Newtown Gun Backlash Hits Wall Street Via California Mega Funds

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NEW YORK ( TheStreet) -- Wall Street can take a leading role in growing support for stricter gun control and an assault weapon ban, in the wake of a mass shooting at a Connecticut elementary school on Friday that killed 26 people, including 20 schoolchildren.

As political support grows for gun reform signs indicate that Wall Street may already be in the process of a 'watershed' change when it comes to the manufacture of high-power firearms that oftentimes are at the center of rampage killings.

On Tuesday, private equity giant Cerberus Capital Management said it would divest its controlling stake in the largest U.S. gun manufacturer and the maker of the Bushmaster assault rifle that authorities say 20-year-old Adam Lanza used in the Newtown, Ct., shooting.

While Cerberus said the decision to divest the holding - a 95% stake in gun and ammunition manufacturer Freedom Group -- was outside of a policy debate on gun control or the Second Amendment, signs indicate key Wall Street investors are using the tragedy as a turning point in making investments that center on social issues such as gun control.

In the wake of the shooting, California state Treasurer Bill Lockyer asked the state's pension funds -- the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) -- to dispose of investments in manufacturers of guns deemed illegal in the state. The call included both pensions' investment in three Cerberus-run funds that owned stakes in Freedom Group, and caused Lockyer to publicly question whether California would continue to invest in the private equity firm.

Even if Cerberus isn't participating in a policy debate by divesting its Freedom Group holdings, California's Lockyer is.

"These guns are illegal in our state and we shouldn't be investing in those kinds of firms," Lockyer said in a late-Tuesday interview with TheStreet, of assault rifles such as the ones manufactured by Freedom Group and used in Friday's shooting.

Lockyer also said he expects the pension funds of other states to also conduct a similar review. "I would expect that to happen in maybe half of the states," says Lockyer, pointing to New York, Connecticut, Illinois and North Carolina, among others.

With hundreds of billions in pension assets under management, CalPERS, CalSTRS and similar funds in other states are key players on Wall Street. Their investment in private equity firms was crucial to the growth of industry titans such as Cerberus and publicly traded competitors The Carlyle Group (CG) , The Blackstone Group (BX) and KKR(KKR) . If a pension investor decides a type of company is outside the bounds of what it can invest in, the decision ripples across the private equity and investing world.

Such was the case on Tuesday as Lockyer of California and New York State comptroller Thomas DiNapoli said investments in certain gun manufacturers may soon be prohibited.