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What’s odd, however, is that Permira seems to be making a questionable financial decision. Hugo Boss reportedly asked the workers to take a 25% pay cut from $12 to $9 and, when they refused, opted to shutter the facility and move the jobs overseas. Ohio officials tried to intervene with financial incentives, but it was too late. In response, an Ohio public employees union that has invested in Permira’s past two funds said it “now has concerns about future involvement.” Local labor unions also are asking other state pension systems to reevaluate their future dealings with Permira. Reports over the number of affected employees has varied, but the highest estimate has been 400. Assuming each of those employees is fulltime — working 40 hours per week, 52 weeks per year — they currently would make just under $25,000 per year (plus benefits). Hugo Boss wanted to cut them down to just under $19,000 per year (plus benefits). The total savings would have been $2.5 million per year. Now compare that to how much money Permira makes off of its relationship with the Ohio pension system, which committed €60 million ($81.5m) to Permira’s latest fund. Assuming a standard 2% management fee, OPERS would have paid out €1.2 million ($1.6m) in the first year of the fund’s life. Moreover, Permira also likely was still collecting management fees from OPERS’ €50 million investment in a predecessor fund. Finally, Permira should — in theory — be collecting carried interest from profitable investments made possible, in part, by OPERS’ money. Now throw in the possibility of other public pension funds following OPERS’ example. And also the startup costs of a new factory and of training a new workforce. It’s impossible to say that Permira will or won’t make more money by closing the Ohio plant, but at best it looks like a wash. At worst, it could be disastrous, and certainly will do nothing to improve private equity’s image issues. The firm isn’t talking, except to say that it is “sensitive to our investors’ concerns and always have an open line of communication with them.” Someone close to Permira tells me that its primary concern is interfering with a decision made by portfolio company management, but isn’t that imperitive of a controlling shareholder? We’re not talking about something piddling like removing bendy straws from the company cafeteria here. Hugo Boss isn’t being much more forthcoming. It refusing to confirm or deny labor union assertions that the factory is profitable, except to say that it isn’t “globally competitive.” The former is objective, while the latter is subjective (guess which one is more compelling?). Moreover, Hugo Boss adds that it “acted in the best interests of shareholders and customers by deciding to close the facility.” Well, we’ve already established that the best interests of Permira are in question. As for customers, have you seen the price of a Hugo Boss suit (which is what the factory makes)? I know every dollar counts, but no way does a Hugo Boss customer make a purchasing decision based on a $10 markup or markdown. Permira still has a small amount of time to tell its portfolio company to reverse course. It should do so…
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March 4th, 2010 at 9:20 pm
So let me get this straight: You’re advocating that Permira abandon its fiscal responsibility to its other clients to boost its management fee?
March 5th, 2010 at 10:46 am
FuManchu, i couldnt have said it any better. Not only is that whole line of reasoning of comparing lost fee and carry to labor savings ridiculous (imagine with how much glee Dan would report the scandal of discovering a GP who actually made calculations like that), but the business logic of equating labor savings to a $5 on the price of a suit is exactly the type of childish understanding of business operations and finances usually reserved for truly bone-headed general news journalists, not proudly differentiated “business” journalists. Dan, do you own anything made in China? if so, how could you? Why arent you buying American in every possible instance?
March 5th, 2010 at 12:27 pm
I don’t understand your argument on Permira - you sound like a raving protectionist! I am sure that nowhere in the LPA for Permira’s funds does it undertake to sacrifice financial gain for indeterminate social good. It is, like all private equity funds, in the business of making money. If it can make things for less somewhere else (would OPERS have been as cross if they’d shifted jobs to Indiana) then it simply should. If OPERS doesn’t like that, then it needs to revisit its decision to invest in private equity and every other asset class. I mean, where does it stop? (”dammit, we won’t invest in Accel ‘cos they won’t move Facebook here!”). Tsk!
March 5th, 2010 at 12:27 pm
Regarding Hugo Boss, your math talks about the impact on the GP (which is, admittedly, of paramount concern to most GPs). But the GPs are supposed to be generating returns for investors, and if the Ohio plant isn’t “competitive”, Permira’s actions may have been appropriate–in the long run, companies have to be competitive or they don’t survive. See the economy in Detroit for a case study writ large.
March 5th, 2010 at 12:28 pm
Sounds like a classic case of mgmt being penny-wise and pound foolish!
March 5th, 2010 at 12:28 pm
I don’t think Permira’s decision is odd at all and don’t share the same cynicism at all about their decision-making. The Ohio pension fund you refer to is just one of the investors in Permira’s fund.
If I were an investor I would hope, expect, demand that Permira make the correct economic decision for this portfolio company without regard to the narrow concerns of a single investor. The media often makes a big deal out of decision-making when there is a conflict of interest (and rightly so!).
In this case Permira appears to have done right by the majority of its investors even at peril to its own longer term economic interests. For this they should be praised, not vilified.
March 5th, 2010 at 12:29 pm
I don’t think it’s correct to use potential lost management fees to assess whether or not Permira’s decision makes sense. It’s very apples and oranges… if the decision makes sense at the company level, and it makes sense for LP’s, then Permira is doing the right thing. If they’re looking our for their management fees they’ve failed at their fiduciary duty, and if they are looking out for the interest of one LP over all of the rest then they’ve failed to be fair and objective. So if your argument is that they saved $2.5m in cost but lost much more in management fees, then I think you’ve missed the point.
No hard feelings, and we are not involved in Permira, Ohio, etc. I do have some HB… the shirt fabric tends to be of lesser quality but I love their flat front slacks.
March 5th, 2010 at 12:30 pm
Dan, how is being globally competitive a subjective assertion?
There are quantitative metrics used to measure profitability, as well as competitiveness, such as COGS as a % of sales; how is the company managing procurement, and supply chain ingeneral? How about vs their nearest competitor in XYZ country? Or their other plant in ABC country? Who can make the suit at the lowest cost? How about SG&A as a % sales; do they have 20 ppl doing the job of 5 b/c they are protected under a union contract?
These are the first few that jump out at me, but in order to be considered globally competitive, you must be THE low cost provider of the best quality of goods vs your competitors. That can, and often is, measured by those companies utilizing best practices.
Perhaps the Labor Unions need to take a step back and really examine how their existance has impacted the US economy…we aren’t talking about plucking chickens for 12 hrs at $.05 a day. It’s a pay cut, it’s painful…it happens? Anyone at OPERS have to take a pay cut in the past few years? I know of a few Public Pension funds that had to slash a few salaries…
OPERS has a point, mind you, but Permira has hundreds of other stakeholders to think about as well. If their decision was in the best interest of the company and its stakeholders, overall, then it was the right one. Private Equity is not Socialist Equity. Sometimes you need to rationalize the workforce/manufacturing sites to move forward as a business. Perhaps OPERS would be more content investing only in businesses located in, and employing Ohio residents…let me know how that works out for them.
BTW, has anyone examined the Human Resource practices at any of the companies owned by OPERS’ public equity managers? Trust me, plant rationalization happens EVERYWHERE, not just in the PE-backed world. I’d like to know whether OPERS is prepared to dump every manager that lays off workers in their state….I’d also like to know the cost to do so…my guess is it’s worth more than $2.5 million in the long term.
March 5th, 2010 at 12:32 pm
Your Permira story is an interesting twist of an old (if you call 2004 old) prediction come true. Journalist William Greider published The Soul of Capitalism then, and in it he posited that LP’s representing particular interests (e.g. – labor union pension funds or philanthropy corpuses) would begin to make investments based not only on sound portfolio management theory, but also based on what might benefit the current constituents of the LP. Pulling money out of Permira’s future funds and putting it with fund managers willing to at least do no harm to their constituents is right in line with his thesis. Interesting stuff. In his book, he talks of both the do no harm side (e.g. – labor union pension funds shouldn’t buy into PE funds that make money by laying off workers) and the active side (e.g. – labor union funds would be wise to make investments that benefit the fund AND the union members, like construction projects for the carpenter’s union or infrastructure bonds for bricklayers, etc.).
While most, if not all, of the LP management would tell you that there needs to be a brick wall between the union or foundation and its pension fund in order to make the appropriate fiduciary decisions, there are many ways that a creative, responsible corpus management team can invest with additional standards beyond simple fiduciary independence to achieve appropriate returns while preserving capital. Investment screens are used all the time in religious and/or other moral corpora, and Greider simply suggest it go beyond screening things out to actively seeking investments that meet portfolio return requirements and some other goals with a portion of the corpus as well (like employment of union members). Takes a bit more work, but GP’s are well-advised to think this way. Heck, even CALPERS has 9.8% of its portfolio invested in CA investments using this same logic.
March 5th, 2010 at 12:33 pm
Kenneth:
Ok, take out the LP commitments.
Hugo Boss will save a max of $2.5m on salaries (based on what it offered
the Ohio workers). It’s already agreed to pay out $1.5m in severance to
the workers. So now we’re down to $1m. Then it needs to open a new
facility (probably) and train new workers. Seems to be a wash, at least in year
one.
I agree a company needs to stay competitive. At the same time, however,
I believe it also has a responsibility to the employees who — over the
years — have helped make it profitable. Saving a small amount of money
on the margins does not (to me) justify laying off 400 employees in a
terrible employment environment.
March 5th, 2010 at 12:35 pm
I agree. There must be a series of other cost savings that argue for the move–if it were only the (relatively paltry) labor savings it would hardly seem worth the effort. And, putting my GP hat on again, why piss off a big LP?
March 5th, 2010 at 12:47 pm
Dan, I’m disappointed in you for suggesting Permira would or should make investment decisions based on the gain or loss of management fee associated with one investor (Ohio PERS). What about Permira’s fiduciary duty to the many other LPs in that fund to maximize the value of their investment? To cross the interests of the GP (having or losing an investor) against the interests of a particular fund would be analogous to a politician (or indirectly, a placement agent) leveraging his influence over public pension investment decisions in exchange for political contributions, an idea you have railed against in this very space. Shame on you, and have a good weekend!
March 5th, 2010 at 12:50 pm
I agree with you.
“It’s primary concern is interfering with a decision made by portfolio company management” is simply a bizarre statement. PE guys claim to be more than just blood-sucking leeches that make money by putting their portfolio companies into bankruptcy and stiffing their creditors by overleveraging them just to get their equity back early, a la Thomas H. Lee and Simmons:
http://dealbook.blogs.nytimes.com/2009/11/11/hands-of-fate-diverge-at-sealy-
and-simmons/?scp=1&sq=simmons%20+%20lee&st=cse
In that case, I am sure it was Thomas H. Lee’s decision, and not management’s, to overleverage Simmons into bankruptcy just to pay a huge dividend.
So, either PE GPs are owners and not just leeches or they are not. And if they are owners, then they have a positive responsibility, which they cannot duck, to weigh in with their management teams (who are, after all, just hired hands) on whether or not to close an entire factory.
Your final statement tells it all: “no way does a Hugo Boss customer make a purchasing decision based on a $5 markup or markdown.” In fact, if there is a consumer backlash due to this action (ie, a boycott), the cost/benefit analysis could look a lot worse for Hugo Boss and Permira. I am just waiting for a Boycott Hugo Boss Facebook group to appear. It won’t take long.
March 5th, 2010 at 2:47 pm
Your article on Permira raises some interesting questions but I don’t agree with your conclusion that Permira should change course. First, the board members of Hugo Boss have a fiduciary obligation to do what’s in the best interest of the company, first and foremost. Keeping the Ohio plant open simply to pacify certain LP’s would be a blatant violation of that obligation. Presumably, there are other shareholders as well. They don’t care about Permira’s LP issues. Second, I am sure Permira has non-pension fund LP’s. How eager would they be to invest in Permira’s next fund if Permira’s investment decisions were guided by union wants and desires?
March 5th, 2010 at 3:17 pm
I knew there was a chance that the comments in my email could appear in a future edition of the Wire, but I wasn’t expecting to see the whole posted here as a comment. At least you had the discretion not to include my second, more personal email, and to invite me in on the discussion.
I’ve read this and the other post and I have to agree that business is business, especially in this economy, though I will repeat the point from my second email that I give credit to a manager who is able to stay competitive and adjust capacity as needed without being heavy handed with the hiring/firing of employees. At the very least, a history of considerate behavior could be thought of as increasing the value of a company’s goodwill, whether it’s by strengthening the brand reputation or by fostering a more productive workplace with employees who are willing to trade some of their wages in exchange for greater job stability when times are tough.