Ohio strikes back

The Ohio Public Employees’ Retirement System (OPERS), a $50 billion pension, has taken the gloves off in its interactions with global private equity firm Permira.

The pension, which has about €110 million invested with the London-based private equity heavyweight, has threatened to re-think its relationship with the firm if Permira’s portfolio company Hugo Boss doesn’t reconsider closing a production plant in the city of Brooklyn, Ohio.

This is a startling show of force on the part of the pension and, in an era when LPs are increasingly becoming more aggressive in their interactions with fund managers, should be of concern to GPs.

Like many other businesses, private equity-backed companies have needed to cut costs through the downturn, but the Ohio situation shows the decision may not be an easy one when it involves killing jobs in the backyards of important LPs.

Permira owns Hugo Boss, and decided recently to shutter the plant after doing everything in its power to make the plant profitable, the firm said. The plant employs between 300 and 400 production workers.

Public officials and the union representing the production workers had been negotiating with the company to find ways to keep the plant open, but talks broke down when the union, Workers United, refused to accept the same contract the company was offering to maintenance workers at the site.

Instead, Hugo Boss decided to close the plant in April, and keep paying production workers’ wages until the plant officially closes, even if production is halted before the closing date.

The break-down of the negotiations spurred the Ohio pension into action and also inspired one of Ohio’s US Senators to write a letter to Permira.

Ken Thomas, OPERS’ chairman, and Chris DeRose, the pension’s chief executive officer, warned Permira to reconsider closing the plant. The city of Brooklyn – with some 11,000 residents – will lose $120,000 in annual income tax revenue once the plant closes, according to a local media report.

“The OPERS board noted that the investment performance of Permira IV has underperformed our expectations and is inconsistent with the reputation of your institution,” the two said in the letter, sent on 25 February. “Due to the poor performance of the fund and representations to the board that [Hugo Boss] did not bargain in good faith … the board now has concerns about future involvement with your institution.” Permira IV closed in 2006 and had a -36.6 percent IRR as of 30 September 2009, according to documents from the California Public Employees’ Retirement System.

Senator Sherrod Brown, considered strongly on the political left in the US Senate, also sent a letter chastising Permira, which is headed up by co-managing partners Tom Lister and Kurt Björklund.

“I have grave concerns when hearing stories of private equity firms such as Permira loading their portfolio companies with debt, closing US production facilities, and reaping high returns – all at the expense of American workers,” Brown said.

Workers United has vowed to enlist other states like Pennsylvania, New Hampshire, Texas and California, in a massive re-evaluation of their commitments to the firm.

Permira has historically had trouble with unions, so its brush-up with Workers United is nothing new. When it teamed up with CVC Capital Partners to buy UK motoring company the Automobile Association for £1.75 billion (€2.6 billion; $3.3 billion) in 2004, a trade union representing a minority of the workers at the company, GMB, publicly attacked Permira. It accusing the private equity firm of “asset stripping” by cutting 3,500 jobs and loading the company with debt. The confrontation started initially between the union and then managing partner Damon Buffini, but spread into a general battle about the role of private equity in the UK economy. In a sense, that same battle goes on today as British authorities debate with European peers the merits of various proposed controls on alternative investments.

In the US, the anti-buyout venom hasn’t quite reached the UK level, but actions like that of OPERS could lead to more labour scrutiny of every move made by private equity firms.

In the era of LP power, a public attack by a public pension against one of their fund managers over a political issue should not be viewed lightly and GPs should evaluate the political risk next time they need to cut jobs.