Should private equity firms accept capital from, or sell ownership positions to, sovereign wealth funds of countries that have poor human rights records? It’s an extremely thorny question, so let’s take some time to work it out.
The reason we do such work today is that the Service Employees International Union (SEIU) is using the issue of human rights to further bash The Carlyle Group, which recently sold a 7.5% firm ownership to a sovereign wealth fund of Abu Dhabi. SEIU argues that Carlyle is employing a “see no evil” approach toward its new (minority, non-voting) owner, which is documented to have mistreated immigrant workers and homosexuals.
“Carlyle is undermining efforts to improve human rights by publicly embracing the government of Abu Dhabi in this way,” argues SEIU spokesman Andy McDonald.
Carlyle spokesman Chris Ullman responded with: “We are pleased to be affiliated with [sovereign wealth fund] Mubadala, which is a sophisticated institutional investor that has become a long-term partner with Carlyle.”
Before continuing, it should be noted that only Carlyle seems to be in SEIU’s sights. Blackstone selling an ownership piece to China? That huge infusion of Abu Dhabi cash into Citi? Not a peep. The reason, of course, is that Carlyle is buying nursing homes operator ManorCare, which SEIU wants to unionize. So what we have here is a bit of PR hardball, but don’t let it cloud the underlying issue. If SEIU’s cause is just, its motives don’t much matter.
A private equity firm’s primary responsibility – both legally and morally – is to its investors. Its second responsibility is to the portfolio company employees it takes into its charge, and its third is to the social/legal infrastructure that enables it to do its work and make its profits.
The SEIU argument rests of the stool’s third leg, and it is about social responsibility rather than legal mandate. After all, Abu Dhabi is an official ally of the United States. SEIU also makes a case about transparency, in that Abu Dhabi’s sovereign wealth funds are considered among the world’s most opaque (download report: IIETruman.pdf), but I think that’s adequately counteracted by Carlyle also counting plastic wrap-clear CalPERS among its owners.
Carlyle obviously made a choice to accept Abu Dhabi’s money. This isn’t a listed security that anyone could buy, and PE firms have shown prior discretion in turning down LP commitments from state pension funds that publicly-disclose fund performance data (although Carlyle has not done so).
I ultimately don’t object to its decision to take the money. To make such decisions based on human rights would handcuff Carlyle, as it’s hard to find a major country without questionable human rights records. China? Russia? Saudi Arabia? The United States?
But that is not where this should end. If Carlyle agrees to accept Abu Dhabi as a partner, it should use its newfound partnership as leverage to push for change. Not because it’s legally mandated, but because it is a unique position to effect change. Carlyle’s David Rubenstein often says that capital is the United States’ greatest export. My hope is that he and his peers will also remember that currency can have multiple meanings.