Behind The Cerberus Announcement Yesterday

As was mentioned yesterday in relation to the announcement that Cerberus Capital Management is putting the Freedom Group up for sale, the threat of the California State Teachers Retirement System to remove $500 million in investments from Cerberus was a good part of their rationale. It appears that CalSTRS was itself reacting to the bad press it was getting regarding their investment in Cerberus and, by extension, the Freedom Group.

From Dan Primack of Fortune.com in his rather anti-gun screed about CalSTRS's investment in Cerberus:

Do you know who owns more than a 6% stake in the maker of .223 Bushmaster rifles, like the one used last Friday to murder 20 first graders and seven adults in Newtown, Connecticut? California public schoolteachers.

The company in question is Freedom Group, a privately-held firearms conglomerate formed by private equity and hedge fund group Cerberus Capital Management. Cerberus created the platform in April 2006 via the acquisition of Bushmaster, after which it added another 10 makers of firearms, ammunition and accessories (including Remington, Marlin Arms and Barnes Bullets).

The California State Teachers' Retirement System (CalSTRS) committed to invest a whopping $500 million into a $7.5 billion Cerberus fund that has helped bankroll Freedom Group. That means that it effectively could own a 6.67% stake in the gun maker, which filed to go public in late 2009 before pulling the offering in early 2011. In fact, the figure could be even higher since CalSTRS also committed $100 million to a $1.4 billion predecessor fund, which likely made the original investment.

CalSTRS has an investment policy statement that reportedly takes into account a number of risk factors including "social injury" and "human health". Primack thinks their indirect investment in the Freedom Group violated this investment policy statement. He then serves up this bit of codswallop:

But I also think that it's time for our large nonprofit institutions to put some of their money where their mission is. Profit should be the primary goal of their investment offices, but not at the expense of their broader purposes. If a schoolteachers union or university endowment or nonprofit foundation truly cares about stopping the next mass killing, then they should not provide capital that produces the instruments of such destruction.

By Primack's rationale, CalSTRS then should not invest in any company that makes or deals in petroleum products, agricultural fertilizers, metal hardware, garden tools, or any number of other products that could have been used to make improvised explosives or sharp pointy things.

Obviously, this sort of nonsensical criticism found its mark with the CalSTRS's investment board. They released this statement regarding their investment with Cerberus and the pending sale of the Freedom Group.

WEST SACRAMENTO, CA – The California State Teachers' Retirement System (CalSTRS) released a statement today regarding its investments in private equity funds managed by Cerberus Capital Management that are invested in the Freedom Group, which manufactures firearms:

"The tragic and devastating acts that took place December 14 at Sandy Hook Elementary School in Connecticut have prompted many in this country to call for change: To determine what we can do differently to help ensure the unthinkable never happens again.

"In our case, CalSTRS investment staff immediately began reviewing our investments in private equity funds managed by Cerberus Capital Management (Institutional Series Three and Series Four) that are invested in the Freedom Group, which manufactures firearms. Our investments staff also initiated discussions with Cerberus to learn more about the facts surrounding the investments.

"This morning, Cerberus Capital Management issued a statement (External link) noting its intent to immediately engage in a formal process to sell its investment holdings in the Freedom Group.

"Cerberus is a multi-strategy private equity firm. They invest in a wide variety of firms and strategies; Financial Services, Healthcare, Consumer & Retail, Manufacturing & Distribution, Building Products, Energy & Natural Resources, Apparel, Paper, Packaging & Printing, Transportation, Industrial & Automotive, and Travel & Leisure.

"CalSTRS first invested in Cerberus Capital Series 3 in 2003, and again in 2007 in Cerberus Capital Series 4 as part of the core Private Equity program. The Freedom Group represents a very small investment within these funds. CalSTRS owns 2.4 percent of Freedom Group, not 6.67 percent as reported by some media outlets.

"CalSTRS has established a thorough vetting process for potential investments that seeks to test not only their financial potential, but their social, human and environmental impacts as well. In fact, current policies require that the risks associated with products that pose significant threats to human well-being be taken into account before an investment is made by CalSTRS investment managers. They are outlined in CalSTRS 21 Risk Factors (PDF - 5.5MB), which we adopted in 2008 after our investments in Cerberus.

"Moving forward, CalSTRS will work to ensure that all of our investments are taking these very important criteria into consideration."

The California State Teachers' Retirement System, with a portfolio valued at $154.8 billion as of October 31, 2012, is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans, as well as disability and survivor benefits. CalSTRS serves California's 856,000 public school educators and their families from the state's 1,600 school districts, county offices of education and community college districts.