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5 minutes with… The Private Equity Stakeholder Project

by The Drawdown 7 September 2018

The latest instalment of our ‘5 minutes with…’ series; a brief catch-up with private equity operational professionals and service providers to learn about their work and views on current trends.

The public’s understanding of the private equity industry has often been questioned, and while leaders have urged firms and associations to change this, people rarely know what the sector does or how it operates.

Scandals spanning from horse meat to allegedly misleading investors over fees have not helped its cause, and the industry now finds itself under the spotlight. In recent times, investors and public bodies have been battling for greater transparency, and reputational risk has been working its way up the priority lists of private equity houses.

Born out of this comes the Private Equity Stakeholder Project, a scheme that aims to work on behalf of employees affected by the practices of private equity firms. The Drawdown caught up with one of its members, Jim Baker.

The Drawdown (TDD): How did the project begin and what are its aims?
Jim Baker (JB): The Private Equity Stakeholder Project was formed several months to a year ago, it’s relatively new. It’s a non-profit organisation that fits within the ESG space in regard to private equity. It stands out because it really strives to look at things from the perspective of stakeholders impacted by private equity and private fund investments more generally.

There’s been a pretty dramatic growth in private funds over the last several years and, with that, investments are playing a greater role in more and more aspects of people’s lives. As a result, you have got more folks who are impacted. So, we are looking to work with stakeholders affected by private equity and other private fund investments as a connector.

We’re based in the US and do most of our work there, but, as mentioned, this is very much a global industry. We strive to work with stakeholders as broadly as they are impacted.

TDD: What are you working on at the moment?
JB: We have recently been working with the former employees of Toys ‘R’ Us, the retailer that was owned by KKR, Bain, Vornado, etc. We’ve been working alongside them and are pushing for them to create a hardship fund for the employees who were laid off.

Those employees were quite rightly concerned that they had been promised severance pay and were concerned about the collapse of the company, so we connected them to the financial firms who played a role in the collapse.

We’ve now entered into positive discussions with the firms about doing that [setting up a hardship fund]. We also reached out to the firms’ LPs. That has been the bulk of the work so far. There has been some serious progress and discussion, but it’s ongoing.

The project is also looking into private equity investments in pay-day lending and high interest consumer loans. There’s been quite a concentration and we have been working with a number of large consumer groups to identify what a set of basic standards and rules that firms can play by would look like.

TDD: What do situations such as these do for the private equity industry’s reputation?
JB: There has been a lot of negative press, but I think there is an opportunity for firms to come out of situations like these positively.

At the Private Equity Stakeholder Project, we don’t just look at the problems, we try to find the opportunities to resolve them in a way which is consistent with the goals of private equity firms, but also works with stakeholders who are impacted.

I would say it’s an open question, but there’s an opportunity.

TDD: Given you recently spoke to a number of LPs, do you think they’re becoming more vocal and wielding more power over their fund managers?
JB: The structure of the industry makes it difficult for LPs to have a direct influence. However, as LPs raise issues they’re concerned about, GPs will start to learn and follow. Part of the problem is that if there’s nobody asking [for change], then you can’t expect GPs to act. When LPs raise it, ultimately market forces will lead to a situation where GPs will listen.

It will take a little bit of time, but ultimately, LPs can have a significant impact.

TDD: Transparency with both investors and the public is a topic that continues to grab headlines. What could the industry do better to ensure they come across in a better light?
JB: I hesitate to speak about the industry generally, but I do think transparency around fees and greater transparency overall is something that would be in everybody’s interest. It’s something that the LP community has been demanding for years now. There’s been some progress, but it sometimes seems like there’s a new way of hiding fees that pops up every day.

While greater transparency may be uncomfortable for some at times, it has a positive impact for everybody. I predict that for the firms that elect to take responsibility for greater transparency, showing the positive impact their investments have on communities, there will be a gravitation from LPs towards those.

GPs that take a responsible approach will be rewarded for doing so. Entrepreneurialism on their part could have a significant impact.

TDD: What is the end goal for the project?
JB: From our experience thus far, it’s clear that there are many examples of information gaps, like the case of KKR, and it has been a situation where the closer we look, the more widespread the gaps are.

At base, it comes down to stakeholder groups and working with them to find out the things they’re striving for. Dealing with these issues is what we do and what we’ll continue to do. Whether that’s related to Toys ‘R’ Us or consumers impacted by a pay-day lending firm, it has become clear that the structure of the private equity industry is such that it’s hard to know who the ultimate decision maker is. Our work is to close that gap. I believe in doing so, and I do think that we will see firms step up and say “these are problems we want to correct.” I am optimistic.

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