For Press-Shy Cerberus, Gun Industry Investment Brings Unwanted Attention
Stephen Feinberg, co-founder of $20 billion private equity firm Cerberus Capital Management, likes to be invisible and hide religiously. “If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person,” Feinberg once said. “We will kill him. The jail sentence will be worth it.”
But following the massacre in Newtown, where a gunman used a rifle manufactured by a company purchased by Cerberus to kill little children, Feinberg’s New York private equity firm has been getting lots of attention from the papers. Reporters like Dan Primack and Andrew Ross Sorkin were quick to point out the Cerberus connection to the Bushmaker AR-15 semi-automatic rifle, and Eliot Spitzer wrote that it was “time to target Cerberus, the private equity firm that dominates the gun industry.”
Cerberus announced on Tuesday that it would be selling Freedom Group, Cerberus’ roll-up company of gun manufacturers. “We have determined to immediately engage in a formal process to sell our investment in Freedom Group,” Cerberus said in a statement on Tuesday. “We believe that 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.”
On the surface, it appears Cerberus might be reacting because it’s concerned about its relationship with its investors. The California State Teachers’ Retirement System, a big investor in Cerberus’ funds, said on Monday that it was reviewing its investment in Cerberus. The private equity industry today is fueled with pension fund money and that means big shot private equity dealmakers need to be much more careful about the social impacts of their investments and their firms’ general public image.
This dynamic appears to have played a big role in Cerberus’ Freedom Group venture in the first place. Private equity firms have been rolling up American industries for years, creating platform companies in sectors ranging from restaurants to chemicals. But in recent years it has been harder and harder to find new American industries in which to pursue these kinds of strategies. For Feinberg and Cerberus, one way around this problem was to invest in an industry that most pension-fund backed private equity firms dared not touch. In 2006 Cerberus purchased Bushmaster for some $76 million and got started.
But Feinberg may have miscalculated the risk of investing in the gun industry. For its part, Cerberus says in its statement that it is now uncomfortable playing a role shaping gun control policy. Bloomberg News reported that Feinberg’s father, Martin Feinberg, lives in Newtown. Even though Freedom Group appears to be financially successful, Cerberus will now have to sell its stake in the company as a desperate seller. In addition, it seems unlikely that any other private equity firm will be interested in buying these gun assets. Given that most private equity portfolio sales these days involve deals between private equity firms, Cerberus has an extraordinary tough sell on its hands.