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 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

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

“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

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.

Cerberus Moves To Ditch The Freedom Group

The Wall Street Journal is reporting that Cerberus Capital Management plans to sell their firearms manufacturing arm in the wake of the Newtown tragedy. Their statement below says that they don’t want to be pulled into a national political debate concerning firearms.

Cerberus Capital Management Statement Regarding Freedom Group, Inc.

NEW YORK, Dec. 18, 2012 /PRNewswire/ — We were shocked and deeply
saddened by the events that took place at the Sandy Hook Elementary
School in Newtown, CT on December 14, 2012.  We cannot comprehend the
losses suffered by the families and friends of those killed by the
unthinkable crimes committed that day.  No words or actions can lessen
the enormity of this event or make a dent in the pain that was inflicted
on so many.

In 2006 affiliates of Cerberus Capital Management, L.P. made a
financial investment in Freedom Group.  Freedom Group does not sell
weapons or ammunition directly to consumers, through gun shows or
otherwise.  Sales are made only to federally licensed firearms dealers
and distributors in accordance with applicable laws and regulations.  We
do not believe that Freedom Group or any single company or individual
can prevent senseless violence or the illegal use or procurement of
firearms and ammunition. 

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.

Our thoughts and prayers are with the families and communities impacted by this tragic and devastating event.

The Freedom Group which has been renamed Remington Outdoor Company, Inc. consists of Remington, Bushmaster, DPMS/Panther Arms, Remington Military, Remington LE, Parker Gunmakers, Barnes Bullets, Advanced Armament, Tapco, Dakota Arms, Marlin, Para-USA, H&R, Mountain Khakis, and Remington PMPD.

Among the upper management of Cerberus are such political figures as former VP Dan Quayle and former Treasury Secretary John Snow. Steve Feinberg, CEO of Cerberus, is reportedly an avid hunter and shooter. According to the Journal, Cerberus came under pressure from certain investors to sell the unit.

Cerberus’s statement comes shortly after it faced pressure Monday from
former New York Governor Eliot Spitzer as well as the California State
Teachers Retirement System, which said it is reviewing a $500 million
investment commitment to the New York-based private-equity firm.

 I find the move by Cerberus to sell Freedom Group aka Remington Outdoor Company much more disturbing than the nonsense coming from the gun prohibitionists and their politician allies. To me it seem a great harbinger of the difficulties that lie ahead for us with regards to gun rights. Investment capital companies such as Cerberus are known to make decisions on numbers and fact without dealing in emotion. They obviously feel that the business environment for them will be difficult in the days ahead due to political forces. The Freedom Group companies manufacture a lot of AR-15s and these are the focus of the gun prohibitionists.

For the firearms industry, this move by Cerberus may actually be beneficial. If the new owners of Remington Outdoor Company are not beholden to public employee/union pension funds and other institutional investors, it will be a good thing. The unity of the firearms industry in the face of the threat of legislation is paramount. They don’t need the management of one of the major players to go wobbly such as is evident in the response of Cerberus.