At the gates of hell

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: Naming yourself after the three-headed dog that guards the gates to hell was, perhaps, asking for trouble. Cerberus, the private-equity beast in question, now finds itself at the centre of a fierce debate about whether corporate America is in for a hellish time, as the credit crisis spreads from financial services to the rest of the economy.

Only months ago Cerberus was praised as the saviour of the American car industry when it bought Chrysler from its German owner and struck a remarkable deal with the unions to cut jobs and benefits. But on November 20 it emerged that Cerberus’s bankers had abandoned efforts to sell $4 billion of the debt it took on when it bought Chrysler. Investors turned up their noses even when offered a 3% discount.

Cerberus has also been hit by growing problems at GMAC, the financing arm of General Motors, in which it bought a 51% stake for $14 billion last year. GMAC reported a net loss of $1.6 billion for the third quarter, up from a loss of $173 million in the same period last year. More controversially, on November 14 Cerberus pulled out of a $4 billion deal to buy United Rentals, a power-tool rental firm. This provoked so much criticism that the famously secretive private-equity firm broke its vow of silence, telling the Wall Street Journal that the attacks on its credibility and integrity were “unfounded” and that it still has “more than $10 billion of available liquidity”.

What happens to private equity may be a leading indicator of how the crisis in the financial system will affect the rest of the business world, both because private-equity deals are so dependent on large amounts of debt, and because many of the shrewdest judges of corporate value work for private-equity funds. The number of new private-equity deals has plunged with the financial crisis, and nobody expects activity to pick up again soon. The collapse of deals suggests that the business climate has changed sharply.