Wednesday, May 20, 2015

Disarming CalSTRS: Cerberus Allows Investors to Exit Firearms Investment

Disarming CalSTRS:  Cerberus Allows Investors to Exit Firearms Investment

It’s been nearly two and one-half years since the Newtown, Connecticut shooting and CalSTRS’ request that Cerberus, a private equity firm, sell its interest in Freedom Group (renamed Remington Outdoors).    Freedom Group manufactured one of the murder weapons.  I’ve been following this story since the shooting (see, “Divesting Guns: Public Funds Deserve No Credit” [December 19, 2012]).  Since CalSTRS (California State Teachers’ Retirement System) is a large investor in Cerberus’s funds, the firm yielded to the investor’s pressure and tried to sell the company for the better part of a year.  When Cerberus couldn’t surface a buyer, they announced that they would buy back the interest of any of their investors who did not want to own a gun manufacturer (see, “A Special Deal on Guns and a Bad Precedent [December 13, 2013]”.    For well over a year nothing happened.

Last week Cerberus announced that it has transferred its investment in Remington to a separate entity valued it at $800 million and offered investors 30-days to redeem their interest.[1]  As I’ve written previously, I think this is a terrible precedent.  Large and influential investors shouldn’t be telling money managers what to buy or sell.  As a limited partner, CalSTRs ceded that responsibility to Cerberus.  Selling a gun manufacturer may soothe the collective consciences of CalSTRS’ trustees, but it doesn’t do anything to better regulate or license firearms.  It also doesn’t change Remington’s business practices.

The Cerberus offer raises some interesting investment questions.  First, who is financing the redemptions?  If CalSTRS sells its stake, the money has to come from somewhere.   Is Remington taking on more debt or is Cerberus financing the transactions?  If Remington is bearing the burden, the remaining investors should be compensated for taking on the additional risk.

Second, how was the valuation determined?  Having failed repeatedly to sell the business, I’d be curious to know the metric or comparable data behind the $800 million value placed on the business.  Cerberus had to try to strike a price that was fair to both potential sellers and those who choose to retain their shares.

Finally, what type of discount was placed on the valuation?  Remington is an illiquid asset.  Typically when an investor asks to prematurely sell a private asset, they don’t get the full price in order to compensate the remaining investors who continue to bear the liquidity risk.

Presumably CALSTRS and all the other affected investors are asking these questions.  After all the uproar in the wake of Newtown, nothing has happened.  Congress couldn’t muster the votes to pass any legislation, and CalSTRS and Cerberus are just shuffling paper.


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