Profits and Politics: PE Firms Put Gun Investments in the Crosshairs

In the wake of the 2012 shooting at Sandy Hook Elementary in Newtown, Connecticut, Americans turned again to the familiar gun control debate. This time, however, an unlikely player was thrust into the spotlight: private equity firms. As the public conversation about gun violence ensued, the pro-gun crowd stood their ground while the anti-gun lobby clamored for stricter controls on so-called “assault weapons.” Meanwhile, few were aware that America’s largest firearm manufacturer, Freedom Group, was actually a conglomerate owned by private equity firm Cerberus Capital Management.1 The Freedom Group umbrella includes well-known brands such as Bushmaster and Remington.2 In fact, Adam Lanza used a Bushmaster AR-15 rifle in the Newtown attack.3 Besides Freedom Group, other companies in the gun industry are owned or controlled by PE firms. For example, Colt Defense is jointly owned by Sciens Capital Management and another fund run by Credit Suisse.4 In addition, Bushnell Outdoor Products, a firearm accessories manufacturer, is controlled by MidOcean Partners.5

When information about Cerberus came to light, the firm, along with founder Stephen Feinberg, came under pressure by the public and even some of its own investors.6 Having previously identified gun control as one of Freedom Group’s biggest risk factors, many initially expected Cerberus to resist new gun control efforts.7 Perhaps prophetically, Freedom Group had warned investors earlier that, “The regulation of firearms and ammunition may become more restrictive in the future and any such development might have a material adverse effect on our business,” and that “regulatory proposals, even if never enacted, may affect firearms or ammunition sales as a result of consumer perceptions.”8 Surprisingly, however, Cerberus quickly responded to the wave of controversy by announcing its sale of Freedom Group only four days after the events at Newtown.9 Not long before the announcement, the California State Teachers’ Retirement System (CalSTRS), one of Cerberus’ largest investors with over $750 million invested, stated publicly that it was “examining the Cerberus investment to determine how best to move forward” in light of the Newtown tragedy.10 Interestingly, just hours after a phone call between Cerberus and a CalSTRS official, Cerberus announced that it was putting Freedom Group up for sale.11 In response, CalSTRS spokesman Ricardo Duran applauded the decision, saying, “They are taking a very responsible approach to this and we are happy that they’re selling.”12 At the same time, California State Treasurer Bill Lockyer opined that none of the state’s pension funds should own stakes in any companies that make assault weapons.13 In a statement, Cerberus noted that, “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.”14 While media scrutiny and pressure from influential investors played a role in the decision to sell, Cerberus’ management team explored other alternatives to respond to the tragedy. Ultimately though, Feinberg and his colleagues decided that making a clean break and selling Freedom Group was best so that the firm did not feel pressured to advocate against gun control proposals in order to protect its business objectives.15 Indeed, in the immediate aftermath of Newtown, shares of other large gun makers plummeted on fears of increased gun regulation, with Smith & Wesson falling ten percent and Sturm, Ruger & Co. (Ruger) declining nearly eight percent.16 In addition, Wal-Mart and Dick’s Sporting Goods, both major retailers of Freedom Group products, responded to the controversy by stopping sales of certain military-style firearms.17 In a statement, Cerberus explained, “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.”18

Once the decision to sell was made, questions turned to who would acquire Freedom Group. There was speculation that a number of prominent foreign or domestic gun makers would want to add the company’s assets to their own.19 Yet more than a year after its announcement, Cerberus still owns the company, raising the obvious question “why?”20 While a complicated answer, and one not yet directly answered by the company, there are five factors potentially holding up the sale.21 First, the company may be too large. Cerberus created America’s single largest gun manufacturer, making it too expensive for smaller companies like Smith & Wesson or Ruger to buy outright.22 Second, it may be too controversial. Without a strategic buyer, the only other universe of firms able to acquire such a large company would be PE firms. Yet they all rely on fundraising from public pensions like CalSTRS.23 Third, the asking price may be too expensive. Cerberus told prospective buyers that it wanted multiples of late 2012/early 2013 sales, when gun sales and profits soared after Sandy Hook and President Obama’s reelection.24 Freedom Group’s EBITDA almost doubled during that time period, and few buyers were interested in purchasing at such high levels.25 Fourth, the company may be too integrated. While a smaller company might conceivably buy one or two pieces of Freedom Group, the problem is that the company manufactures multiple product lines out of many of the same factories.26 Fifth, Stephen Feinberg loves the business. He is a well-known gun enthusiast, and even proposed buying the company himself at one point, but such a transaction would have run into difficulties with allegations of self-dealing given Feinberg’s position.27

  1. James R. Hagerty, Ann Zimmerman & Sharon Terlep, After Shooting, New Pressure on Thriving Gun Industry, Wall St. J. (Dec. 18. 2012, 8:34 PM),

  2. Andrew Ross Sorkin, Wall Street, Invested in Firearms, Is Unlikely to Push for Reform, N.Y. Times DealBook (Dec. 17, 2012, 10:17 PM),

  3. Id. 

  4. Id. 

  5. Id. 

  6. Id. 

  7. Id. 

  8. Sorkin, supra note 2. 

  9. Peter Lattman, In Unusual Move, Cerberus to Sell Gun Company, N.Y. Times DealBook (Dec. 18, 2012, 5:54 AM),

  10. Sorkin, supra note 2. 

  11. Lattman, supra note 9. 

  12. Id. 

  13. Id. 

  14. Id. 

  15. Hagerty, supra note 1. 

  16. Id. 

  17. Id. 

  18. Lattman, supra note 9. 

  19. Id. 

  20. Dan Primack, Why Cerberus still hasn’t sold its gun giant, Fortune Fin. (Dec. 9, 2013, 12:08 PM),

  21. Id. 

  22. Id. 

  23. Id. 

  24. Id. 

  25. Id. 

  26. Id. 

  27. Id.