Private equity firms and public pension funds have long had a symbiotic relationship: The funds supply the firms with billions of dollars to invest, and the firms deliver double-digit returns that help the funds support retired public servants.
Now, pension leaders are showing a new willingness to confront private equity over the human impact of its investments.
Minnesota’s pension plan temporarily halted investments in one of Toys “R” Us’s former private equity owners, Kohlberg Kravis Roberts, after hearing that 30,000 workers laid off amid the retailer’s bankruptcy had been denied severance.
A top Oregon pension official criticized the private equity firm TPG for what he said was its serious lack of diversity, specifically citing a disparaging remark that one of the firm’s founders had made about women.
And New Jersey’s pension fund moved recently to ensure that private equity firms with mortgage investments in Puerto Rico were not foreclosing on residents of the island after the havoc caused by Hurricane Maria.
Pension officials said the moves were sound investment decisions that were not driven by politics. Major layoffs at companies owned by private equity firms can hurt local economies, where pensions are broadly invested. A harassment scandal could damage a private equity firm’s reputation and, by extension, a pension fund’s investment.
Pensions have long shunned investments unpopular with the people they represent, often in broad categories like guns and fossil fuels. But in recent years, pension holders’ concerns have gotten more specific, and calls for the funds to take stands have increased.
“We are having more contact with the public about these types of issues,” said Adam Liebtag, the acting chairman of the New Jersey State Investment Council. “They are paying closer attention. They are following the money.”
New Jersey is a hotbed for social concerns over pension investments. In addition to voting to more closely monitor firms under the moratorium on foreclosures in Puerto Rico, the state recently pulled money out of a private equity firm that had acquired a so-called payday lender.
“It’s a balancing act every time these situations arise,” Mr. Liebtag said.
The attitudes expressed by private equity investors are also attracting scrutiny.
In June, John Russell, vice chairman of the Oregon Investment Council, said sexist remarks that David Bonderman, a TPG founder, had made in his capacity as an Uber board member were “part of the behavior that basically crippled the brand.”
“I would attribute that in part to lack of diversity,” Mr. Russell said, according to a recording of his remarks.
A TPG spokesman said in a statement that the firm was “committed to being a leader in advancing diversity and inclusion in the industry.”
“Our investors are our partners, and we welcome discussion of how TPG and the industry need to improve,” the statement continued. (Mr. Bonderman apologized for his remarks last year and resigned from the Uber board.)
Today, about 35 percent of private equity’s money comes from public pensions, according to Preqin, a data firm.
Private equity has continued to produce high returns, but the industry faces resistance to its high fees and profit-sharing. Some large pension funds are starting to make more investments directly and cutting out private equity firms entirely.
Not wanting to alienate their funding sources further, private equity firms seem willing to concede on social issues, pension experts say.
“The last thing private equity wants to do is screw this up,” said Ashby Monk, executive director of the Stanford Global Projects Center, which focuses on financial research.
The shift coincides with a growing awareness among workers that they can exert influence through public pension boards, where many of the members making investment decisions represent labor unions.
“Workers don’t want their pension money invested in ways that hurt other workers,” said Sarah Bloom Raskin, a fellow at Duke University and a deputy Treasury secretary in the Obama administration.
“No one wants to be invested in their own decline,” she said.
The collapse of Toys “R” Us has earned private equity particularly widespread criticism. The former owners had loaded the retailer up with $5 billion in debt, which helped push it into bankruptcy in September 2017.
Toys “R” Us has also served as a test case for how workers exert their influence through pensions. As the bankrupt company was liquidating its stores in June, employees protested outside the New York offices of the retailer’s former owners, K.K.R., Bain and Vornado Realty Trust, demanding severance.
The workers said they were unable to get through to the private equity firms, so they switched tack. Over the next three months, they traveled to investment meetings of 14 pension funds in 12 states.
The employees were organized by the activist groups Rise Up Retail and the Private Equity Stakeholder Project, which was started last year.
“There is a well-developed ecosystem of groups that focus on the practices of public companies,” said Jim Baker, the Stakeholder Project’s executive director. “But it’s a limited field around private equity.”
The Stakeholder Project, which is partly financed by labor unions, has focused on private equity’s ownership of for-profit colleges, bail bond companies and the private prison industry. The group argued that Toys “R” Us workers deserved a portion of the financing and management fees the private equity firms collected from the retailer.
The workers scored a big victory in Minnesota when Gov. Mark Dayton, a Democrat, and the chairman of the state pension board led the effort to suspend further investments with K.K.R. in June.
In Washington State, pension officials publicly questioned a top K.K.R. executive, asking if anyone had lost his or her job at the firm over the Toys “R” Us bankruptcy or had gotten a cut in pay. One pension board member suggested that the firm had a “moral obligation” to set up a fund to help the workers. The K.K.R. executive, pointing out that the firm had lost money in the bankruptcy, apologized to the pension board.
Michelle Perez of Vancouver, Wash., was among those laid off when Toys “R” Us closed. Ms. Perez, 28, said she had spoken to officials with pension funds about the difficulty she faced as a single mother trying to find a new job, without severance to provide any cushion.
“We are getting listened to,” she said.
The toy store workers also made their case to pension funds that invest with Bain.
By late summer, their efforts had begun to bear fruit: K.K.R. and Bain agreed to contribute up to $20 million between them to a hardship fund for the workers, although the final amount and terms had not been set, according to people briefed on the matter. Both firms declined to comment.
Last month, Minnesota lifted the suspension on future K.K.R. investments after learning that the firm had agreed to contribute to the hardship fund.
Vornado has not indicated that it planned to participate, according to the workers’ group. The firm did not respond to requests for comment.
The toy store workers are still pushing to recoup all of the $75 million they are owed in severance. Lately, they have been urging New Jersey to put pressure on Solus Alternative Asset Management, which owns some of the failed retailer’s debt. New Jersey has $300 million invested with Solus.
Solus has indicated that it has no plans to contribute to the fund, saying in a letter to investors that the stakeholders group was trying to “extort” investment firms.
In a statement, Solus said it was working to revive the Toys “R” Us brand “in a way that we hope will provide sustainable employment for workers in the future.”