Explaining Southern California's economy

Why was CalSTRS investing in gun company linked to Newtown massacre?

California State Teachers Retirement System

CalSTRS

The headquarters of the California State Teachers Retirement System in Sacramento. Like many big pension funds, it's increasingly invested in a riskier manner to meet return targets. This led to its investment with Cerberus Capital Management and the gunmaker that built the weapon used in the Newtown massacre.

Just to lay it out for you:

• Adam Lanza, a disturbed young man, killed 20 children, his mother, and six other adults in Newtown, Connecticut on Friday before killing himself

• He used a "Bushmaster" automatic rifle, a civilian variation of the AR-15, a military rifle that traces its heritage to the M-16

• The company that owns Bushmaster, Freedom Group, is owned by Cerberus Capital Management, a prominent private equity fund that...

• Raised at least $500 million from the California State Teachers' Retirement System (CalSTRS) for a fund that invested in Freedom Group.

It's one of those gruesome loops – the serpent eating its own tail – that can only result from the intersection of private-equity, the huge pension funds that provide private-equity with money, and the imperative for funds like CalSTRS to hit their annual return targets.

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Good money after bad: CalPERS and the crisis in venture capital

Max Whittaker/Getty Images

The California Public Employees' Retirement System (CalPERS) building in Sacramento. The fund has billions invested in venture capital and other alternative asset classes.

VC-Returns-Kauffman

The performance of VC has been poor sine the the mid-1990s.

Smaller-VC-Kauffman

In VC, smaller funds outperform larger ones.

VC-Big-Kauffman

Big VC doesn't meet outsized return expectations.

N-J-Curve-Kauffman

The "N-curve" is in blue and red. The "J-curve" is in green. In VC, you expect J, but you actually get N, with most returns coming early, rather than late.

Institutionalization-VC-Kauffman

A healthy VC ecosystem? Not really. Most of the money is going to fewer funds.

VC-Fees-Kauffman

Are VCs really all about raising money and charging fees? The Kauffman Foundation blames itself for creating this compensation structure.


Pretend, for a moment, that you’re a computer science student at Stanford University. Chances are good that you’ve thought about taking your degree — or even not waiting to get your degree — and starting a technology company.

It’s the new American Dream. It attracts the most talented international students to our major research universities. It’s made the likes of Jerry Yang, Sergey Brin, Larry Page and, more recently, Facebook’s Mark Zuckerberg and Instagram’s Kevin Systrom (both under 30) multi-millionaires if not multi-billionaires nearly overnight.

Technology. The Internet. Mobile. Innovation. Disruption. Entrepreneurship.

These are the things that make America great in the early 21st century. Many of these new businesses are located in California. And they all have one thing in common: They live and die based on the investment decisions of venture capitalists, arguably the most important reallocators of wealth in the global economy.

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