October 14, 2019

Gun Control News Makes Hedge Funds Unload

Houston Gun Show

A once common site of a "gun show" is now a thing of the past thanks to one hedge fund selling its stake in a gun company.

The nation no longer has to worry about guns. Following mass shootings last year, gun control dominated the news. Some managers must have felt the heat because they divested of investments in gun companies. The New York Times, known for their unbiased political stances, basically ran the headline, “Gun Control News Makes Hedge Funds Unload.” Peter Lattman summed up one hedge fund’s move.

Cerberus decided to make a clean break and sell the gun company. “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,” the firm said in its statement.

Cerberus, a private equity and hedge fund firm that manages more than $20 billion, is owned by the billionaire financier Stephen A. Feinberg. It is not clear whether Mr. Feinberg will find a ready buyer for the Freedom Group. Over the last two days, shares of the publicly traded American gunmakers, Sturm, Ruger & Company and Smith & Wesson, have dropped precipitously on fears of increased gun regulation. Several foreign gun manufacturers, including Forjas Taurus of Brazil and Heckler & Koch of Germany, could be possible acquirers, according to a banker familiar with the weapons industry.

This is hardly the first time that the publicity-shy Mr. Feinberg has come under scrutiny because of a Cerberus holding. In the last decade, during the peak of the leveraged buyout boom, Cerberus made national headlines after buying two of the country’s best-known companies, the automaker Chrysler and the finance arm of General Motors.

Having made those acquisitions just before the financial crisis struck, Cerberus suffered losses on both deals, and Mr. Feinberg told his clients that the firm would in the future stay away from such prominent investments.

Despite that vow, Mr. Feinberg again has found himself in an uncomfortable spotlight. The Freedom Group’s origins date to 2006, when Cerberus acquired Bushmaster Firearms. The firm then consolidated the fragmented gun industry, acquiring at least six other brands and rolling them into one company to create the Freedom Group, which is based in Madison, N.C. Freedom is on track to post about $900 million in revenue this year.

Mr. Feinberg has a penchant for investing in military-related businesses. Cerberus’s holdings include the military contractor IAP Worldwide Services and the satellite provider GeoEye. Cerberus also explored an investment in Blackwater USA, the private security contractor since renamed Academi, but a deal never materialized.

The son of a steel salesman, Mr. Feinberg, 52, was raised in Spring Valley, N.Y., in Rockland County. After graduating from Princeton, he started his Wall Street career working at Drexel Burnham Lambert during the bank’s heyday in the 1980s. After developing a specialty trading in the distressed debt of troubled companies, Mr. Feinberg struck out on his own to start Cerberus.

Though the Freedom Group was unable to complete its initial public offering, the deal has been largely successful, with Cerberus already making a small profit via a dividend payment, a person briefed on the investment said.

With Cerberus saying “No” to guns, potential mass murderers have subsequently decided against purchases. Schools are safer and homes that would be potentially protected against intruders are ironically less safe than they otherwise would have been had Cerberus continued to maintain its holdings in Freedom Group.

Yet perhaps more importantly, Cerberus’s biggest investor in California, Calpers, is happy. So really it’s not “Gun Control News Makes Hedge Funds Unload” – but rather “Hedge Fund Does What Biggest Investor Wants So Fees on Assets Don’t Fall.”

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