The Cerberus Decision: Corporate Character Front and Center

What is the most surprising aspect of Cerberus’s decision to sell Freedom Group, the manufacturer of the gun used in the Newtown tragedy? Was it the very public prodding from CALPERS, a major investor in Cerberus? Was it the speed at which the decision was taken, even before a shocked nation could make sense of it all? Or was it just the fact that private equity, often characterized as insular and, well, “private”, took such a public and eye catching stance? Probably a little of all three, but mostly, I believe, the most significant aspect was the coming of heightened institutional activism, in a very prominent way, to private equity.

Cerberus, a private equity and hedge fund that manages more than $20 billion, like many PE firms, is no stranger to taking stakes in controversial companies or industries. In fact, PE has had major holdings in the gun and firearms industry for years. For example, Sciens Capital Management and a Credit Suisse fund jointly own Colt Defense, a weapons maker for law enforcement and the military, and MidOcean Partners controls Bushnell Outdoor Products, a purveyor of all manner of supporting “products” for weapons. Let’s not forget, too, that KKR was a long time holder of cigarette maker, RJR, and stubbornly held on – in the face of healthcare industry and government concerns – as long as tobacco companies continued to rack up meaningful returns.

All this has changed abruptly with the Cerberus decision to dispose of Freedom in what may well be a fire sale to a non-US buyer. The Cerberus action, prompted largely by investor concern and public outrage, signifies a definitive break with the predominant PE past, where investors looked the other way as long as their returns were guaranteed. It is clear that the days are gone when alternative investors could make (and raise) money at all costs, under the radar screen. Real accountability for the intangible notion of “corporate character” has arrived – whether PE firms like it or not.

Apart from pressure by institutional investors, I suspect the Cerberus decision was also influenced by the personal circumstances of the firm’s CEO, Stephen A. Feinberg, whose father lives in Newtown. But, nonetheless, the Cerberus move certainly marks a new era in the alternative investment space. We have now entered, four square, into a reality where PE firms recognize – reluctantly or not – that reputation matters and that institutional investors will embrace or reject firms not only based on investment track records, but also on corporate character.

While the response from government entities, activists and the general public to the Cerberus decision was largely positive, let’s keep in mind that it came about in a maelstrom of public scrutiny and collective sadness. It is true, of course, that alternative investors have been slowly moving in this direction for years, but the Cerberus decision – whatever its motivation – has changed the game forever. In the end, its decision to sell Freedom, potentially at a loss, will be cited as a case study for a PE firm that viewed reputation and corporate character – even if driven by outside forces – as a factor to be considered.

Jennifer Prosek is the founder and CEO of Prosek Partners. Opinions expressed here are entirely her own.

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