Pen­sion lead­ers be­gin tak­ing on pri­vate eq­uity firms

The Palm Beach Post - - BUSINESS - ©2018 The New York Times

Michael Corkery

Pri­vate eq­uity firms and pub­lic pen­sion funds have long had a sym­bi­otic re­la­tion­ship: The funds sup­ply the firms with bil­lions of dol­lars to in­vest, and the firms de­liver dou­ble-digit re­turns that help the funds sup­port re­tired pub­lic ser­vants.

Now, pen­sion lead­ers are show­ing a new will­ing­ness to con­front pri­vate eq­uity over the hu­man im­pact of its in­vest­ments.

Min­nesota’s pen­sion plan tem­po­rar­ily halted in­vest­ments in one of Toys R Us’s for­mer pri­vate eq­uity own­ers, Kohlberg Kravis Roberts, af­ter hear­ing that 30,000 work­ers laid off amid the re­tailer’s bank­ruptcy had been de­nied sev­er­ance.

A top Ore­gon pen­sion of­fi­cial crit­i­cized the pri­vate eq­uity firm TPG for what he said was its se­ri­ous lack of di­ver­sity, specif­i­cally cit­ing a dis­parag­ing re­mark that one of the firm’s founders had made about women.

And New Jersey’s pen­sion fund moved re­cently to en­sure that pri­vate eq­uity firms with mort­gage in­vest­ments in Puerto Rico were not fore­clos­ing on res­i­dents of the is­land af­ter the havoc caused by Hur­ri­cane Maria.

Pen­sion of­fi­cials said the moves were sound in­vest­ment de­ci­sions that were not driven by pol­i­tics. Ma­jor lay­offs at com­pa­nies owned by pri­vate eq­uity firms can hurt lo­cal economies, where pen­sions are broadly in­vested. A ha­rass­ment scan­dal could dam­age a pri­vate eq­uity firm’s rep­u­ta­tion and, by ex­ten­sion, a pen­sion fund’s in­vest­ment.

Pen­sions have long shunned in­vest­ments un­pop­u­lar with the peo­ple they rep­re­sent, of­ten in broad cat­e­gories like guns and fos­sil fu­els. But in re­cent years, pen­sion hold­ers’ con­cerns have got­ten more spe­cific, and calls for the funds to take stands have in­creased.

“We are hav­ing more con­tact with the pub­lic about these types of is­sues,” said Adam Lieb­tag, the act­ing chair­man of the New Jersey State In­vest­ment Coun­cil. “They are pay­ing closer at­ten­tion. They are fol­low­ing the money.”

New Jersey is a hot­bed for so­cial con­cerns over pen­sion in­vest­ments. In ad­di­tion to vot­ing to more closely mon­i­tor firms un­der the mora­to­rium on fore­clo­sures in Puerto Rico, the state re­cently pulled money out of a pri­vate eq­uity firm that had ac­quired a so-called pay­day len­der.

“It’s a bal­anc­ing act every time these sit­u­a­tions arise,” Lieb­tag said.

The at­ti­tudes ex­pressed by pri­vate eq­uity in­vestors are also at­tract­ing scru­tiny.

In June, John Rus­sell, vice chair­man of the Ore­gon In­vest­ment Coun­cil, said sex­ist re­marks that David Bon­der­man, a TPG founder, had made in his ca­pac­ity as an Uber board mem­ber were “part of the be­hav­ior that ba­si­cally crip­pled the brand.”

“I would at­tribute that in part to lack of di­ver­sity,” Rus­sell said, ac­cord­ing to a record­ing of his re­marks.

A TPG spokesman said in a state­ment that the firm was “com­mit­ted to be­ing a leader in ad­vanc­ing di­ver­sity and in­clu­sion in the in­dus­try.”

“Our in­vestors are our part­ners, and we wel­come dis­cus­sion of how TPG and the in­dus­try need to im­prove,” the state­ment con­tin­ued. (Bon­der­man apol­o­gized for his re­marks last year and re­signed from the Uber board.)

To­day, about 35 per­cent of pri­vate eq­uity’s money comes from pub­lic pen­sions, ac­cord­ing to Pre­qin, a data firm.

Pri­vate eq­uity has con­tin­ued to pro­duce high re­turns, but the in­dus­try faces re­sis­tance to its high fees and profit-shar­ing. Some large pen­sion funds are start­ing to make more in­vest­ments di­rectly and cut­ting out pri­vate eq­uity firms en­tirely.

Not want­ing to alien­ate their fund­ing sources fur­ther, pri­vate eq­uity firms seem will­ing to con­cede on so­cial is­sues, pen­sion ex­perts say.

“The last thing pri­vate eq­uity wants to do is screw this up,” said Ashby Monk, ex­ec­u­tive di­rec­tor of the Stan­ford Global Projects Cen­ter, which fo­cuses on fi­nan­cial re­search.

The shift co­in­cides with a grow­ing aware­ness among work­ers that they can ex­ert in­flu­ence through pub­lic pen­sion boards, where many of the mem­bers mak­ing in­vest­ment de­ci­sions rep­re­sent la­bor unions.

“Work­ers don’t want their pen­sion money in­vested in ways that hurt other work­ers,” said Sarah Bloom Raskin, a fel­low at Duke Uni­ver­sity and a deputy Trea­sury sec­re­tary in the Obama ad­min­is­tra­tion.

“No one wants to be in­vested in their own de­cline,” she said.

The col­lapse of Toys R Us has earned pri­vate eq­uity par­tic­u­larly wide­spread crit­i­cism. The for­mer own­ers had loaded the re­tailer up with $5 bil­lion in debt, which helped push it into bank­ruptcy in Septem­ber 2017.

Toys R Us has also served as a test case for how work­ers ex­ert their in­flu­ence through pen­sions. As the bank­rupt com­pany was liq­ui­dat­ing its stores in June, em­ploy­ees protested out­side the New York of­fices of the re­tailer’s for­mer own­ers, KKR, Bain and Vor­nado Realty Trust, de­mand­ing sev­er­ance.

The work­ers said they were un­able to get through to the pri­vate eq­uity firms, so they switched tack. Over the next three months, they trav­eled to in­vest­ment meet­ings of 14 pen­sion funds in 12 states.

The em­ploy­ees were or­ga­nized by the ac­tivist groups Rise Up Re­tail and the Pri­vate Eq­uity Stake­holder Project, which was started last year.

“There is a well-de­vel­oped ecosys­tem of groups that fo­cus on the prac­tices of pub­lic com­pa­nies,” said Jim Baker, the Stake­holder Project’s ex­ec­u­tive di­rec­tor. “But it’s a lim­ited field around pri­vate eq­uity.”

The Stake­holder Project, which is partly fi­nanced by la­bor unions, has fo­cused on pri­vate eq­uity’s own­er­ship of for-profit col­leges, bail bond com­pa­nies and the pri­vate prison in­dus­try. The group ar­gued that Toys R Us work­ers de­served a por­tion of the fi­nanc­ing and man­age­ment fees the pri­vate eq­uity firms col­lected from the re­tailer.

The work­ers scored a big vic­tory in Min­nesota when Gov. Mark Day­ton, a Demo­crat, and the chair­man of the state pen­sion board, led the ef­fort to sus­pend fur­ther in­vest­ments with KKR in June.

In Wash­ing­ton state, pen­sion of­fi­cials pub­licly ques­tioned a top KKR ex­ec­u­tive, ask­ing if any­one had lost his or her job at the firm over the Toys R Us bank­ruptcy or had got­ten a cut in pay. One pen­sion board mem­ber sug­gested that the firm had a “moral obli­ga­tion” to set up a fund to help the work­ers. The KKR ex­ec­u­tive, point­ing out that the firm had lost money in the bank­ruptcy, apol­o­gized to the pen­sion board.

Michelle Perez of Van­cou­ver, Wash­ing­ton, was among those laid off when Toys R Us closed. Perez, 28, said she had spo­ken to of­fi­cials with pen­sion funds about the dif­fi­culty she faced as a sin­gle mother try­ing to find a new job, without sev­er­ance to pro­vide any cush­ion.

“We are getting lis­tened to,” she said.


For­mer Toys R Us em­ploy­ees and their sup­port­ers rally out­side a New Jersey State In­vest­ment Coun­cil meet­ing last month. The col­lapse of Toys R Us has earned pri­vate eq­uity par­tic­u­larly wide­spread crit­i­cism.

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