“He who has a thousand friends has not a friend to spare, while he who has one enemy shall meet him everywhere,” goes an adage attributed to Ralph Waldo Emerson. I’m not sure if the Service Employees International Union qualifies as a full-blooded enemy of the buyout industry. But the union’s criticism does seem to be everywhere—first in a report published last month month called “Behind the Buyouts,” and since then in a stampede of press releases and blogs spotlighting unflattering features of the latest deals.
So what did buyout firms do to deserve the apparent enmity of a fast-growing union that represents 1.8 million North American workers in health care, property services, and public services?
Well, first imagine that you’ve peronally spent the last 20 years fighting to improve salaries and benefits for office-building janitors and security guards, many of which work for third-party contractors. Then imagine that for years you battled one particular property owner, Chicago-based Equity Office Properties Trust, to something of a draw. In cities like Chicago and New York, you successfully secured health insurance for union members. But in other cities you failed to. Finally, imagine you witness Equity Office Properties acquired in a $39 billion leveraged buyout in which the company somehow scrapes together hundreds of millions of dollars in transaction fees to pay the new owner.
Now you know what it feels like to be Stephen Lerner. He’s the long-time director of SEIU’s “Justice for Janitors” campaign, and now also director of its effort to compel private equity firms to provide a better deal to rank-and-file workers. By Lerner’s estimate, the fees paid by Equity Office Properties to
Lerner points to the Equity Office Properties sale, as well as other LBOs where union members saw little gain, as one of two primary inspirations for his union’s private equity campaign. The other was the realization—based on “deep research” such as “reading the newspaper,” quips Lerner—that private equity is fast becoming a force in the global economy. “We’re trying to figure out where the economy is going, and how you make that work for working families.”
SEIU recognizes the futility of battling irreversable economic forces. Nevertheless, of the dozen or so principles that the union would like buyout firms to follow, several do seem to be tilting at windmills. According to one, listed in the “Behind the Buyouts” report: “The industry should provide transparency and disclosure about their businesses, their deals, their income, their plans for the companies they buy and sell….” But why should buyout firms have to put themselves at a competitive disadvantage to, say, family-owned companies? Other goals set forth by SEIU seem so generic that they’d apply to any company, in any industry: “Workers should have quality, affordable health care coverage.” As a practical matter, few buyout firms would remain competitive for long without meeting that one.
My guess is that the SEIU, along with the politicians, environmental groups, and others it seeks to persuade, will eventually recognize that buyout firms are simply business owners. They’re subject to the same competitive pressures as other business owners, and enjoy no particular advantage despite their high-profile successes. To be sure, buyout firms set themselves apart by using tax-friendly limited partnerships to raise and invest money; and their backers typically agree to terms that are unbelievably favorable to the fund managers. But the deal-making tools routinely exploited by buyout firms, from leveraged buyouts to dividend recapitalizations to add-on acquisitions, are available to every other business owner in the country. Many are adopting them. For smart, talented people, owning a business has always been a lucrative thing to do. And, needless to say, those lacking smarts and talent have failed miserably in the buyout market.
I used to wonder why the buyout market had no trade association. Now that it does—the recently constituted Private Equity Council—I see one of the drawbacks. Some may infer from its existence that buyout firms lie outside the mainstream of American business, that they are in special need of advocacy and defense. In creating an association, the buyout industry has, paradoxically, made itself a bigger target for criticism. Would a buyer who wasn’t a buyout firm have wrung such a big fee from Equity Office Properties? I don’t know. But capitalism gives them that choice.