The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything (Bloomberg)

by Jason Kelly

  The reality in several cases seemed to be that the data didn’t exist, at least in an easily accessible way. There also were questions around what constituted creating a job. Private-equity firms wrestled with whether they could or should count jobs where they were a minority investor, and whether jobs created after they sold their stake in the company should count. Echoing the political calculation used by the Obama administration, they also wondered aloud whether they should get credit for “saving” jobs, that is, employment in cases where they bought a company that was likely to go out of business without their investment.

  In political and public relations terms, the venture capital industry rather brilliantly outflanked private equity by positioning itself as a job creation engine. The industry’s chief lobbyist in Washington, the National Venture Capital Association, said that as of 2010, venture-backed companies accounted for 11.87 million jobs and over $3.1 trillion in revenue, citing a study produced by IHS Global Insight.10

  Said one private-equity executive: “That’s tiny compared to PE. And you’re talking about companies out in Silicon Valley that are hiring computer engineers from Berkeley and Stanford. They create wealth, not jobs. It’s private equity that buys old line industrial companies, companies where we can make a difference.”

  Blackstone pressed its companies in 2010 and 2011 for data that it could use to tell its story to Washington and to the press. Synthesizing what it got back, Schwarzman and James told anyone who’d listen that their companies had cumulatively grown employment. Blackstone posted on its website that U.S. companies in which it held a majority ownership grew jobs at 4.6 percent, versus 1.1 percent for the broader economy in 2010. The other firms were conducting similar exercises, asking the portfolio for employment information.

  One place where two sides of the private-equity equation collide is with labor unions, which can find themselves as both beneficiaries of the profits generated by private-equity funds and at their mercy as employees after their company is bought out. There’s also this less examined but important piece: Some number of labor union members rely on the private-equity managers for a piece of their own retirement through their pension funds.

  Slavkin of the AFL-CIO participated in a session at the Brookings Institution, the Washington think tank, in November 2011 and talked about that conundrum and how members of the unions affiliated with her organization dealt with it. The event was co-sponsored by the Private Capital Research Institute, a non-profit group that aims to foster the independent academic study of private capital. The PCRI is headed by Harvard’s Josh Lerner and its backers include CD&R founder Joe Rice. Slavkin described a situation where private equity has a mixed track record with labor, citing Blackstone’s mostly positive interactions vis-à-vis hotel workers at Hilton, as well as other, less positive situations where buyout firms had taken over casinos.

  The unions, she said, are happiest and best served, not surprisingly, when they’re at the table and participating in the decisions around the deal and the future of the company. “These are people that oftentimes have been working for a company, that know the business better than the private-equity fund coming in to purchase the company, and hope to stay there for a long time into the future,” she said. When shut out of the process, though, things can turn ugly. “If the workers are seen as the enemy, it can cause some major headaches,” Slavkin said. “It can become a big expense for the private-equity fund.”12

  KKR and Clayton, Dubilier & Rice had a flare-up with the Teamsters in late 2011, one of a handful of times in recent years when a private equity versus labor dispute bubbled into the public eye, albeit briefly. Teamsters at US Foods, which the two firms bought in 2007, went on strike at the company’s Streator, Illinois, facility as the union negotiated a new contract. The action brought sympathy pickets at other US Foodservice locations. The sides ultimately finalized a new contract in December 2011.

  The showdowns at US Foods were not the first time the Teamsters had clashed with KKR specifically. Teamsters General President James Hoffa in April 2010 wrote a column for the Huffington Post to urge Congress to increase the tax rate on carried interest. “The Teamsters have had plenty of experience with private-equity firms, and it hasn’t been pretty,” Hoffa wrote. “Time and again, private-equity firms have bought good, profitable Teamster employers only to devour their cash.”

  He continued: “Kohlberg Kravis Roberts & Co.’s history with Teamster employers is one of underinvestment, stretching workers and equipment to the breaking point. KKR’s pattern has been to kick to the curb the carcasses of what were once productive enterprises.”13

  The Service Employees International Union, or the SEIU, was probably the most vocal and visible critic of private equity at the height of the leveraged buyout boom. Under the guidance of Andy Stern, the Washington-based union took aim at a handful of the largest firms, especially Carlyle. The centerpiece of the SEIU’s campaign was a 42-page report, released in April 2007, called “Beyond the Buyouts,” which underlined the scope of private equity’s ownership and question some of its methods, particularly in light of the workers at private-equity-owned companies.

  The tone was sweeping and focused largely on the wealth gap that would several years later become the centerpiece of the Occupy Wall Street movement. “These profits come during a period of historic income inequality in America, at a time when millions of Americans are working harder and harder for less, with less health care, less retirement security, and less time to spend with their children,” according to the report.14

  The report went on to give a primer on the LBO business and provided snapshots of five of the biggest firms. It also provided five separate narratives of private-equity deals where it determined the owners made choices detrimental to workers, through job cuts or decisions like dividend recapitalizations. It concluded with a list of proposed principles for the private equity industry, pushing for more representation of workers at the outset of a deal being negotiated, more transparency of information from the firms, and more involvement in the communities where managers bought companies.

  The SEIU was just getting started. In July, the union sponsored a double-decker bus tour of New York’s Times Square, where it pointed out private equity’s presence throughout. By the SEIU’s count, within 50 blocks encompassing the square famous for its billboards and New Year’s Eve celebration, there were 53 locations of 28 companies owned in part or wholly by private-equity firms. That included KKR and Bain’s Toys “R” Us, whose flagship store sits near the center of Times Square.

  The union’s effort hammered home the income question in the context of the toy retailer, describing how the firms had already earned fees from the takeover while laying off workers. “A handful of private-equity executives are personally making millions of dollars in buyout deals but workers are being left behind,” Stephen Lerner, who led the SEIU’s private-equity effort, said at the time.15

  “They never saw themselves as conglomerates, and we were forcing them to think about that,” Stern told me. “I don’t think they were ready to be out in the public like that.”

  Through 2007, as Carlyle was seeking approval for its takeover of nursing home chain Manor Care, SEIU protesters were a fixture on Carlyle co-founder David Rubenstein’s public speaking schedule. They routinely showed up at speeches, sometimes picketing outside, other times making their way into the events to chant or unroll banners. Chants included: “Better staffing, better care/No more money for billionaires.”16 The SEIU also targeted Carlyle at its headquarters in Washington. In October 2007, members of the union rolled wheelbarrows full of fake money from the offices of the Internal Revenue Service to Carlyle’s Pennsylvania Avenue offices and dumped them in front of a person dressed up as a “fat cat.” A banner with Rubenstein’s picture on it said, “Caution: Carlyle Deal in Progress, Taxpayer Money Moving to David Rubenstein’s Pockets.”17

  Stern wasn’t afraid to venture into the lion’s den. In early 2008, he turned up on a panel
at Columbia Business School’s annual private-equity conference, where he sparred with buyout executives on a panel in front of a standing-room-only crowd of B-school students, journalists, and industry executives. There was even undercover security in the audience and the moderator, the New York Times columnist and author Andrew Ross Sorkin, later described it: “If Jerry Springer had a show about business, this might have been an early episode.”18

  Then a funny thing happened: The SEIU, at least publicly, seemed to lose interest in private equity. The union turned its focus to the more traditional banks as the financial crisis deepened, creating a campaign that helped oust Bank of America CEO Kenneth Lewis. The SEIU also spent a lot of its time and resources on healthcare reform. Stern himself was a frequent visitor to the White House after Obama was elected.

  The SEIU leaders had envisioned a type of global settlement, whereby all the big firms agreed to sign on to a set of principles that would govern their behavior in leveraged buyouts. That never happened. Instead, the union won smaller victories, like when Blackstone agreed in August 2007 to provide health insurance to janitors in the Boston area who worked for Equity Office Properties.19

  What appeared to be a mellowing toward Stern’s private-equity foes bubbled into public view in mid-2011. In a Bloomberg Television interview, Stern said: “I was awfully tough on . . . private equity and the banks. Some of it was totally appropriate; other of it probably was a little bit out of hand.”20 He turned up around the same time as a speaker at a meeting of KKR’s limited partners. After working as a fellow at Georgetown University, he accepted a fellowship at Columbia Business School. That’s where I found him in 2012 to ask him about what appeared to be a conversion, or at least a change of heart.

  A couple of funny things struck me as I walked to Stern’s office, tucked in a warren of small workspaces in the school’s Uris Hall. I’d last seen him in full throat steps from here, at the aforementioned conference four years earlier. The second was that if Stern continued this gig at Columbia for a few more years, the most vocal agitator of private equity was likely to be working at a building named for Henry Kravis. Kravis’s $100 million gift to the school included the honor of having a building at the new business school campus in East Harlem named for him.

  It turns out Stern was not so much a changed man, but a slightly more contemplative one, maybe by virtue of having a post in the relatively cozier world of academia and some distance from the hand-to-microphone combat of running a union day in and day out. During a relaxed conversation in a quiet conference room, he showed how he retained some of his fiery rhetoric about private equity.

  “We have every right to criticize business practices, but not business,” he said. “This is a way that people invest money and we can’t be too coarse. We need to attack the practices and not the vehicles.”

  The vitriol Stern once directed at the private-equity firms was redirected at the sources of their money, namely the public pensions. “There’s a contradiction of values and practices,” he said. “It’s a loss of opportunity because it’s their money being used against their interests.”

  The investors have an obligation to force the issue of what Stern calls “secondary returns,” that is, proof that what the private-equity managers are doing to companies and economies has some benefit to society at large. Just as the investors have pushed for more favorable economic terms through efforts like ILPA, they need to press managers to prove their social worth. “If you want to make change, have money,” Stern said. “That’s what I’ve learned.”

  The idea of the investors pressing for social change was described to me in a slightly different way by another labor leader with private-equity experience. Marty Leary is a long-time labor man, having started his career in the late 1980s organizing state workers in Mississippi. At Unite Here, the hospitality workers union, he’s run across private equity through acquisitions of hotels and casinos. What he’s found, and he has an obvious affinity for unions, is that when an industry is already organized, it does better in the context of a takeover because the buyer is more likely to include the workers in the earlier conversations. “If you’re in an industry that’s not organized and you’re suddenly part of a huge conglomerate that’s all about cutting costs and making the nut in terms of the debt load, it’s going to be a rough ride,” Leary said.

  His clear-eyed view of private equity echoed a sentiment of Stern’s: Ultimately the private-equity guys are not ideologically in favor of or opposed to unions. “They’re in to get their carry and get out,” Leary said. “If workers can position themselves so their cause is at least not counterproductive to PE managers’ goals, it’s possible they can find an opportunity to win collective bargaining rights that might not have been otherwise possible.”

  Also like Stern, he put the onus on the pensions to affect real change in private equity: “It’s a little bit like saying, ‘Are bosses good or bad?’ It’s here, we’re not going to stuff the genie back in the bottle,” Leary said. “The question is, How do we create some rules that allow these guys to do what they do without wreaking havoc and devastation?”

  “The real owners are way too timid, that’s the problem,” he said of the big limited partners. “They are letting the private-equity owners use our own money to devastate our communities. They are the only ones who can rein these guys in.” Leary’s version of Stern’s secondary returns is a “double bottom line,” where investors demand of the private-equity firms that they generate not only good financial returns, but essentially good social returns, as well. It’s here that Leary has a nuanced view of private equity and job creation—mainly, that it’s not just about the numbers.

  “The issue is really are those jobs going to be good jobs or crappy jobs,” he said, noting that this is especially important when you’re talking about workers who want to work at one place for an extended period, not a one-off construction job. “It’s the long-term jobs that matter over time. The people who work in the facility are the ones who live in the town.”

  Where the relationship between unions and private equity goes from here isn’t clear. Some inside the big buyout firms worry that while it was relatively quiet from 2009 on, that didn’t signify a meaningful evolution in the dynamic. Rather, the distractions of the financial crisis and the fight for Obama’s healthcare plan had diverted resources away from criticizing LBO firms. One executive characterized it to me as simply a “lull.”

  The unions, too, represent an increasingly small part of the workforce, especially within the private sector. Government employees, though they may have money invested with private-equity firms, aren’t likely to be a party to a leveraged buyout. According to the Bureau of Labor Statistics, the union membership rate for U.S. workers was 11.9 percent in 2010, down from 20.1 percent in 1983, the first year when comparable data were available. Breaking it down by public and private sector: 36.2 percent of public workers were members of a union, while only 6.9 percent of private-sector workers were unionized.21

  Unions, though, have managed to become a bigger part of the perception equation as private-equity firms contend with the broader implications of being big, visible institutions.

  A lot of my project was about finding where the rubber meets the road for private equity—for the firms, for their investors, for the companies they buy, and for the people who work for their companies. I kept asking the question, what difference private equity makes for all of those pieces of the equation. For George Sterba, it meant 100 bucks less a month in retirement.

  Sterba is a retired truck driver from Chicago. He worked for Ashland Distribution until he retired in July 2011. We met in San Francisco in 2012, when he was part of a protest against TPG. We sat on a short stone wall outside the Fairmont Hotel on a picture-perfect San Francisco winter day, breezy and sunny, just cool enough to make the black hat on Sterba’s head necessary.

  While TPG co-founder David Bonderman spoke on a panel at a conference inside the hotel, Sterba and other members
of the Teamsters Local 705 were outside. They handed out flyers, one of which said “TPG Capital = Pension Fund Buster” and asked people to call Bonderman’s office to “ask him to stop TPG’s anti-worker practices.”

  In Sterba’s case, his retirement plan shifted after Nexeo Solutions, an affiliate of TPG, bought Ashland’s distribution business in early 2011. After the transaction, the new management switched to a 401(k) from the pension plan the company previously had. For him, the switch meant that he didn’t get credit for the last few months of his service in pension terms. Since he’d reached 25 years, he was entitled to $2500 per month, and then $100 a month for each subsequent year. Retiring in July meant he’d reach 27 years, or $2700. but the switch away from the pension meant those months between April and July didn’t count and he didn’t get credit for that last year.

  Sterba, a guy with two kids and two grandkids, and whose own dad was a member of Local 705, struck me as more resigned than angry. “I try to understand both sides, but part of the case for the workers is the light at the end of the tunnel,” he said. We talked about the conundrum of private-equity firms including TPG investing on behalf of pensions while simultaneously taking actions that affect the very people for whom those pensions are a promise. It’s a case the private-equity managers make more and more—that they are a vital participant in the retirement system for millions of U.S. workers. The Teamsters, in the flyer, put it this way: “The reality is these pension plans are helping to fund TPG’s anti-worker investments.”

  Sterba said, “It’s like cutting off your nose to spite your face. You gotta give the incentives for the workforce to stay with you.” For him, the upshot was that seemingly small difference in his monthly check. “I’m missing a hundred bucks a month. It may not seem like a lot, but to someone on a fixed income, it sure feels like it.”