Guns and Private Equity – Cerberus: Teacher-Clients’ Interests in Mind

Photograph by Ethan Miller/Getty Image

A Bushmaster Firearms rep, right, shows an attendee a semi-auotmatic Bushmaster Enhanced Adaptive Combat Rifle (ACR) at the Bushmaster Firearms booth at the National Shooting Sports Foundation's 34th annual Shooting, Hunting, Outdoor Trade (SHOT) Show.

It didn’t take long for Cerberus to remember who its masters are.

The New York-based private equity firm, which takes its name from the mythical three-headed dog that guards the gates of Hell, said late yesterday it would sell Freedom Group, the largest U.S. gun-maker and part of its $20 billion portfolio of assets.

The move was stunningly swift. Earlier in the day, California’s treasurer said he’d ask the state’s pension funds to examine their investments in firearms in the wake of last week’s massacre in Newtown, Connecticut. One of those pensions, the California State Teachers’ Retirement System, has $751 million committed to Cerberus, according to Bloomberg’s Devin Banerjee’s reporting.

In the wake of the Newtown deaths, smart journalists including Fortune’s Dan Primack followed the money behind the guns back to its source, revealing that the Bushmaster rifle used in the killings was made by Freedom, the gun conglomerate Cerberus assembled beginning in 2006. Primack and others then went a step further, noting where Cerberus’s money ultimately comes from.

Private equity firms pool money from public pensions, endowments, sovereign wealth funds and wealthy families, then usually pair that money with debt to take over companies. The money’s origin was highlighted yesterday in a column on Slate by Eliot Spitzer,  the former attorney general of New York turned media commentator, who noted that investors “wield vast power.”

“Ownership has both responsibility and power,” Spitzer wrote. “It is time for every comptroller and pension fund manager with an investment in Cerberus to use that power.”

California used that power, and to great effect. Cerberus said it will hire a financial adviser to shop Freedom Group, allowing it to remove itself from the increasingly raging debate about gun control.

“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,” according to Cerberus’s statement. “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.”

While an extreme example, California’s public stance underscores an ongoing shift in the dynamics of the private equity business. Investors’ won’t-get-fooled-again attitude from the 2008 financial crisis, coupled with the scrutiny around PE brought on by former practitioner Mitt Romney’s presidential candidacy, has emboldened investors to press for more information and demand a bigger voice.

Private equity firms themselves have responded to this in different ways. The industry has bolstered its nascent lobbying effort in Washington, industry titans like KKR and Carlyle release annual reports on social responsibility, and a number of players have increased their efforts to work with labor unions, a category long skeptical of buyouts and their consequences.

Whether the Cerberus decision marks an inflection point in this long-complicated relationship between private equity and its backers/benefactors/beneficiaries remains to be seen.

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