Pension funds pressure private equity over labour risks

Welcome back.

A year ago, the US was in the thick of what activists dubbed “hot labour summer”, as Hollywood’s writers and actors, hotel workers and fast-food employees took to the streets to protest against working conditions.

Yesterday, US President Joe Biden announced he would drop out of the presidential race, following weeks of resisting pressure from within the party during which Biden emphasised a record that he said made him “the most pro-union labour president in history.”

His successor as nominee will probably make the case for carrying on that work, even as Republican vice-presidential nominee JD Vance seeks to cast himself as a champion of US workers.

For today’s newsletter, I looked at how the effects of a reinvigorated US labour movement are rippling through public pension funds that manage vast sums of workers’ capital — as well as the possible consequences for private markets.

labour risks

Pension funds reinforce a strengthened US labour movement

Nearly half a million US workers participated in major strikes last year, according to the US Department of Labor, as booming employment fuelled the most union activity in two decades.

Beyond the headline-grabbing work stoppage by the United Auto Workers — which gave President Joe Biden the chance to become the first sitting US president to walk a picket line — nurses, baristas, actors and screenwriters also went on strike to push for better working conditions.

Investors have taken note. US pension funds have recently put money managers on notice over labour standards among their portfolio companies. The strike wave, as well as recent child and migrant labour scandals, have underscored the threat that worker exploitation can pose to returns — particularly in private markets, where recent illegal labour practices have been in the spotlight.

California’s Calpers, the US’s biggest public pension fund, in April sent letters to all of its private fund managers requesting that the companies they own comply with a new set of labour standards. New York State Common Retirement Fund also recently adopted a private equity-focused responsible workforce management policy.

“We believe this is an important risk mitigation tool, so that managers and companies we indirectly own are aware of potential labour principle risks and issues — and highlight these before they become possible problems,” Peter Cashion, who runs sustainable investment at Calpers, told me.

Many of the standards detailed in the policy, Cashion said, were “pretty indisputable: no child labour, follow labour law, promote a healthy and safe work environment”. 

The push for stricter workforce standards is happening as the US labour movement, despite historically low levels of total union membership, is attempting a comeback. If it continues, greater union power could provide extra strength in this fight.

Calpers’ private equity investment director, Anton Orlich, however, says that the pension fund’s attention to working conditions predates last year’s unprecedented union activity.

“This is absolutely an effort that was driven by the board, to align our values with our deployment of capital,” he said. “That’s a long-standing commitment on the board’s part. It wasn’t the result of recent labour strife.”

Growing private equity exposure

As pension funds increasingly shift capital out of listed equities and fixed income, and into private equity and real estate funds, they are exposed to more private market risks.

For a sense of scale: the 100 largest US public pension plans allocated 34 per cent of their assets to alternatives in 2023, according to actuarial and consulting firm Milliman.

Private equity-backed businesses employ about 20mn workers globally, many of whom work in low-paying sectors such as fast food and private security. And recent labour troubles in portfolio companies have pummelled those companies’ returns.

Blackstone-owned Packers Sanitation Services, a cleaning contractor used by slaughterhouses, is one example. The US Department of Labor last year accused Packers of employing at least 102 children in overnight cleaning shifts at meatpacking plants across eight states. The agency reported that the children worked with “caustic chemicals to clean razor-sharp saws”. The DoL fined Packers $1.5mn for hiring children as young as 13. In the aftermath of the scandal, Packers’ earnings fell by as much as half, Bloomberg reported, as sales dropped.

Private equity’s focus on slashing costs in human capital-intensive industries has also been a target of the revitalised labour movement.

The hotel industry is one case study. Hotels owned or controlled by private equity groups Blackstone, Oaktree Capital and Advent International have been targeted by recent strike activity. Workers at hotels across California and Arizona have won chunky pay raises after organising strategic strikes, often timing their walk-offs to coincide with business conventions.

Workers find allies at pension funds

Hotel workers’ willingness to strike over labour concerns appears to signal a backlash to the strategies often employed by private equity owners.

A 2023 study found that PE-backed hotels generated a significant and lasting boost in profits from rooms, by cutting labour costs. Generalist private equity investors tend to spend their gains from cutting labour costs on increased sales and marketing. Even as they spent less on workers, in other words, these firms made their public image a bigger part of their business strategy — an approach that may also have increased their exposure to reputational risks, such as strikes.

Unions such as Unite Here have found a sympathetic ear at some of the US’s largest pension funds, which manage the retirement savings of unionised workers. The president of Calpers’ board was previously vice-president of California’s largest public sector union.

Perhaps unsurprisingly, given the financial clout of these giant pension funds, their attention to these issues is forcing a response from their external money managers. Nearly all of Calpers’ private fund managers had agreed to adopt the labour principles it circulated in the spring, Cashion and Orlich said.

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