me [Cerebus] is betting the ranch in terms of their reputation. They clearly didn’t get this [money] from their fund; they had to go to their limiteds and get co-investments."
I’m starting to think about the dynamic of what’s going on in the [private equity] world: If you have a very limited downside but execute a [business] plan and make a double or triple on one of your deals when no one else would, you look like a genius.
Remember the Cerberus guys are distressed debt guys by origin. And distressed debt guys are really good at protecting their downside and buying low. If it doesn’t work out, they don’t get hurt that bad. If it does work out they get huge pops. That’s their game and this one looks like [Stephen Feinberg] did a pretty good job on it.
There was a time in the height of the 80s buyout crazes where management acumen was less important. Financial structuring was the key to making double and triple digit returns. Load on the debt, streamline waste, exit. The interesting property with buyouts through, say, 2005 is that the addition of "management excellence" was required to meet the same goals. It is beginning to look to me like this is less and less the case. Financial structuring (along with the public debt markets, IPOs and special dividends) are all that is required to capture massive returns.
Well, there may be one other element. As I obliquely implied out in my earlier entry today on cable acquisitions in Europe, a long view might also carry the day. Buy in when an industry is on the outs, impose "adult supervision" even in the face of embedded cultural impediments to anyone doing "real work" (ahem, Germany, France), lend to your acquisition when no one else will to keep it afloat long enough for the recovery and then reap 50% IRRs, even in the face of a 5 year investment wait. This is what an LBO is supposed to look like, I believe. GMAC is a far different flavor of deal. Why? Hedgefund buyer? Vegetable Capital? The flood of cash that has poured into deals? All three?
Art: Hercules and Cerberus, artist unknown, Musée du Louvre.