Eliot Spitzer and a few others think that Cerberus Capital Management’s decision to sell Freedom Group is a good sign— that if you pair an enraged public with a tuned-in LP, you can force private equity firms to define their ethical duty beyond the most narrow sense of returning the most dollars possible to investors. It may be a sign, but not of that.
Firms like Cerberus won’t now begin to divest every company in their portfolio presenting complicated ethical issues. They know that, as Patrick Radden Keefe says at The New Yorker, “Our collective indignation has a half-life—and it isn’t long.” Just wait it out. In any case, why give up access to such a lucrative sector, especially with an easy retort so close at hand: it’s impossible to satisfy every shareholder’s or LP’s peculiar ethical standards. Vanguard said precisely that just now to justify its decision to maintain investments in Smith & Wesson.
So why didn’t Cerberus respond like Vanguard? Contrary to what Spitzer says, the real surprise is that Cerberus instead chose to sell Freedom Group, which through its brands sells the most guns and ammo in the US, including the gun used in Newtown. (The other surprise in all this is that Martin Feinberg, the father of Stephen Feinberg, co-founder of Cerberus, lives barely 6 miles from Sandy Hook elementary.)
Clearly, Cerberus forecast a worse-than-usual threat to business — in the form of suddenly vocal LPs, hearings and bills, new laws and regulations — and if so, the shootings merited a strong, preemptive response. But Cerberus isn’t Dick’s Sporting Goods, an in-the-headlines player in the gun market. Dick’s interacts daily with thousands of consumers, all of whom know that it sells guns, Bushmaster included. Cerberus stands apart, owning gun makers, but without any lasting public cognizance of the fact.
Free from the constant, penetrating glare of the pubic eye, and free from having to interact directly with consumers like Cabela’s, another prominent gun retailer, Cerberus is like any other private equity investor, focusing myopically on the IRR. The rare times a firm actually considers the ethical or moral questions posed by a disaster made possible in part by its activities, it does so by adroitly framing its role as, ahem, owner, as being a mere caretaker of its LPs’ interests.
Cerberus did this, of course, but using the most blandly formal language I think I’ve ever seen in such a press release: “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.” ”Formal charter” has got to be a first. And notice the sly way that Cerberus distances itself from Freedom Group? Suddenly, Cerberus is just working on behalf of investors “whose interests we are entrusted to protect,” not a savy investor who saw dollar signs in a gun maker and who as owner was instrumental in transforming it into a dominant player.
So Cerberus intends to sell Freedom Group. Okay, but don’t expect a habit to develop. If you know private equity, you know how little influence LPs choose to exert on GPs in this sense. All the retired teachers and firefighters, to take just one significant bloc, to whom pension funds must ultimately answer, would have to finally inform themselves of how their money is being used. Until that happens, pressure on private equity firms will only be sporadic, and last only until the next big story takes over the headlines.
In its statement, Cerberus said;
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. The debate essentially focuses on the balance between public safety and the scope of the Constitutional rights under the Second Amendment. As a Firm, we are investors, not statesmen or policy makers. Our role is to make investments on behalf of our clients who are comprised of the pension plans of firemen, teachers, policemen and other municipal workers and unions, endowments, and other institutions and individuals. It is not our role to take positions, or attempt to shape or influence the gun control policy debate. That is the job of our federal and state legislators.
There are, however, actions that we as a firm can take. Accordingly, we have determined to immediately engage in a formal process to sell our investment in Freedom Group. We will retain a financial advisor to design and execute a process to sell our interests in Freedom Group, and we will then return that capital to our investors. 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.