For more than a year now, we’ve been talking about a Wall Street phenomenon. Activist and institutional investors, we’ve noted, are increasingly seeking to influence public companies on so-called ESG issues (those relating to environmental, social, and corporate governance concerns). Exhibit A of the trend: when the asset manager Vanguard, which before 2015 had never supported a single sustainability resolution, joined BlackRock and State Street Global Advisors in a “shareholder rebellion” against Exxon management, requiring it issue a climate-change-related report.
BlackRock, meanwhile, began 2018 by issuing an open letter that urged companies to “make a positive contribution to society.” The letter threatened, at least implicitly, that companies may lose BlackRock’s investment dollars if they don’t.
While this type of activism has grabbed the attention of the business world, private companies have been able to write it off as a headache that only public companies (with their shareholder votes) must endure. But that, too, appears to be changing.
The sad fate of Toys “R” Us is shining a light on a new phenomenon—this one impacting private equity firms and the companies they own. The public pension funds that invest billions of dollars with private equity sponsors are challenging them to act on ESG issues. Public pensions contribute about a third of private equity’s money, according to data firm Preqin, so it’s not surprising that those in the know are telling The New York Times that “private equity firms seem willing to concede on social issues.”
The Exhibit A of this trend is the collapse of Toys “R” Us, the beloved toy store taken private in 2005 by a trio of private equity firms including Bain and Kohlberg Kravis Roberts. When Toys “R” Us sunk under the weight of its debt and went bankrupt last year, 30,000 of its workers were laid off and denied their severance. That earned the ire of pension funds, which have a natural concern for the interests of workers. In response, the state of Minnesota suspended its investments in KKR and Washington state pension officials subjected a senior KKR executive to an intense grilling. Bain and KKR eventually buckled and agreed to establish a hardship fund of up to $20 million for workers.
It’s not an isolated case. The Times report points to the efforts of New Jersey’s pension fund to ensure that private equity firms aren’t foreclosing on Puerto Rico residents impacted by Hurricane Maria, and the state’s decision to pull out of a private equity firm after it acquired a payday lender.
The trend only appears to be gaining strength. If it’s as influential with private equity as it has been with issuers, we’ll still be talking about it a year from now.