By Marco Trbovich
Senior Vice President, Strategic Communications, Tricom Associates
Private equity firms and their investors from Taft-Hartley and state pension funds offered compelling accounts of their success in securing profitable returns on investment in U.S. manufacturing – especially in the Midwest – at the Heartland Capital Strategies fourth and final Responsible Investment Forum, organized in collaboration with the Blue Green Alliance.
Michael Psaros, a co-founder and managing principal of KPS Capital Partners, the world’s leading turnaround private equity investor in the middle market, explained how KPS has achieved top decile investment returns among private equity firms globally by investing in manufacturing and industrial companies, while maintaining a constructive relationship with unions.
“When we raised our first institutional fund fifteen years ago, institutional investors were initially skeptical that superior investment returns could be achieved by investing in manufacturing. Further, investors were highly skeptical that unions could play a constructive role in the turnaround and subsequent growth of our companies.
“The industrial affiliates of the AFL-CIO did something magical at that time. They took reference calls for us reassuring potential investors in KPS of our firm’s successful track record in turning around companies, and in the power of working constructively with unions.”
As a result, KPS was able to raise $210 million for its first fund which closed in 1998. Almost 15 years later, the firm has achieved truly world class investment returns, easily in the top decile globally according to investors, primarily by investing in manufacturing and industrial companies and mostly away from the coasts, thus proving, Psaros quipped, “that a labor-friendly fund with a card-check policy can invest and make more money than the union-hating investors.”
Now, with almost $2.8 billion of assets under management, KPS’ funds have been oversubscribed for years, with blue chip investors from eight countries.
PRI in Manufacturing
“A turnaround, at the end of the day, is about sheer force of will.” Psaros said. He cited the case of HHI, a supplier of forged and machined steel automotive part components with sixteen plants in the Midwest. The company is today comprised of five formerly bankrupt firms that were facing liquidation, that KPS bought, turned around and integrated under new management, headed by Greek immigrant and University of Michigan graduate George Thanopoulos, who brought to the challenge a solid background in manufacturing from his experience at Mascotech Inc.
Six years later HHI, whose workers are variously represented by the United Steelworkers (USW), the United Auto Workers (UAW), and The Workers United “is among the most profitable auto parts company in the world on a cash flow margin basis and was solidly profitable and cash flowing straight through the automotive crisis in 2008-2009,” Psaros said. Equally important, he noted, 3,200 jobs were saved and another 1,000 workers will be hired over the next three years.
Pension Fund Allies
One of the Taft-Hartley pension plans that has invested in KPS funds is the International Association of Machinists (IAM), whose $9-billion pension fund is comprised of public funds, as well as single- and multi-employer plans.
IAM Fund Director Steve Sleigh explained that all three of the union’s forms of pension savings “operate under different regulatory regimes. We’re highly regulated. So anything we do for social well being, if it doesn’t pay off, we can’t invest in it.”
“Private markets,” he said, “give us an opportunity to have relationships, which is a good thing,” because it allows more direct oversight of developments in the investments in order to ensure that the union can readily meet its obligations to pay pension checks each month to its 83,000 plan participants. (more…)