The SEIU Takes On… the Private Equity Industry?
What... the... *#%^&#@^! ???
By blackhedd Posted in Amnesty International | Carlyle Group | Economy | KKR | MoveOn.org | private equity | SEIU — Comments (3) / Email this page » / Leave a comment »
A friend sends along this tidbit. The august New York Times is once again presenting a labor-union press release as a news story.
The Times piece is bylined Michael J. de la Merced, whom I don’t know but from his archive seems like a fairly conventional MSM business reporter.
It appears that the Service Employees International Union is going on the warpath against the global private equity industry.
But I have to admit I’m flummoxed by what this story is trying to say. As I said, the core of it is a press-release-disguised-as-news, about a set of coordinated global protests to take place in 100 cities in 25 countries next month. No, I’m not kidding, they really mean this!
Of course, the SEIU can’t organize [sic] such an undertaking on its own, so they’re partnering with two outfits with a lot of experience in the coordinated-protest business: Amnesty International and MoveOn.org.
I really don’t know how to describe this more precisely than that. The SEIU are obviously not out to unionize private equity shops, Lord knows. (They’d find out that in the successful firms, even the secretaries are near-millionaires.)
And they’re not really out to change the laws that affect PE. They say on one hand that the big PE firms have “unfairly gamed the system” (more on that shortly), but on the other they acknowledge that wholesale changes in the tax laws will have powerful and far-reaching effects they haven’t yet thought through. So the SEIU admits they haven’t endorsed any legislation at this time.
What does one of the nation’s largest (and most corrupt) labor unions want to do to private equity firms? According to de la Merced, they are seeking “to clamp down on the handsome profits that those companies reaped during the buyout boom.”
Oh dear. What is the SEIU and its New York Times mouthpiece really saying here?
Well, let’s see. They note that some well-known fatcats have made a few billion dollars while America’s workers have trouble paying for their cars. When they say “fatcats,” they single out David Rubenstein of the Carlyle Group in Washington, DC, and Henry Kravis of Kohlberg Kravis Roberts in New York. (Odd that they should have left out household names like Steven Schwarzman of the Blackstone Group, and a bunch of others I could rattle off.)
What isn’t the SEIU and the Times’s newshound saying? Well, let’s see. What do private-equity firms actually do?
There are plenty of variations, but the basic idea in private equity is to acquire whole companies, either in private transactions or from the public. You remember the “leveraged buyout” boom of the Eighties? Same basic idea. Many of the guys that pioneered that business, like Pete Peterson, Tommy Lee, Schwarzman, and a few others, are still at it today.
Why does a business go private? Again, there are plenty of variations, but they usually don’t have a choice in the matter. PE firms often take over companies where the managers haven’t been successful or have underperformed their peer companies.
And where does the “L” in LBO come from? Usually a combination of balance sheet cash from the target company, and debt financing from banks. Up until the credit crisis got started nearly a year ago, LBOs were one of the hottest things around, and global investors of all stripes were clamoring to put up money for them.
Nowadays, almost no one is doing PE transactions. The big ones that were pending a year ago have mostly either failed, had hung bridges, or ended up in court (as lenders like Citigroup try to invoke force majeure clauses to pull out of their funding commitments).
And the Blackstone Group, which pulled off a sparkling IPO just as the credit mess caught fire, has totally screwed the public investors that went into it. One of those was the government of China, who thought their $3 billion investment in Blackstone was pretty smart. It was actually pretty stupid.
Bottom line, no one is making much money on PE this year, except for the management fees. So the SEIU’s timing is a little funky. But let’s leave that to the side.
What usually happens when a business, particularly a publicly-owned one, goes private? Well, the whole basis on which the business is managed changes. You go from whatever it is that public companies manage to (usually avoiding sharp swings in earnings and revenues from quarter to quarter), and you start concentrating on the bottom line.
Why? Simple. If the PE firm borrows billions of dollars to acquire the company in the first place, they need to pay that money back, with interest, usually over a five to seven year horizon, and they need to clear perhaps a 40% profit in that time as well. So they start cutting costs like crazy.
Ah yes, I see it now! The SEIU doesn’t like it when companies cut costs. That means workers are called upon to do more with less, or to take pay cuts, or even to lose their jobs altogether!
And perhaps the biggest single thing that makes workers inefficient is… belonging to a labor union.
I’m going to leave the story here for now. When I get a chance later on, I’ll update you on one of the more interesting points that the SEIU has made: the charge that PE firms deliberately take advantage of tax laws which privilege debt-finance at the expense of equity. Here again, they’re way off base, but the story is actually interesting and it will take a bit more explaining.
-Francis Cianfrocca (“blackhedd”)