July 14 (Bloomberg) -- Cerberus Capital Management LP's newest fund fell 1 percent since starting in November 2006, hurt by stakes in unprofitable companies including Chrysler LLC that may prevent the private-equity firm from matching past returns.

The $7.5 billion Cerberus Institutional Partners Series Four lost $32 million on $3.3 billion in investments through March 31, the New York-based company said in a presentation to investors last month, a copy of which was obtained by Bloomberg News. The Standard & Poor's 500 Index, a gauge of the largest U.S. stocks, fell 5.6 percent in the same period.

Founder Stephen Feinberg plowed as much $4 billion into automaker Chrysler and GMAC LLC, the former vehicle- and home- lending arm of General Motors Corp., before they were battered by the subprime-mortgage collapse and gas prices that rose 34 percent in the past year. He may be forced to hold them longer than planned, leaving profits below those of earlier funds, which returned as much as 28 percent a year to investors.

``They're at the epicenter of major problems in the financial system,'' said Sean Egan, managing director of Egan- Jones Rating Co. in Haverford, Pennsylvania. ``Reasonable people can assume there has been a major downdraft in values.''

It's too soon to judge the performance of the new fund, Timothy Price, a Cerberus managing director, said in a July 11 telephone interview.

``This is a challenging time, but it's ludicrous to try to measure the future success or failure of a long-term fund after 15 months of investing,'' Price said.

Patient Investors

In a letter to investors in January, Feinberg said Series Four is diversified and ``its overall success does not depend on the future of GMAC, Chrysler or any other single investment.

Feinberg, 48, a former Drexel Burnham Lambert Inc. trader, started Cerberus in 1992. The firm manages $26 billion in private equity and hedge funds.

Investors who've made money with the firm in the past, including the Pennsylvania Public School Employees' Retirement System, noted that private-equity funds can take years to pay off.

``It is a fairly recent fund, early in its cycle, and you don't usually see much distributions until further into it,'' spokeswoman Evelyn Tatkovski said in an e-mail.

The Pennsylvania fund, also known as PSER, more than doubled its money in one Cerberus fund and has made about 25 percent in another, Tatkovski said. PSER's $178 million stake in Series Four, part of a $400 million commitment to the latest fund, shows a $284,722 loss because of upfront fees.

Cerberus's $7.4 billion purchase of 80.1 percent of U.S. automaker Chrysler last year was preceded by an equal sum spent for 51 percent in 2006 of GMAC.

Limiting Risks

The firm makes such purchases with partners to limit the risk to investors and itself. Of $15 billion to buy Chrysler and GMAC, the firm put up between $3 billion and $4 billion, said a person with knowledge of the deals. No single investment is more than 5 percent of any fund's committed capital, so Series Four's Chrysler stake could be no more than $375 million, they said.

Chrysler is doing better than expected, with an operating loss of $300 million through April this year, or less than half the amount Cerberus budgeted for, according to data from the annual meeting. Chrysler Financial had a $214 million profit on operations in the first quarter.

The company is eliminating about 1,500 jobs by closing a minivan plant in St. Louis and scaling back production at another factory, affecting about 900 jobs.

``We have the right plan,'' the presentation states.

Residential Capital LLC, GMAC's mortgage unit, lost $5.3 billion during the past six quarters in the worst housing slump since the 1930s. Those issues have stalled discussions about combining GMAC with Chrysler Financial, a move that potentially would help cut costs and boost profit.

Past Returns

Cerberus's most successful fund is the $160 million Cerberus Institutional Partners (America) Series One, started in August 2001. It made an annualized 28.3 percent after fees.

The second-biggest fund, the $1.8 billion Cerberus Institutional Partners Series Three, has leveraged $1.5 billion of committed capital into investments costing $3 billion since October 2003. It returned 23.6 percent.

These results, known as the internal rate of return, were calculated by marking the investments to market, based on the general partners' judgment of fair value. A ``substantial number'' of the company's funds are audited twice a year, according to the annual report.

Other Stakes

Cerberus has stakes in companies that generate $100 billion in annual sales, including seven CBS Corp. television stations; grocery chain Albertsons LLC, which cost $17.4 billion in 2006 and has been selling and shutting stores; and Austria's Bawag PSK Bank, whose former chief executive officer Helmut Elsner was sentenced to 9 1/2 years in prison this month for misuse of funds. Two Asia funds have assets of $61 million and $305 million.

Egan said it's hard to value Cerberus's Chrysler and GMAC stakes in today's markets.

``There hasn't been any real transaction causing them to change their valuation,'' he said.

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net

Last Updated: July 14, 2008 09:07 EDT