Cerberus forced to sell off gun maker

SITTING in their offices high above New York's Park Avenue late on Monday, the private equity executives who owned the country's largest gun company received a phone call from one of their most influential investors.

By InvestSMART · 20 Dec 2012

By InvestSMART ·
20 Dec 2012

Comments

An official at the California teachers' pension fund, which had $US750 million ($713 million) invested with the private equity firm Cerberus Capital Management, was on the line, raising questions about the firm's ownership of the Freedom Group, the gun maker that made the rifle used in the Connecticut school shootings.

Hours later, in the early hours of Tuesday, Cerberus said it was putting Freedom Group up for sale.

"It is apparent that the Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level," Cerberus said in a statement.

The move by Cerberus was a rare instance of a Wall Street firm bending to concerns about an investment's societal impact rather than a profit-at-all-costs ethos.

Public pension funds such as the California one - officially, the California State Teachers' Retirement System, or CalSTRS - have hundreds of billions of dollars in private equity and hedge fund investments. While their influence is vast, it is usually exerted behind the scenes and rarely prompts snap business decisions.

While concern from Cerberus's investors - as well as a swirl of media attention - had an impact on the decision to sell, the leadership of the private equity firm debated through the weekend on how to respond to the tragedy and its potential fallout. Cerberus decided to make a clean break and sell the gun company.

"We believe this decision allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate that is more properly pursued by those with the formal charter and public responsibility to do so," the firm said in its statement.

Cerberus, a private equity and hedge fund firm that manages more than $US20 billion, is owned by the billionaire financier Stephen Feinberg. His father, Martin Feinberg, lives in Newtown, Connecticut, where the shootings occurred. Bloomberg News quoted the elder Feinberg as saying that the shooting was "devastating" and "horrendous, truly horrendous".

Cerberus said it would retain a financial adviser to sell its interests in Freedom Group and return the sale proceeds to its investors.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

Why did Cerberus decide to sell Freedom Group (the gun maker)?

Cerberus put Freedom Group up for sale after intense media attention and pressure from influential investors following the Sandy Hook school shootings. The firm said the tragedy was a "watershed event" that raised the national debate on gun control and that selling the company would let Cerberus meet its obligations to investors without being drawn into that public debate.

What role did CalSTRS and other public pension funds play in Cerberus's decision to sell?

An official from the California State Teachers' Retirement System (CalSTRS), which had about US$750 million invested with Cerberus, raised concerns about Cerberus's ownership of Freedom Group. The article notes that public pension funds often hold large private equity stakes and can exert behind-the-scenes influence—CalSTRS's concerns were a key factor in prompting Cerberus to act.

How did media attention influence the sale of the gun maker by Cerberus?

The swirl of media attention after the Connecticut shootings increased public scrutiny of Cerberus's ownership of Freedom Group. Along with investor concerns, that heightened publicity contributed to the firm's decision to sell the business rather than remain part of the national debate on gun control.

Who owns Cerberus Capital Management and what size of funds does it manage?

Cerberus is owned by financier Stephen Feinberg. The article says Cerberus manages more than US$20 billion in private equity and hedge fund assets.

What will Cerberus do with the proceeds from selling Freedom Group?

Cerberus said it would retain a financial adviser to sell its interests in Freedom Group and return the sale proceeds to its investors.

Was this sale a typical private equity decision driven purely by profit?

No. The article describes the move as a rare instance of a Wall Street firm bending to concerns about an investment's societal impact rather than acting solely on profit-at-all-costs. Cerberus debated the move internally and chose to make a clean break to avoid the national debate.

What connection did Cerberus's leadership have to the Connecticut shootings?

The article reports that Stephen Feinberg's father, Martin Feinberg, lives in Newtown, Connecticut, where the shootings occurred. Bloomberg quoted Martin Feinberg describing the shootings as "devastating" and "horrendous."

What does the Cerberus-Freedom Group situation mean for everyday investors watching private equity and public pension interactions?

The episode highlights that large public pension funds and media scrutiny can influence private equity decisions. For everyday investors, it shows that non-financial factors—like reputational risk and public policy debates—can affect investment outcomes and prompt firms to divest holdings to protect investor interests.