Legal Special: GPs and the unions

When details of almost 1,900 flights taken on its company jets were published on a website in February, Leonard Green found itself the latest target in an increasingly elaborate struggle between unions and private equity.

The report by Unite Here, a US union representing workers in the hospitality industry, suggested Leonard Green had been less than transparent with investors about the allocation of expenses associated with its use of private jets.

Leonard Green is far from the only firm to come under fire from the union. Unite Here is infamous in the private equity and real estate industries for its fund manager list, which labels 18 managers as “irresponsible” and 13 as “responsible”.

PE Closer Look, the union's private equity-focused website, defines irresponsible managers as those “that have refused multiple requests to meet, have refused to identify places to work together, or have had a longstanding, unresolved dispute at a hospitality-related property or portfolio company”.

Responsible managers, meanwhile, have reached an agreement “ensuring labour peace” at hospitality-related properties or companies that creates “a basis for co-operation”.

The Carlyle Group, TPG Capital and Ares Management are “irresponsible”, while The Blackstone Group and Apollo Global Management have been deemed “responsible”.

Unite Here has been posting reports on “irresponsible” managers since 2013, questioning issues like fee practices, turnover rates and performance. The Leonard Green report stood out, however, because of the lengths to which the union was willing to go to dig up dirt.

It used Freedom of Information Act requests to access old filings of Leonard Green's Form ADV Part 2A and researched the firm's three private jets registered with the Federal Aviation Administration, analysing its 1,898 flights over the past three years. It then appealed to all Leonard Green LPs, urging them to request more transparency on private jet travel from their manager.

“I didn't know they were going to those levels, but I'm not terribly surprised,” says one source.

The goal of Unite Here's report, according to its author Michael Pineschi, was to increase transparency for defined benefit plans. But some industry sources take a more cynical view, suggesting it was part of Unite Here's broader campaign to persuade Leonard Green to unionise the Palms Casino Resort in Las Vegas, which the firm owns alongside TPG. When Unite Here released its report, the union had been trying unsuccessfully for eight months to meet the fund manager regarding unionisation of the Palms.

“We, Leonard Green & Partners, pay virtually all (98 percent last year) of the costs associated with private air travel. Our investors were charged nothing,” the firm says. It declined to comment further on the matter.

For institutional LPs, the union attention is more of a nuisance than anything else, says a source familiar with the matter. When Unite Here shows up at public pension meeting with flyers or publishes scathing reports it makes more work for the LPs who have to answer questions from trustees and other stakeholders.

“It makes life miserable for investors' investment staff,” says one GP whose firm received negative attention from Unite Here in the past. “We haven't lost a single investor because of it, but for firms that don't have the same returns, it may impact them.”

US unions protesting private ownership of various assets, or tenets of the private equity industry, isn't anything new. In 2007-08, the Service Employees International Union (SEIU) led a number of campaigns against private equity ownership of nursing homes, with Carlyle's acquisition of Manor Care a particular focal point. The SEIU went on to wage protests against KKR and others on points including taxation, outsourcing and labour, using tactics including 'street theatre' and picket lines.

But market sources say that particular type of approach – which attempts to attract negative headlines to shame LPs and GPs into action – is being replaced by unions in favour of pressing for change from within.

“It comes down to where the union thinks it's going to get the best results,” says Heather Stone, co-chair of the investment advisor and alternative funds group at law firm Locke Lord. Unions may choose to be LPs in private equity funds and make good labour relations a stipulation for their continued commitments, she notes. “It depends on whether that's a more powerful message than bringing negative publicity to bear.”

If you can't beat 'em…

Given the contentious relationship between private equity firms and unions, it may come as a surprise that many union pensions – even Unite Here's – are LPs in private equity funds. In fact, the union investor base is on the rise. Stone says she has seen growing numbers of unions investing in the asset class.

In addition to the economic benefits of including private equity in their pensions' asset mixes, unions may be looking to private equity investment as another way to promote their interests. When they commit to a fund, the union can negotiate language in a side letter that promises the GP will consider using union labour at portfolio companies.

Another aspect is the increased focus on labour relations as an environmental, social and corporate governance (ESG) consideration worldwide. Although ESG has yet to become a make-or-break issue for US LPs, their European cousins are increasingly focusing on responsible investment, and may be pushing their US-based GPs to be better stewards.

Indeed, global private equity firms have begun to include labour relations in their responsible investment policies. KKR states in its ESG policy that “consistent with applicable law, [the firm] will respect the rights of employees to decide whether or not to join a union and engage in collective bargaining”.

At the end of the day, though, “GPs are being paid to make money for their LPs. The best way to do that in some cases may be to unionise, in other cases it may not be to unionise,” says Stone. “If it's not going to drive the bottom line, any kind of lobbying won't affect their decision-making.”