Three Taft-Hartley pension funds expect to commit between $40 million and $50 million to the Heartland Labor Investment Fund, the working name for a new private equity fund being organized to invest in small industrial companies needing capital to modernize or expand.
The funds that are signing on are the $4 billion Union of Needletrades, Industrial and Textile Employees, New York; the $455 million United Steelworkers of America, Pittsburgh; and the $370 million International Union of Electrical Workers, Washington.
Tom Croft, director of the Steel Valley Authority, Pittsburgh, which has been helping to develop the fund, said that two other union pension funds are also considering investments in the fund, which is targeted at $100 million. Interviews with potential private equity managers to run the fund are slated to start this month. "We'll be looking for managers with experience investing in traditional manufacturing businesses," he said.
The new Heartland Labor Investment Fund has a special appeal to Taft-Hartley plans because it gives participants an opportunity to assist responsible employers, said Doug Williams, a trustee at IUE, which expects to invest $10 million in the fund. It will be the first time the pension fund has invested in private equity.
"We see employers with smaller firms who have trouble getting the attention of banks because the deals would be too small for them. We're a multiemployer plan and represent a fair number of employers who fit this category," Mr. Williams said. "The trustees discussed this as an option, and we see it as an opportunity to make a prudent investment offering participants a good return."
IUE management trustees are as interested in the Heartland fund as the union trustees are, he said.
Ronald Richman, an attorney with Schulte Roth & Zabel, New York, who is organizing the fund, said: "There are a number of these mid-level and smaller companies that have a hard time accessing capital. One view of this fund is to use it to make money available to these kinds of companies.
"These are the kind of deals that don't get on the radar screen. Yet there are many situations where there is an acute need for capital, such as in a family business whose patriarch is retiring, or at a company that needs money to modernize."
Many private equity managers seem to like the fact that the fund will have something of a built-in deal flow, Mr. Richman said.
Bruce Raynor, secretary-treasurer of UNITE! and chairman of the 10 pension funds belonging to UNITE!, said: "We don't want to be part of something destructive or invest in companies that are getting rid of U.S. workers and doing their manufacturing in Vietnam. We're interested in investing in companies that can make it on the high road, companies that are union friendly. The companies don't have to be unionized, but good solid investment vehicles."
The funds in UNITE! are in the process of voting to allocate 5% of assets to private equity, a new asset class for most, he said.
The Heartland Labor Investment Fund is an outgrowth of a conference United Steelworkers secretary-treasurer Leo Gerard organized in the mid-1990s to examine the reasons for continuing job loss in key American industries. One important conclusion resulting from the conference, Mr. Croft said, "was that U.S. pension funds have helped finance some of the most destructive buyouts and mergers that have resulted in massive layoffs of American workers. In addition, U.S. pension funds have been investing in Asian 'tiger' economies, which helped lead to a flood of steel dumping in the U.S., costing 10,000 steelworkers their jobs."
The Steel Valley Authority was created to retain jobs in Western Pennsylvania and has saved or created more than 7,500 jobs in the past 10 years, Mr. Croft said.
"We help small manufacturing businesses find a way to save the plant. What we learned from doing this is that there are major capital gaps in the small manufacturing service industry. A fund like the Heartland Labor Investment Fund will help fill it," he said.
Regional Heartland funds will be linked to the national Heartland Labor Investment Fund and will co-invest with it.
"We're setting up regional networks in seven or eight key cities to help identify deals for the fund," Mr. Croft said.
The fund's investment style is modeled after Canada's Quebec Fund, which started in 1983 and has grown to $3 billion in assets. Since its inception, it has invested $1.5 billion in 1,200 small privately held industrial companies and has returned between 15% and 20% annually on its investments. Mr. Croft said he was hoping the Heartland Labor Investment Fund would produce similar returns.