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CalSTRS makes big decision on gun investments

January 10, 2013: 11:39 AM ET

California teachers pension plans to divest of certain firearms makers.

FORTUNE -- The California State Teachers' Retirement System (CalSTRS) board yesterday voted unanimously to divest itself of investments in makers of firearms and ammunition that are illegal to purchase or own in the state of California. This includes those who produce assault rifles, "Saturday night specials" and/or high-capacity magazines. The divestiture option also was endorsed by CalSTRS chief investment officer Chris Ailman, who does not have a board vote.

All of this follows last month's discovery that CalSTRS had a multi-million dollar interest in Freedom Group -- maker of the Bushmaster AR-15 rifle used in the Newtown massacre -- via its investment in a fund managed by private equity firm Cerberus Capital Management.

On the private equity side, the CalSTRS divestiture decision won't mean too much since Cerberus already has announced its intention to sell Freedom Group. If Cerberus ultimately chooses not to sell or can't find a buyer, then CalSTRS would look to reduce its exposure to the firm. In public equities, CalSTRS has a combined $2.9 million of exposure via investments in index funds that hold Smith & Wesson (SWHC) and Sturm Ruger & Co. (RGR):

exposure

It is worth noting that there was no discussion during yesterday's board meeting of investment exposure to retailers who sell firearms like the Bushmaster AR-15 outside of California. One example would be Academy Sports & Outdoors, owned by CalSTRS manager Kohlberg Kravis Roberts & Co. (KKR).

During the meeting, Chris Ailman acknowledged that the system kind of dropped the ball when Ceberus created Freedom Group, since the investment violated two of "risk factors" identified in the system's environmental, social and governance (ESG) policy:

violation1

violation2

CalSTRS historically has asked outside managed to read its ESG policy and certify compliance at the time of initial investment, but now plans to require managers to do so annually.

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Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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