In 2006, Cerberus Capital Management, the private equity firm run by the secretive financier Steven Feinberg, set out to raise $6.5 billion in a new fund called Cerberus Institutional Partners Series IV. Feinberg's reputation for extracting value from troubled companies — by replacing management, shuttering facilities and creating "efficiencies" — was such that by May 2007, when the fund was finally closed, it had gotten commitments for nearly $1 billion more than it had sought.
Fred R. Conrad/The New York Times
Joe Nocera
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Cerberus Institutional Partners Series IV is the fund that took over Chrysler in 2007. It bought General Motors' financing arm, now called Ally Financial. It gobbled up hospitals, purchased bus companies, and even bought the raunchy magazine Maxim.
It is also the fund that bought Bushmaster Firearms, the company that made the assault weapon used by Adam Lanza to massacre 20 children and seven adults in Newtown, Conn., last month. It bought Remington Arms, the maker of the pump-action shotgun that was among the guns James Holmes used to kill 12 people and wound 58 in Aurora, Colo. It bought a handful of other firearms companies, which it then merged into a new parent company, Freedom Group. At which point, Cerberus was the largest manufacturer of guns and ammunition in the country.
Not long ago, I obtained a partial list of the institutional investors that committed money to the Cerberus fund. One of the investors, the California State Teachers' Retirement System, which put in $500 million, has already announced that it will divest its gun holdings. "We shouldn't be investing in things like that," says Bill Lockyer, the California state treasurer. He noted that assault weapons are illegal in California.
Most of the other big investors, however, have kept their heads down. TIAA-CREF, the financial services giant, committed $147.8 million to the Series IV fund. ("No comment," said a spokesman.) The State of Wisconsin Investment Board put up $100 million. The University of Texas endowment made a $75 million commitment; the Regents of the University of California kicked in $40 million; the University of Missouri endowment was an investor. So were the Los Angeles Fire and Police Pension system, the Indiana Public Retirement System, and the Pennsylvania Public School Employees' Retirement System (which kicked in $400 million). And plenty of others.
When I called these investors to ask their rationale for investing in a fund that financed a gun "roll-up," as the Cerberus strategy is called, I got three main responses. The first was that the percentage of their investment that went to Freedom Group was minuscule. "We have a very small investment in Bushmaster, which translates to about $1 million," said Dianne Klein, a spokeswoman for the University of California system. (She added that the California system was going to divest its gun holdings.) Jennifer Hollingshead at the University of Missouri told me that the endowment's exposure was less than $450,000 — "which represents about 0.01 percent of our total portfolio."
The second response was that, as limited partners, the institutional investors didn't have a say in how Cerberus invested the money. The fact that Feinberg decided to buy companies whose guns have repeatedly been used for mass slaughter was, in effect, his decision to make.
The third was that the core duty of a pension fund or university endowment is to maximize returns. Nobody made this point more vehemently than Bruce Zimmerman, a spokesman for the University of Texas Investment Management Company. "We have no plans to divest," he said. "We invest strictly on economic considerations, and we do not take into account social and political consideration."
Cerberus never tried to hide what it was doing. And why would it? It was proud of its gun strategy. It held annual meetings with its investors and talked freely about Freedom Group. Investors were also aware that in 2010, Cerberus had tried (and failed) to take Freedom Group public.
But until Newtown, none of the investors gave the business a second's thought. Aurora, Fort Hood, Wisconsin — and dozens of other mass slaughters — came and went, and the investors stuck with Cerberus.
Newtown, it is often said, has changed that dynamic, sensitizing the country to the insanity of its gun laws, and giving gun control advocates hope that reform might finally be possible. But with the tragedy barely a month old, you can already feel the pushback. Supporters of the National Rifle Association in Congress are vowing to resist any effort to tighten the nation's gun laws. Gun-friendly state legislators are pushing absurd laws aimed at pre-empting federal gun legislation. And then there are the investors, who have a unique ability to push companies to change, if they so choose. (Just recall the South African boycott.)
What I learned this week is that, Newtown notwithstanding, too many of them have other priorities. Making money is still more important that saving lives.
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