Thursday, April 18, 2013

Will Private Equity Managers Buy Freedom Group?

Will Private Equity Managers Buy Freedom Group?

It may turn out that the new owner of Freedom Group, the gun manufacturer, is very closely related to the old group of owners.  According to published reports[1] [2], Stephen Feinberg, the CEO and CIO of Cerberus Capital Management, is preparing a bid for the company, which is owned by one of the funds that his company manages.  Apparently, Mr. Feinberg and his colleagues are gathering a group of wealthy investors to join them in buying the company. 
A List of Wants (1999)
Last December after the Newtown shooting, a number of large pension plans immediately put pressure on Cerberus to sell Freedom Group, the gun manufacturer.  I questioned the efficacy of pushing for divestiture:

Rather than being lauded for their efforts, the trustees and politicians should be lambasted.  They haven’t done anything to advance their stated objective of fostering gun control.  They’ve just ducked the issue and asked Cerberus to pass the problem on to a new group investors.  Meanwhile, they’ll pocket a nice return on the sale of guns, bullets, and silencers.  Cerberus looks like it is being responsive and doing something difficult and may be even financially painful.  I doubt it.  “Divesting Gun Ownership: Public Funds Deserves No Credit” [12/19/2012]

Mr. Feinberg may believe that he is doing a financial favor for his investors by creating a potential buyer for the company.  Perhaps the auction process for Freedom Group has not surfaced very much interest.  Obviously, there’s a conflict of interest when a money manager acquires a company from one of its funds.  Not to worry; Cerberus and Lazard, the investment banker on the deal, will construct a process to make sure that the conflict of interest is ameliorated.

The conflict of interest is the least of the problems with Mr. Feinberg’s proposal to buy Freedom Group from his investors.  Rather, the sale of Freedom Group to a group of spectacularly wealthy money managers will demonstrate just how inept the folks are who oversee public pensions.  As investors in Freedom Group, the public pensions and other investors had a semblance of control of over the company, its products, and even its public policy positions.  Rather than choosing to exercise some control, they opted to wash their hands of the investment.  Cerberus was more than happy to oblige them, and now Freedom Group may fall into the hands of people who care about only one thing: money.

If public pension plans really cared about gun control and the products manufactured by Freedom Group, they’d follow Mr. Feinberg’s lead and put together a consortium of like-minded investors to buy the company.  Freedom Group may be sold to another gun manufacturer, to another private equity fund, or to Mr. Feinberg and friends.  Under any of these outcomes, I’m sure the trustees and senior staff at public pension plans will sleep better knowing that the manufacturer of a semi-automatic weapons, silencers, and high capacity clips are in the hands of a new owners who want to rapidly expand these businesses.

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