Michelle Perez, a former Toys “R” Us worker and single mother, used to have only a basic understanding of Wall Street. But she recently helped bring one of the world’s most powerful investment firms to heel.
Ms. Perez, 28, from Vancouver, Wash., has been traveling the country, putting pressure on the private equity firm Kohlberg Kravis Roberts and the other former owners of the failed retailer to help the 30,000 workers who were laid off this summer with no severance pay.
Ms. Perez and her fellow employees found a powerful ally in some of the nation’s largest public pension funds, which supply private equity with billions to invest.
In June, Minnesota’s state pension fund halted further investments in K.K.R. over concerns about how the Toys “R” Us workers had been treated. The fund lifted the suspension last month after K.K.R. agreed to contribute millions to a hardship fund for the workers. So far, the fund is said to have raised $20 million.
“We are getting listened to,” Ms. Perez said.
Pension officials managing the retirement benefits of government workers have long shunned investments that their constituents find unpalatable, often broad categories like guns and fossil fuels. But lately, some pensions have been aggressively confronting Wall Street firms and companies over specific social concerns.
An Oregon pension official publicly criticized what he saw as a serious lack of diversity at the large private equity firm TPG and called out a disparaging remark that one of the firm’s co-founders had made about women at an Uber staff meeting.
A major trade group for pensions and other investors in private equity funds recently released a “due diligence questionnaire” that would require the investment firms to disclose all incidents of sexual harassment by their employees and how they dealt with them.
And New Jersey’s pension board is evaluating its investments in Nike in light of the company’s advertising campaign with Colin Kaepernick, the former professional quarterback who knelt during the national anthem in protest. The move came at the request of a retired police detective on the pension board.
“We are having more contact with the public about these types of issues,” said Adam Liebtag, acting chairman of the New Jersey State Investment Council. “They are paying closer attention. They are following the money.”
The criticism aimed at private equity, which generally refers to investment firms that acquire troubled companies and assets and try to sell them for a profit, is particularly significant.
For decades, private equity has enjoyed a symbiotic relationship with pension funds. As long as the firms kept generating double-digit returns, pensions kept giving them more money to invest.
Today, about 35 percent of private equity’s money comes from public pensions, according to Preqin, a data firm.
Private equity has continued to deliver on returns, but the industry faces resistance to its high fees and profit-sharing. Some large pensions are starting to make more investments directly and cutting out private equity firms entirely.
Not wanting to alienate their funding sources further, private equity seems 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.
At the same time, workers are finding 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 hurts other workers,” said Sarah Bloom Raskin, a former deputy Treasury secretary in the Obama administration, who is now a fellow at Duke University.
“No one wants to be invested in their own decline.”
New Jersey is a hotbed for such concerns. The state recently pulled money from a private equity firm that acquired a payday lender. And this year, the pension board said it would more closely monitor a pair of private equity firms with mortgage investments to ensure they were abiding by a moratorium on foreclosures in storm-ravaged Puerto Rico.
The decision to evaluate its Nike holdings over the Kaepernick advertisements was unanimous, though it’s not clear how much support there would be on the board to divest.
“It’s a balancing act every time these situations arise,” Mr. Liebtag said.
Pension officials say they are not just playing politics, but making sound investment decisions.
Huge layoffs in companies owned by private equity 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 investment.
In June, John Russell, the vice chairman of the Oregon Investment Council, said that sexist remarks that TPG’s co-founder David Bonderman made about women at Uber was “part of the behavior that basically crippled the brand.”
“I would attribute that in part to lack of diversity,” Mr. Russell said, according to a recording of his remarks.
(Mr. Bonderman apologized for his remarks last year and resigned from the Uber board.)
A TPG spokesman said in a statement that the firm “is 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 collapse of Toys “R” Us has earned private equity particularly widespread criticism. The former owners had loaded up the retailer with $5 billion in debt, which helped push it into bankruptcy last September.
Toys “R” Us has also served as a test case for how workers can 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, K.K.R., Bain and Vornado Realty Trust, demanding severance.
The workers said they were unable to get through to the giant firms so they switched tack. Over the next three months, workers 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 the Stakeholder Project’s executive director, Jim Baker. “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 and the chairman of the state pension board led the effort to temporarily halt further investments with K.K.R. in June.
A few weeks later, in Washington State, pension officials publicly questioned a top K.K.R. executive, asking if anyone had lost their job at the firm over the Toys “R” Us bankruptcy or had their pay cut. One pension board member suggested that the firm had a “moral obligation” to set up a fund to help the workers. The K.K.R. executive, pointing out that the firm had lost money in the bankruptcy, apologized to the pension board.
The toy store workers also made their case to pensions funds that invest with Bain.
By late summer, the hardship fund began to take shape. K.K.R. and Bain agreed to contribute as much as $20 million, though the amount and terms have not been finalized, according to people briefed on the matter. Both firms declined to comment.
Vornado has not indicated it will participate, according to the workers group. The firm did not respond to requests for comment.
The toy store workers are still pushing to recoup all of the $75 million they are owed in severance. Lately, they have been urging New Jersey to put pressure on Solus Alternative Asset Management, which owns some of the failed retailer’s debt. New Jersey has $300 million invested with Solus.
Solus has indicated it has no plans to contribute to the fund, saying in a letter to investors that the stakeholders group was trying to “extort” investment firms. In a statement, the firm said it was working to revive the Toys “R” Us brand “in a way that we hope will provide sustainable employment for workers in the future.”
New Jersey pension officials said they were discussing with Solus its role in the bankruptcy before deciding their next step.
Source: The New York Times