Private equity isn’t known for squeamishness – or for dumping promising investments. So it’s significant that Cerberus Capital Management is selling its stake in Freedom Group, the largest U.S. firearms maker, following the Newtown school atrocity last week. Gunmakers’ shares are plunging, too: big money is betting on tougher restrictions.
Cerberus in 2006 bought Bushmaster, maker of the semi-automatic rifle used to kill 20 young children and six teachers in the Newtown shooting. It then folded in other manufacturers including Remington under the Freedom Group umbrella. The company has ridden a wave of strong gun sales in the run-up to the presidential election in November. Net revenue for the first nine months of this year was $677 million, an increase of 20 percent from the same period last year. And Cerberus has already reaped some return. In 2010 Freedom Group issued $225 million of debt in the form of PIK-toggle notes and used the proceeds to redeem preferred shares held mostly by Cerberus.
The California State Teachers’ Retirement System said earlier this week it was reviewing its Cerberus investment, with commitments totaling $751 million at the end of March. And no private equity firm wants to lose a giant pension fund backer. But there’s also the question of bad press for the publicity-shy Cerberus and its boss, Stephen Feinberg. In announcing the sale, the firm indicated it didn’t want to be “drawn into the national debate” on gun control. There may even be a personal element: according to a Bloomberg report, Feinberg’s father lives in the Newtown area.
In another response to public feeling, one big gun retailer, Dick’s Sporting Goods, stopped selling semi-automatic weapons nationwide. Meanwhile, Wal-Mart Stores removed some Bushmaster information from its website.
All the same, Cerberus’ decision is primarily about money. Freedom Group rode high on rising demand for guns and, in particular, for pricey semi-automatic rifles. Stiffer gun control measures would hurt, and a ban on assault rifles would certainly eat into profit. Investors in other gun manufacturers are coming to the same conclusion. Smith & Wesson has seen its market capitalization fall about 20 percent since Thursday, the day before the Newtown massacre. And Sturm Ruger’s value has shrunk by some 15 percent. Money talks, and it seems to be saying that Friday’s massacre has brought a sharp turn toward stricter U.S. controls on guns.