Oct. 21 (Bloomberg) -- Cerberus Capital Management LP, the private-equity firm that's in talks to sell Chrysler LLC, may keep the company's finance unit in an effort to make the most of its ill-timed foray into the auto industry, according to two people familiar with the matter.

The New York-based firm's negotiations with General Motors Corp. are focused on combining auto production, and a transaction may not include Chrysler Financial, said the people, who asked not to be identified because the discussions are private. Cerberus is also talking with Nissan Motor Co. and Renault SA about a linkup, the people said.

While shedding Chrysler would mark a retreat by Cerberus from the largest private-equity investment in auto manufacturing, retaining the vehicle-lending unit would play to its strengths in finance. The firm, managed by former Drexel Burnham Lambert Inc. banker Stephen Feinberg, bought Auburn Hills, Michigan-based Chrysler for $7.4 billion in 2007, following its $7.4 billion purchase of a majority stake in GMAC LLC, the finance unit of Detroit-based GM, in 2006.

``Financing is a better business for them,'' said Paul Schaye, managing director of New York-based Chestnut Hill Partners, which helps private-equity firms find deals. ``The automotive industry came to a screeching halt, so it makes sense to get rid of the bricks and mortar and become the automotive bank.''

Feinberg put as much $4 billion into GMAC and Chrysler before they were battered by the subprime-mortgage collapse and rising gasoline prices.

Equity Stake Possible

Cerberus may seek an equity stake in a combined Chrysler-GM and may put cash into the new company, according to one of the people familiar with the talks. Additional funding may be needed as the automakers seek ways to pay for potential job cuts related to a merger as sales fall and credit markets stay tight.

Officials at Cerberus, GM and Chrysler declined to comment.

Cerberus has bought companies in a variety of industries, including financial services. The firm controls Japanese lender Aozora Bank Ltd. and is part of a group that owns Bermuda-based reinsurer Scottish Re Group Ltd.

Since buying Chrysler in 2007, Cerberus has held discussions about strengthening ties between GMAC and Chrysler Financial, according to people familiar with the firm's thinking. Those efforts have stalled in part because of GMAC's Residential Capital LLC mortgage unit, which has fought to avoid bankruptcy amid the global credit crisis and a U.S. housing slump.

Feinberg's Resolve

JPMorgan Chase & Co. and Citigroup Inc., based in New York, are advising Chrysler and Cerberus in their discussions with GM and other automakers. Morgan Stanley and Evercore Partners Inc. are advising GM. JPMorgan and Citigroup are among the Wall Street firms that helped finance Cerberus's Chrysler purchase and still hold some of the debt.

Feinberg has assured his investors that Cerberus is prepared to weather the current markets, even as it writes down the value of some holdings.

``We have aggressively taken significant markdowns in our private companies where appropriate,'' Feinberg wrote in a letter to investors dated Sept. 25. ``We believe we are marked conservatively and will continue to be aggressive in taking markdowns if the bad market continues and when appropriate.''

Still, Feinberg struck an overall optimistic tone in the 13-page letter, a copy of which was obtained by Bloomberg News. He pointed specifically to finance-related investments in the mortgage and loan markets as areas where Cerberus may make further moves.

``We are seeing both the value of all financial assets being questioned and routed along with a massive and rapid financial delivering,'' Feinberg wrote. ``This combination puts horrible stress on the systems and creates nothing short of incredible buying opportunities.''

To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net

Last Updated: October 21, 2008 15:52 EDT