SEIU legal push on private equity funds backed by SWFs

The SEIU has introduced legislation in California that would ban Californian public employee pension funds from investing in private equity firms backed by sovereign wealth funds. Reasons include lack of transparency of the fund, risky leveraged debt used as the financial return strategy, little incentive to invest in local community infrastructure investment and the political concern for the motivation of these firms are some of the reasons for concern.

Hat-tip: Capital Matters

Sovereign wealth funds - friend or foe?

Interesting to see that sovereign wealth funds (SWFs), which at one time looked set to become the next bête noire of the capital markets (after hedge funds, and then private equity) are now being talked up as a potentially stabilising force. The idea is that these funds ought to be long-term investors, and as such maybe able to provide what we used to call 'patient' capital.

SWFs were given the thumbs up by the WEF at Davos recently, see this press release. More interesting is the statement from the International Corporate Governance Network (ICGN) on their website (third link down in the 'What's new' section). According to the ICGN "sovereign wealth funds share the economic objectives of traditional long-term institutional investors such as pension funds and insurance companies."

The funny thing is that I'm fairly sure that the ICGN had a veiled dig at SWFs not so long ago (I will check this out). If my memory is accurate there was a bit of concern about political interference. If I am right maybe the ICGN just changed its collective view, as other have done.

To make a fairly obvious point as with hedge funds, and to a lesser extent private equity, it's a bit misleading to see SWFs as an homogenous group. They have different histories, even different investment objectives, and, obviously, originate from countries of varying politics. Therefore any labour movement response probably needs to work case by case. Also from my limited reading on SWFs it seems pretty clear that their collective assets are still substantially smaller than pension funds. So whilst they are important, and we should keep an eye on them, we shouldn't overestimate their role. As I said at the outset they are probably attracting policy interest these days more as a fresh pool of capital than as political threat.

UNI report on sovereign wealth funds

I have a copy of UNI's report on Sovereign Wealth Funds. Unfortunately I only have it as a PDF and I can't see it on the UNI website to link to. If anyone would like a copy add a comment to this post and I can email the PDF to you.

Private equity not good for jobs says WEF

The World Economic Forum has just published a paper about the global impact of private equity. You can get hold of the exec summary if you scroll down to the bottom of the press release. I'll just pull out the section on employment from the summary. It clearly does not back up the claims frequently made by the industry that it has a better job creation record than businesses not owned by PE.

• Employment grows more slowly at target establishments than at the control group in the year of the private equity transaction and in the two preceding years. The average cumulative employment difference in the two years before the transaction is about 4% in favour of controls.

• Employment declines more rapidly in target establishments than in control establishments in the wake of private equity transactions. The average cumulative two-year employment difference is 7% in favour of controls. Just as was the case before the private equity transaction, growth at controls is higher in the three years after the private equity transaction. In the fourth and fifth years after the transaction, employment at private equitybacked firms mirrors that of the control group.

• Post-transaction, buyout establishments seem to create roughly as many jobs as peer group establishments. Gross job creation (i.e. new employment positions) in the wake of private equity transactions is similar in target establishments and controls. The difference in net employment is attributable to higher gross job destruction rates in targets.

• Firms backed by private equity have 6% more greenfield job creation than the peer group. Greenfield job creation in the first two years post-transaction is 15% of employment for target firms and 9% for control firms. It appears that the job losses at target establishments in the wake of private equity transactions are partly offset by substantially larger job gains in the form of greenfield job creation by target firms.

Separately there is a broadly positive message from the WEF about sovereign wealth funds. These are big state-run investment funds that are becoming increasingly important shareholders in some markets. I won't repeat the sont of the WEF press release, save to say that there is an argument that SWFs are actually moe long-term investors than other market participants. In addition they certainly need to be more transparent.