Private Equity: The Bankruptcies Begin

Just how smart is Stephen Feinberg, the principal of Cerberus Capital? Portfolio's Daniel Roth tells us:

On Wall Street, the C.E.O. of Cerberus Capital Management, an investment firm with $26 billion in assets under management, has long been admired. (“You probably think you’re smart,” says one former employee. “Now take your brain and mine, take them to the 28th power, and you have Steve Feinberg.”)

Wow. A brain to the 28th power? Is that a bit like a 25-standard-deviation event? I only ask because Mr Feinberg might not be feeling so particularly clever this morning, after Aegis Mortgage Corporation filed for bankruptcy, owing more than $600 million to its creditors. Among those creditors is Madeleine LLC, owed $178 million in unsecured debt and very unlikely to see any of it.

Madeleine is a part of the Cerberus empire, it turns out, and owns 81% of Aegis. I don't know how much money Feinberg paid when he bought Aegis, but all that is now surely gone as well.

But let's not concentrate too much on the Feinberg-specific schadenfreude and miss the bigger story, which is this: companies owned by private-equity shops are defaulting, now. And those shops include big names like Cerberus.

Lenders have gotten a little starry-eyed in recent years, as private-equity principals willing to pay eight-figure sums in M&A advisory fees have persuaded them to fork over billions of dollars to overleveraged companies. I'm sure the bankers told themselves that these private-equity types make lots and lots of money – and that the only way they can continue to make money is if their portfolio companies don't do things like file for bankruptcy.

Well, so much for that theory.