Thursday Throwback

The sun is shining, the hand-me-down VW is on block (at least the Pontiac was always cheap to fix) and we have over 80 firms participating in our upcoming Internship Drive (further info at end of column). In other words, it’s time for some Thursday Throwback…

Most of the week’s email came yesterday, in response to my column on the SEIU private equity report. Specifically, many you took issue with my use of the term “basic fairness” – in sympathy to SEIU’s argument that portfolio company worker’s should share in a company’s success. So here’s a sampling:

Loretta: “Basic fairness? I’d be surprised if I was the only reader thinking that such an approach would be out of alignment with the philosophies underlying our capitalist system and a step in the direction of a socialist approach. Is this really what’s needed? Do we think our economy will prosper if we create a climate that no longer rewards innovators well enough for them to continue to innovate? How will ‘the workers’ make a living then? It’s misguided to think that others’ prosperity will increase if you tie the hands of those who create wealth.”

George: “You old closet lefty. Unions are declining in America because the reason for their genesis—the excesses of the Robber Baron era—is no longer relevant. The competition now is global, and union work rules won’t help one US worker keep his or her job. Sorry to be a wet blanket, but I can’t think of one unionized industry that has prospered in the past 30 years, with the exception of the public school monopoly, which is in desperate need of competition. SEIU is merely trying to inject politics into the buyout mix.”

Jordi: “Employees sharing the profit without sharing the risk seems like a skewed proposition. Basically, SEIU is saying that they want the additional upside without exposure to the additional downside of an equity investment (their maximum downside is loss of employment, regardless of whether the buyout happens). Plus, they want the new owner to disclose the business plan so as to be better able to identify where the sensitivities in the deal lie, i.e. so they know what measures to choose first to protest against / try block in order to hold management to ransom. nice one. A fairly large section of the employee base in our firm are offered the opportunity to co-invest in every investment. very few below senior management ever do so. Enough said.”

David: “The growing disparity between the top 0.1% of the U.S. and everybody else looks more and more like Latin America. Historically, U.S. unions have been a far less radical counter-balance than in Europe (let alone the ‘alternative’ of the ‘free-market’ capitalism of our new-found friends in China). SEIU has grown in size, power and respect due to the innovative approach of its leadership. Rather than simply calling them out as the boogey man Socialists, it behooves us to consider their analysis more seriously. Kudos to Dan for spending the time to provide both an intelligent perspective of the SEIU proposal, and for vetting it for the rest of us in the PE community.”

Jonas: “You’re probably getting slammed for the term ‘basic fairness,’ but the word that most stuck me in your column was ‘cocoon.’ I think that a lot of us in the higher levels of private equity (or maybe of any industry) begin hearing our own arguments repeated so many times that we lose the ability to objectively consider and respond to outsiders (like SEIU). I’m not saying I agree with all of SEIU’s points (nor do you, it seems), but some of the backlash I’ve already heard today is exactly the type of ‘they just don’t understand’ carping that you cited. Maybe the problem isn’t so much that they are too outside the realm to understand, but rather that we are to close to it.”

It’s worth noting that the SEIU report came up multiple times last night at a Ropes & Gray private equity forum I attended, which included senior partners from such firms as Bain Capital, Berkshire Partners and Thomas H. Lee Partners. No harsh slamming of it, but more reluctant acceptance of the notion that politics is going to play a more significant role in private equity going forward. As for the “basic fairness” comment, I stand by it. To me, providing employees with equity upside generally would result in greater alignment under a capitalist model – not less alignment.

As for the issue of employee risk in exchange for reward, I offer a few thoughts (and note that I raised that very issue in the SEIU conference call). First, employees always assume risk in any company that goes south – in terms of losing employment. And there is a subset of PE-backed portfolio workers who make so little already, that the idea of them buying in is impractical (can’t invest if you can’t make ends meet). But, in general, I accept the notion that employees should buy in if they want the potential to get paid out. Again, greater alignment of interests.

However, it is also worth noting – as was said repeatedly at last night’s event – that private equity investors themselves have spent the past few years minimizing risk while maximizing rewards. Examples include increased leverage, leverage securitization, LP co-invest and KKR’s apparent ability to get an equity bridge on First Data, while getting to keep any carry on the bridge for itself. So while I generally accept the risk-reward premise, I’d also say that those in glass houses might not want to throw stones.