George Roberts, principal in the august Kohlberg Kravis Roberts & Co. private equity firm, last week made his customary annual presentation to a Washington State Investment Board panel.
The meeting was hardly customary.
The Private Markets Committee also heard comments from a representative of the Service Employees International Union, which has become a vocal critic of the private equity industry in general, and KKR in particular.
Although the exchange between Roberts and SEIU representative Chris King was characterized as “civil” by a board spokeswoman, the encounter again highlighted the frequent tension between maximizing investment returns and minimizing the social and political side effects.
The SEIU represents 45,000 beneficiaries of the state’s school and public employee retirement system, and a total 1.9 million workers in the United States and Canada. It has been one of the more successful labor organizers despite an overall decline in union membership.
In April, SEIU published “Inside the World of Private Equity,” a critique that says public companies taken private lay off employees, while equity managers earn millions in fees. Also, the deals usually saddle the private companies with substantial new debt. Because interest payments are tax deductible, governments that levy income taxes may lose significant revenues.
The union has taken its concerns to several state investment boards in recent months.
The SEIU’s Washington State Council last month exchanged letters with KKR that asked for more disclosure about the company and its holdings, which include Toys “R” Us, Sealy and Hospital Corporation of America. In a separate letter, the union also asked the investment board not to invest in the pending KKR initial public offering.
King, a University of Washington employee, reiterated the SEIU’s objections before the Markets Committee. “I think these are serious questions,” he says.
The KKR response to SEIU concerns, in a letter authored by principal Henry Kravis, deflects calls for more disclosure while defending the firm’s record as an investor in U.S. companies that have created jobs and helped keep the U.S. competitive internationally.
King says Washington taxpayers and pension fund beneficiaries deserve more information.
The committee was unmoved.
Roberts was asking the group to recommend to the full board a $700 million commitment to a third KKR European Fund. The state committed $900 million to two earlier versions, which have so far yielded impressive results. A $400 million investment initiated in 1999 now has a net value of $973 million. The state committed $500 million to a second fund in 2005, of which KKR has tapped $406 million. But the fund has already dividended $56 million back to the state.
Since 1981, the investment board has earned $4.9 billion with KKR, an annual return of 17.3 percent.
The board has steadily rejected suggestions it weigh non-financial matters when making investments, and the response last week was no different. Even Glenn Gorton, a SEIU-represented member of the Markets Committee, recommended the $700 million commitment be approved.
The board, by the way, has been cool to participation in the KKR IPO.
SEIU’s concerns are well-taken, especially as questions arise regarding the kindly tax treatment the private equity industry enjoys. But those issues can be more properly addressed in Congress and the Legislature.
The investment board, meanwhile, does well to maximize the returns for the pension funds that benefit all state employees, and taxpayers. Members have been single-minded, and singularly successful.