A more perfect union

With a pressing need for higher returns and greater diversification, labor union pension funds – commonly called Taft-Hartley plans – are slowly making moves toward private equity real estate. By Eva Poon

In theory, labor unions should love real estate investing. Setting aside the beneficial effects real estate can bring to the portfolio, construction sites create union jobs, while new and improved buildings create service-sector union jobs.

But in practice, the so-called Taft-Hartley market in the US has not been a major participant in real estate investment for a number of reasons, including a generally conservative approach to portfolio management, and a suspicion that many fund managers do not have the best interests of workers in mind.

This is beginning to change, albeit slowly. And the private equity real estate market has much to gain if the trend continues. By one market-insider estimate, Taft-Hartley plans – the sprawling set of labor-union-linked plan sponsors – control roughly $450 billion in assets. If this group catches up with the rest of the institutional investor market by way of a real estate allocation, it will mean billions of fresh investment capital.

New pockets of union capital continue to emerge. In September, auto giant General Motors struck a deal with the United Auto Workers union to shift to an independent trust $51 billion in healthcare obligations for union retirees. The trust, a voluntary employees' beneficiary association (VEBA), may include up to $35 billion of funding from GM. Ford and Chrysler are also reportedly in contract talks with the UAW. The three Detroit auto makers have a combined union retiree healthcare obligation of $90 billion to $95 billion, according to The Wall Street Journal.

“Many of the funds had pretty clear mandates that their investing efforts should be in support of creating additional jobs for employment in the US and more locally if possible.”

Clearly there is much capital to be put to work. But Taft-Hartley investment in private equity real estate is a relatively recent phenomenon in the US, says Michael Hoffman, president and partner at San Francisco-based Probitas Partners.

“In terms of alternatives—which include private equity, infrastructure and real estate—[it's been] relatively recent that Taft-Hartley funds really stepped up their investing efforts in those markets,” says Hoffman. “Part of it is that many of the funds had pretty clear mandates that their investing efforts should be in support of creating additional jobs for employment in the US and more locally if possible.”

Sponsored in 1947 by US Senator Robert Taft and Representative Fred Hartley, Jr., the Labor-Management Relations Act, commonly called the Taft-Hartley Act, served to restrict the activities and power of labor unions. The act also imposed a number of procedural standards that unions and employers must meet before using employer funds to provide pensions and other benefits to unionized employees.

In 1974, more extensive protections for workers and employee benefit plans were set forth in the Employee Retirement Income Security Act (ERISA). ERISA set minimum standards for most voluntarily established pension and health plans in private industry to better protect individuals in the plans.

A balancing act
In general, Taft-Hartley plans are behind their institutional investment peers in embracing risk. “The willingness [of Taft-Hartley funds] to consider the alternative areas has evolved based off of the experience in the public markets—they've been somewhat successful [there] and it's just a natural evolution,” says Steven Case, managing director at Connecticut-based investment consulting firm Evaluation Associates. “The Taft-Hartley market is a more cautious user of diversifying and return-enhancing investments vis-à-vis, for instance, the endowment and foundation marketplace, which have been more path-breakers. The Taft-Hartley area takes a little bit longer because of the governance issues.”

Despite the consensus that real estate can deliver badly needed returns and diversification to a portfolio, advisors and consultants of Taft-Hartley funds point out that alternatives investing in general creates something of a juggling act. Union fund managers must fulfill their obligation to union beneficiaries and at the same time be mindful to social sensitivities around labor issues.

“Historically, there's been some resistance to investing in funds—whether they're real estate or private equity or otherwise—that have a broader global mandate that includes something outside of the US because theoretically that would export jobs or create jobs in another market,” says Probitas' Hoffmann.

This, in part, explains why Taft-Hartley funds have focused much of their investments in the US: “Real estate funds—if they're US focused—obviously fulfilled much of their interest in having the additional support of job creation,” Hoffmann adds. “If they're domestically focused funds, theoretically whether it's development or management of assets, it's still job creation on a domestic basis and that's a positive thing for them.”

A New York-based advisor to union and Taft-Hartley funds says one common practice within the market is to require fund managers to sign a “responsible contractor” agreement, meaning that they will only support projects that are union friendly.

“Real estate is something that is close to the Taft-Hartley's because construction is such a big business in the country and the world. So they're sensitive to the fact that underlying investments have an awareness of their Taft-Hartley constituents.”

Of course, different groups will define “union-friendly” in different ways. The advisor points out that some GPs may claim to support labor-friendly practices, but what they mean is “laborneutral” – in other words, they endeavor not to destroy jobs, which is distinct from seeking to create more union jobs.

There is also not harmony among the unions on the issue of what constitutes a labor-friendly development. A construction site that employs non-union workers may gain the blessing of a service-sector union once the building is complete if the doormen, cleaning services and catering services are all unionized. “Solidarity gets lost in the mix,” says the consultant.

Same animal, different stripes
In their investment objectives, Taft-Hartley funds are much closer in their objectives to other pensions. The approach involved is no different than for other investors, says Gary Stevens, a partner at Connecticut-based Landmark Partners. “We've got a large union pension fund as a major investor, and they do what everybody else with a very large fund does. They have a very professional staff, they have good lawyers, they have a serious well-thought-through approval process and they often use high quality advisors.”

One trend to note in Taft-Hartley investing is the increasing use of third-party advisors or consultants to manage alternative investments. According to Hoffmann, Taft-Hartley funds have historically used consultants and advisors to invest in the alternatives market.

“Unlike the rest of the private equity world, it's still probably much more consulted than the public funds—the foundation and endowment market,” says Hoffman. “So, almost without exception, nearly all the Taft-Hartleys rely heavily on consultants to do their investing as most boards still make the final decision.”

This development is echoed by Evaluation Associates' Case: “Most Taft-Hartley clients aren't set up to be investment managers and as a result they rely more on third parties.”

Similarly, as with many funds with limited experience in the private real estate markets, Taft-Hartleys are eyeing the fund of funds option to execute their real estate investments.

The proliferation of funds of funds in the past few years also, in a cyclical sense, accounts for the increase in real estate-related investments among pension funds.

“What's happened between five years ago and today is that the number of funds available for investment has exploded,” says Jack Foster, managing director and head of real estate at Franklin Templeton Real Estate Advisors. “What that means is even endowments and your foundations don't have the investment staff capacity to see everything out in the market. So the dance is: Well, do we just pick the funds that come to our office and maybe do a little traveling, or do you go and hire a firm whose job is to see every fund out there?”

Notable Taft-Hartley/union pension plans

Name AUM Notes
The Western Conference of Teamsters Pension Trust $29bn Largest labor-managed trust in the world
National Railroad Retirement Investment Trust $21bn Launched in 2002, the trust invests on
behalf of the Railroad Retirement System
Central States $20bn Comprised of the health & welfare fund
and the pension fund