Wall Street and gun control problem

As the debate over gun control rages following the horrific tragedy in Newtown, Connecticut, one unlikely group is expected to play a central role in pushing back against any reform effort: the private equity industry.

It is often overlooked, but some of the biggest gun makers in the nation are owned by private equity funds run by Wall Street titans. The .223 Bushmaster semi-automatic rifle that was used by Adam Lanza to massacre 20 schoolchildren was manufactured by the Freedom Group, a gun behemoth controlled by Cerberus Capital Management, named after the three-headed dog of Greek myth that guarded the gates of Hades. Its founder, Stephen A Feinberg, hunts regularly on the weekends with a Remington Model 700.

Besides Cerberus, Colt Defense, which manufactured the .44-40 Colt revolver made famous by John Wayne, is jointly owned by Sciens Capital Management, a fund advised by Blackstone Group (through its credit unit, GSO) and another fund run by Credit Suisse.
On Colt’s website, it markets its Colt New Agent, a laser-scope-equipped handgun that looks like something out of the video game “Call of Duty,” as “ideal for concealed carry.”
Everything for a gun

And then there is MidOcean Partners, a private equity firm that once owned the diet company Jenny Craig that now controls Bushnell Outdoor Products. Bushnell makes just about everything for a gun except the gun itself, for both the hunting and “tactical” markets.

Need a laser scope for your semi-automatic handgun? Bushnell makes one called the Tactical Red Dot: First Strike. How about military-grade night vision goggles? Yep, they have a subsidiary that makes them. Looking for a “loader” for your AK-47? They have you covered. Or what about a magazine for bullets? One of their subsidiaries sells the Hot Lips 10-Round Magazine, which is marketed this way: “Put 10 rounds through your 10/22 faster than the blink of an eye, and reload with amazing ease.”

Perhaps it should not be a surprise, but Wall Street will hardly take a leadership position in the conversation about gun control. The more vocal stances could come from pension funds questioning their investments in gun makers, though they may be loath to take a stand. Since the killings, Freedom Group and other notable gun manufacturers have not commented on the tragedy – not even a basic, “We condemn such violence and pray for the families of Newtown.”

When I called Feinberg, he declined to comment, as did others. About a year ago, the National Rifle Association issued this statement about Freedom and Cerberus: “The owners and investors involved are strong supporters of the Second Amendment and are avid hunters and shooters.”

Cerberus and other funds with ownership stakes in the gun industry would be in an awkward position if they sought reforms that could hurt their investments. Private equity firms have a long history of investing in “sin” companies, including guns, alcohol, gambling and tobacco, in part because the companies often are inherently discounted. Kohlberg Kravis Roberts acquired RJR Nabisco in 1988; the R J Reynolds Tobacco Co. was later spun off.

Eliot L Spitzer, the former governor of New York and the former New York state attorney general, called on Cerberus’ investors to pressure it to try to reform the gun industry. “While Cerberus, whose array of holdings is vast, is generally immune to public pressure and the opprobrium of trafficking in products that while legal may be marketed in a loathsome way, Cerberus would not be immune to pressure brought by its own investors,” he wrote on his blog on Slate.

If Spitzer is right, the economic impact of such reform may be painful for its investors. About two years ago, when Freedom sought to pursue an IPO (which was later shelved) it identified gun control as one of its biggest “risk factors.”

“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, financial condition, results of operations or cash flows,” the company told potential investors. “In addition, regulatory proposals, even if never enacted, may affect firearms or ammunition sales as a result of consumer perceptions.”