Is Chrysler The Worst PE Deal Ever?

In the past 48 hours, I’ve received more than a dozen variations of this email from Randy: “You wrote last year that TPG’s investment in Washington Mutual was the worst private equity deal ever. Does Cerberus’ investment in Chrysler now take the title?”

What I find so interesting about the question is that I was first asked it during an NPR interview two years ago (just as the deal was becoming official). The phrasing of that query was more speculative, of course, but I’ll answer now as I answered then (save for different tensing): No, it’s not the worst private equity deal ever, although it’s probably in the top three for hubris.

Before continuing, let me stipulate that Cerberus/Chrysler may indeed have been the largest money suck in PE history. But we just don’t know, because (a) Cerberus’ out-of-pocket has never been disclosed, and (b) The fate of Chrysler Financial is not yet sealed. In other words, this question has to be answered qualitatively rather than quantitatively.

In general, there are two types of mega-buyouts: Buyouts of strong companies that the PE sponsor plans to make stronger, and buyouts of weak companies that the PE sponsor is charged with saving. Chrysler was clearly in that latter category. In fact, it was such an albatross around Daimler’s neck, that (from a pure market cap perspective) it essentially paid Cerberus to take the majority stake of its hands. This is the Manny Ramirez to the Dodgers scenario, where the Red Sox paid his contract through all of last season, just to be rid of him.

In other words, Chrysler was dying long before Cerberus showed up. Moreover, the buyout occurred before the economy turned sour, which has led to struggles for even the heartiest of automakers (as opposed to TPG/WaMu, which occurred after things had turned to pot).

I’m not suggesting that Cerberus did an admirable job, or that it is blameless. It did not, and it is not. And Cerberus was certainly tone-deaf to think it could buy such an iconic American company without having to come out from its self-confined shadows.

But this was a turnaround attempt from day one, and an extreme longshot at that (if it was obvious to me during that NPR interview, it must have been obvious to Cerberus). I also don’t see it as having much of a aobering effect on the industry at large, since it was always such an outlier (as opposed to WaMu, which was a type of deal most big firms were either doing or thinking about doing).

So feel free to send me emails in CAPS about how I’m letting Feinberg and company off the hook, but I simply see this as a very bad private equity deal. Not the worst one.