The hand that feeds

US pensions beware: a persistent US labour union may try to legally thwart your private equity programme.

This week Thomas DiNapoli, New York’s state comptroller and thus trustee and manager of the $154 billion (€99 billion) Common Retirement Fund (CRF), indicated a desire to change legal constraints limiting its allocation to alternative investments at 25 percent of the portfolio.

It’s not hard to understand why – private equity and real estate were the stars of CRF’s portfolio, returning roughly 25 percent and 15 percent, respectively, for the fiscal year, compared to public equities’ dismal -6.44 percent.

DiNapoli is planning a strategic allocation review next year and wants CRF, the US’ third largest public pension, to have greater investment flexibility to enhance returns for pensioners. Given precedents being set in other states, the Service Employees International Union will likely try to sponsor a legislative stumbling block.

The SEIU, which bills itself as the fastest-growing North American labour union, criticised the Washington State Investment Board’s November 2007 decision to increase its private equity target to 25 percent from 17 percent. SEIU president Andy Stern called it “excessive” in a March 2008 interview with The Washington Post, in which, incidentally, Stern erroneously said the WSIB upped its target to 29 percent, “with 25 percent of that allocated just to KKR”.

The SEIU last month introduced an initiative in Washington State which, if it gathers enough signatures to eventually become a ballot measure, proposes legislation likely to severely limit the pension’s private equity programme.

The “Washington Community, Environment, and Retirement Protection Act” would force the WSIB to invest only with private equity fund mangers whose portfolio companies adhere to certain corporate social responsibility principles. Though short on specifics, the Act says this includes “provisions intended to ensure transparency, tax responsibility, environmentally responsible and corruption-free practices, and a peaceful relationship between management and labor”, as well as tangential annual reporting on compliance with such principles.

A WSIB spokeswoman says the pension is analysing the Act’s legal interpretations and potential impacts, but will only take an official position should it become a bill on the ballot.

The SEIU is considering introducing similar initiatives in other states, she adds.

The union recently failed to push a bill through California’s state assembly that would have prevented the state’s pensions from investing with managers linked to certain sovereign wealth funds, namely those associated with countries deemed to be negligent in human right policies.

The state’s powerhouse pensions lobbied hard against the bill, Governor Arnold Schwarzenegger came out strongly in opposition to it, and it effectively died in committee.

But killing a bill being debated among politicians is different than possibly having to educate voters on private equity’s benefits. It is even more of an uphill battle if a labour union is able to portray the issues, true or not, as private equity pitted against the broadly accepted concept of corporate social responsibility.

This publication has long argued the private equity firms must sing their own praises, cease to be a “black box” and help frame debates about its impact on workers, the economy and social issues.

So, too, must private equity’s biggest fans. Influential limited partners like the WSIB and CRF must speak out to educate their beneficiaries as to private equity’s positives – well ahead of potential ballot battles.