Cerberus Capital Management is leaving Germany with its tail between its legs. The U.S. private equity investor late on Monday offloaded roughly two-fifths of its holdings in Deutsche Bank and Commerzbank at a loss of around 20%. The poor payoff from a four-year investment highlights the difficulty of forcing change at large banks, as well as the limits of the group’s own strategy.
at a loss of around 20%. The poor payoff from a four-year investment highlights the difficulty of forcing change at large banks, as well as the limits of the group’s own strategy.
Run by co-Chief Executives Stephen Feinberg and Frank Bruno, Cerberus snapped up the stakes in 2017. Buying minority holdings in publicly listed banks looked like an odd move for a private equity group, but the trade had some logic. Deutsche and Commerz were trading with bargain-basement valuations of 50% and 40% of respective forward tangible book value at the start of that year. A potential rise in interest rates looked set to push up lending margins.
Yet monetary policy is now looser than in 2017, and Germany’s overbanked economy is just as tough for lenders. A merger was scrapped for being too complex, and both companies’ standalone rescue plans have been arduous. They now trade at roughly the same multiple of tangible book value as at the start of 2017.Cerberus struggled to make much of a mark on either lender. With a 5% stake in Commerz, and a 3% holding in Deutsche, the U.S.
The timing of the exit also looks odd. Granted, Deutsche and Commerz shares have rallied recently, allowing Cerberus to limit its losses. But the market is not yet giving either credit for their turnarounds. Deutsche, for example, is targeting an 8% return on tangible equity this year, which argues for a valuation closer to 80% of tangible book value rather than the current 50%.
Perhaps Feinberg and Bruno doubt the targets. Alternatively, they may have to hand money back to their own investors: it will soon be five years since they made the outlays, close to the typical investment period of a private equity fund. Either way, it looks like a premature end to a painful investment.
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