I'm a bit of a geek about capital markets for a trade unionist (in the UK at least), so I rarely find that when I read union commentary about these things that I think 'I hadn't thought of thought that' or 'I must check out the things they are referring too'. More often I think 'that isn't quite right' or simply 'Doh!'. But some of this stuff shows a much better and deeper understanding of private equity than I have.
Private Equity Workshop Advances Union Bargaining Agenda
While unions internationally continue to push for regulatory measures to curb the funds, and while they explore discussions with the funds and management of their portfolio companies to secure trade union rights, buyout funds are now major national and transnational employers. Unions need to adapt their collective bargaining practices to the changed financial and management imperatives that a leveraged buyout imposes. Following on the successful international conference held in November 2006, IUF, IMF and UNI organized a workshop in Nyon, Switzerland on November 14 focusing on concrete organizing, bargaining and negotiating tools for unions.
In the first of two presentations, the IUF's Peter Rossman reported on new trends in the buyout business following on the global credit crisis set in motion this summer with the collapse of the US subprime loan market. Despite the credit crunch, investors, including employee pension funds, continued to invest in private equity. Buyout funds had already raised over USD 263 billion in the first 10 months of 2007, more than for the whole of 2006, and there was no indication that pension fund money was retreating significantly. While the big leveraged buyouts were temporarily off the agenda, the funds continued their activity in the food sector with buyouts of small and medium size companies, often consolidating them into substantial companies with manufacturing and distribution on a wide scale and big payrolls. The danger for employees was the vulnerability that comes with the heavy leverage taken on with each successive buyout.
Buyout funds, while waiting for the credit pipeline to free up, would also be acquiring significant shares in listed companies. Unions had to be aware that in such cases the funds were not simply another activist investor in search of "shareholder value" but a structurally aggressive investor. To take their large profit on the deals as "carried interest", they had to beat the "hurdle rate", or profit threshold, agreed with investors in the funds. The IUF presentation gave examples to illustrate the shift in focus of buyout activity from the credit-strapped North American and European markets to the Asia/Pacific region.
Elaborating on the implications of the credit crisis for unions and collective bargaining, Rossman pointed out that credit markets were now incapable of financing big secondary buyouts and the large-scale debt refinancing which had permitted many private equity-owned companies to be pushed to the point of insolvency while still serving as cash cows for the funds. Exiting investments through a return to public stock markets was also problematic in the current situation. Private equity funds would therefore be managing their portfolio companies under even tighter cash flow constraints than originally anticipated. Unions would have to develop appropriate bargaining strategies to withstand these additional pressures.
In a second afternoon session, the IUF elaborated on the ways in which private equity ownership - and in particular the weight of massive debt (leverage) on the portfolio companies' balance sheets - fundamentally altered the context of collective bargaining. Unions engaged in collective bargaining with private equity-owned companies were essentially negotiating with a bundle of debt; understanding and unpacking that debt was fundamental to the bargaining process. Unions would have to press for full disclosure of the total amount of debt incurred in the buyout process (including fees etc.) as well as the types and maturity of the bonds and debt securities, the rates, the loan covenants etc. Negotiating a collective agreement, however, was only the first step. In order to detect cash being pumped out and new debts being assumed, unions would have to press for ongoing access to verifiable financial accounts in order to continuously monitor debt- and dividends-to-earnings ratios!
Unions would also have to monitor asset management, including the selloff of real estate and "intellectual property" (trade marks, brands etc.) and understand their implications for cash flow management in order to secure ongoing investment as a bulwark against asset stripping. Defending company pension commitments was also a strategic imperative, and could be used in some cases to block a buyout.
The IUF presentation was complemented by a presentation from the IMF's Ron Blum, who explained the ways in which degrees of leverage led to changes in management cash flow strategy with immediate implications for workers. Learning to Identify these management techniques was an essential task for collective bargaining under private equity ownership, and crucial for securing employment and investment commitments. The presentation included concrete examples drawn from the metal industry in Europe and North America.
Stephen Lerner and Michael Laslett of the North American SEIU stressed the importance of union pressure on pension fund trustees. Despite their legal obligation to deliver maximum returns, pension fund trustees were in fact susceptible to various forms of pressure. Unions had not yet learned to exercise this pressure strategically, and many unions were in fact not even informed of the extent or the details of their own pension funds' investments in private equity. The SEIU had been able to turn up political pressure on the funds by campaigning for them to disclose the fiscal impact of potential buyouts - another useful campaign tool.
One of the main conclusions of the presentations and discussions was the need for more educational material to assist unions in campaigning against the funds and their buyouts and to prepare unions to negotiate with them more effectively. The IUF will be producing new educational material to supplement the Workers' Guide to Private Equity Buyouts.