Cerberus loses bet on Chrysler

By Megan Davies - Analysis

NEW YORK (Reuters) - When Cerberus Capital Management struck a $7.4 billion deal to buy Chrysler in May 2007, it made a big, risky bet that it could succeed in turning around an American icon.

It declared that the carmaker would benefit from life out of the spotlight, without the pressure of quarterly reporting.

"Our capital is patience," Cerberus Chairman John Snow said on striking the deal.

But the failure of the No. 3 U.S. automaker could not have been a more public black eye for the private equity firm that has struggled for the past two years to make the investment work.

"This is what happens when you make an investment in a highly cyclical business at the peak of a cycle," said Steven Kaplan, a professor of finance specializing in private equity at the University of Chicago. "It's very risky and often ends badly and this one did."

Cerberus has never disclosed what its exposure to Chrysler is, but it is far less than the deal value because the company bought it along with a number of co-investors.

None of Cerberus' investments make up more than 5 percent of its total assets, a source familiar with the matter said.

That makes its exposure to Chrysler and Chrysler's financing arm as much as $1.7 billion, and it is possible that Cerberus makes some return on its investment in Chrysler Financial.