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Consequences

NY pension funds find private equity controversy as Blackstone cuts jobs

Pinnacle Food

Shirley Kimber walked off the production line from her $17.56-an-hour job at a Birds Eye Foods plant in Fulton, New York, for the last time in November.

The new owners, Pinnacle Foods Group LLC, a company held by the private equity firm Blackstone Group LP, closed the factory and fired 270 workers. Ms. Kimber, 64, got eight weeks severance for her 12 years on the job and lives with her 37-year-old unemployed daughter in the Rust Belt town of about 12,000, northwest of Syracuse.

“They just used us. That’s exactly what they did,” Ms. Kimber said. “And then they kicked us to the curb.”

While the closing killed union jobs, it might also help protect the retirement benefits that organized labor bargained for on behalf of public employees.

In addition to Blackstone, the world’s largest buyout firm, New York State’s two public employee pension funds and four New York City pension funds stand to gain from the drive for higher profits at Pinnacle foods. The retirement funds poured $920 million into the $20 billion Blackstone fund that owns Pinnacle, which took over Birds Eye in 2009.

Companies owned by New York-based Blackstone added jobs at a faster pace than the U.S. economy for the past two years, said Peter Rose, a spokesman for the firm. Private equity’s investment returns “are one of the few ways that pension funds can help keep the promises that they have made to their retirees,” he said.

In 2011, Blackstone’s portfolio companies added 4.6% to their payrolls by creating new jobs, rather than through acquisitions, and increased them 3% in 2010, said Mr. Rose. That outpaced job growth in the economy, he said.

“Private equity is a vital source of capital to grow and strengthen companies where public capital cannot, or is unwilling to, invest,” said Mr. Rose.

Pinnacle Foods closed the Fulton plant to cut transportation costs by moving operations closer to suppliers, said Michelle Weese, a spokeswoman for the company.

While firms such as Blackstone and Bain Capital LLC, co- founded by Republican presidential candidate Mitt Romney, have drawn scrutiny for their paring of jobs and the low tax rates enjoyed by executives, the role of taxpayer money in financing their acquisitions has received less notice.

Fueling private equity’s rise

Public pension funds — seeking to boost returns after failing to secure the 8% annual investment earnings needed to pay benefits for teachers, police officers and other civil servants — are the biggest source of cash for private equity firms.

By September 2011, public pensions with at least $1 billion in assets had an average of 11% of their money in private equity, more than triple their investments a decade earlier, according to Wilshire Associates, a Santa Monica, California- based consulting firm.

Such funds have about $400 billion with private equity, 29% of the total, according to Preqin Ltd., a London-based private equity research firm. That’s more than twice what was put in by private pension funds, the next biggest investor.

Public pension funds “have been the investors that have really fueled private equity’s rise,” said Steven Davidoff, a professor of law and finance at Ohio State University’s Moritz College of Law in Columbus, Ohio. “For those people who complain about private equity, the money is really coming from pension funds.”

Private equity firms buy companies and seek to trim costs, improve operations, boost profits and resell them. The takeovers are typically financed by debt taken on by the purchased companies.

The business has been drawn into the presidential contest as Mr. Romney parried attacks from Republican rivals who suggested he built a fortune of as much as $250 million with takeovers that cost workers their jobs. He has disputed this characterization.

Private equity executives — including Prakash Melwani, Blackstone managing director and Pinnacle Foods director — have helped stock Romney’s campaign war chests. Mr. Melwani declined to comment.

After the collapse of 1990’s Internet bubble left pension funds reeling from investment losses, state and local government funds poured money into private equity firms.

Higher returns

Returns have outpaced those of stocks and bonds. For example, the 15-year median return, before fees, on stocks for public pension funds with more than $1 billion in assets is 5.5% annualized as of Dec. 31, 2011, while the median return for private equity in that time period is 9.8%, according to the Wilshire Trust Universe Comparison Service.

The New York State Teachers’ Retirement System’s private equity investments delivered an annual rate of return of 11.8% as of June 30, 2011. New York City’s private equity investments in four of its five pension funds have returns ranging from 9.2% to 11.1%.

That helps save taxpayers money. For workers and the acquired companies, the benefits can be harder to discern.

Fulton Mayor Ronald Woodward, a Republican, said the Birds Eye takeover has devastated his town, adding that he is troubled to learn that New York pension money helped finance the acquisition.

“Isn’t that a slap in the face to the people in Fulton that are losing their jobs and paying the salaries of those union workers and they’re using their investments there,” Mr. Woodward said. “It’s like biting the hand that feeds you.”

A study led by the University of Chicago’s Steven Davis, based on 3,200 private equity deals from 1980 to 2005 and published in September, sought to quantify the impact. It found that employment at acquired companies dropped 6% in the next five years relative to standalone peers as they shuttered lagging businesses.

Still, the companies also added workers by opening new business lines and through acquisitions. The study concluded that such deals accelerated the “creative destruction” of jobs, with a “modest” impact on total payrolls.

“Private equity investors are remorseless in their perspective on business,” said Robert Bruner, dean of the University of Virginia’s Darden School of Business. “That is a manifestation of the rigors of the capitalist system,” he said. “It accelerates the process.”

Rose Pitcher, 50, experienced that first hand. After working 25 years at the Birds Eye plant in Fulton, she wrapped up her last shift in November, with eight weeks severance, as Pinnacle moved the plant’s jobs to Wisconsin and Minnesota. Other employers in the area, like an apple-packing plant in Oswego, pay less than half the $17 an hour she was making overseeing the machine sealing packages of Voila! ready-made meals at Birds Eye.

“There just doesn’t seem to be anything out there,” she said.

New York Comptroller Thomas DiNapoli, sole trustee of the state’s $140 billion retirement fund, declined to comment. New York City Comptroller John Liu declined to comment. John Cardillo, a spokesman for New York state’s Teachers’ Retirement System, declined to comment.

Pension funds takes a stand

Not all public pension funds have stood by as a private equity firms managing their money announced job cuts.

In 2010, after hearing that clothing-company Hugo Boss AG was planning to close a factory in a Cleveland suburb where it manufactured suits, threatening the jobs of 300 workers, Ohio’s public employee pension fund contacted Hugo Boss’s owner, London-based private equity firm Permira Advisers LLP.

Ohio’s Public Employees Retirement System had invested $80 million in the Permira fund that owned Hugo Boss. After writing to Permira and not getting a response, the pension fund followed up with another letter saying it would “think long and hard” about investing any more money with Permira, said Hugh Quill, a former Ohio pension trustees. The plant was never closed.

“These guys could have cared less about a plant in Cleveland, Ohio, but they did care about not having institutional investors for their next $500 million offering,” Mr. Quill said. “I think it was the right thing to do, given the amount of pain and suffering that was going on in the state.”

The California Public Employees’ Retirement System and public pension funds in Maryland and Pennsylvania, which invested in Permira, also lobbied the firm. So did New York City’s pension funds.

“New York’s pension funds do not wish to be investing in job loss or in a global ‘race to the bottom,’” New York City Comptroller Liu wrote in a letter to Permira.

Chris Davison, director of communications for Permira, declined to comment.

Fulton mayor Mr. Woodward, who was a maintenance supervisor with Nestle when its plant shut down in 2003, said Fulton’s story is another sign of the times.

“What you’re doing by doing that — you are systematically eliminating the middle class,” he said. “You’re going to be rich or you’re going to be poor. There’s no in between.”