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Powerful state investment board faces toys issue, private equity firm

At the state Capitol today, an international union unveiled elements of a national campaign to shed more light on the workings of private equity firms. Moments later, an alliance led by the union won limited support for its effort from Minnesota’s powerful State Board of Investment.

Board members voted unanimously to ask Kohlberg Kravis Roberts & Co. (KKR), a leading private equity firm, to immediately eliminate the sale of contaminated toys sold in Toys “R” Us and Dollar General stores. KKR owns Toys “R” Us and has a significant stake in Dollar General. The labor organization, the Service Employees International Union, says the investment board has sunk nearly $1 billion into KKR since 1984.

The board also asked the staff to meet with the union to discuss its concerns about KKR’s toy safety policies.

The SEIU-led alliance raised questions about KKR and the two retailers’ toy safety practices at a news conference just before the board acted. The toy issue is part of a drive led by the SEIU to raise questions about the practices of private equity firms.

Shane Allers, executive director of SEIU Local 284, which represents public school employees, told the board that hundreds of thousands of toys containing lead and sold by the two chains have been recalled over the last year. Allers charged that Toys “R” Us “has so far refused to take all the steps necessary to guarantee that the toys they sell are safe.” Citing news reports, he also said Dollar General failed to appear at a September congressional hearing on lead safety.

A Dollar General spokesperson disputes that charge, saying that although its representative did not testify in person, the company responded in writing to a comprehensive list of questions and was represented at the hearing by a retail trade organization.

Representatives of both KKR and Toys “R” Us both stressed their concern for toy safety. A KKR spokesperson said, “We hope citizens and organizations in Minnesota will join Toys “R” Us and Dollar General in supporting proposed federal legislation to build more effective federal oversight and strengthen third-party testing requirements for products.”

A Toys”R” Us representative said the company “holds the manufacturers of the toys we sell accountable, and we will not tolerate products that do not meet our rigorous safety standards.”

Investment board big player
The investment board manages more than $50 billion in public pension fund money for roughly 500,000 state and local government employees and retirees. Its members are the state’s constitutionally elected officers: Gov. Tim Pawlenty, who is chairman; Lori Swanson, state attorney general; Rebecca Otto, state auditor; and Mark Ritchie, secretary of state.

Control of the board swung from a three-to-one Republican Party majority to three-to-one for the DFL in the statewide election a year ago. That shift has led to speculation that the board could edge toward a more activist investor position on several advocacy issues.

At the meeting, the governor and Howard Bicker, the board’s longtime executive director, cautioned that the board not venture too far into the toy safety issue. The board didn’t act on two other Allers proposals, also aimed at KKR.

Union report takes on KKR
At the news conference, the alliance distributed copies of a new SEIU report — “Barbarians at the Gates: KKR in Minnesota.” The report picked up parts of a more expansive report, issued by the union in April, charging that KKR and other large private equity firms operate in the dark, benefit unfairly from favorable tax policies and appear to destroy more jobs than they create.

The new report also questions whether Minnesota has benefited from KKR’s interests in four companies with operations in the state: the two toy retailers, Jostens and Creamette, which it subsequently sold.

Last February, KKR and other large private equity firms formed the Private Equity Council, a Washington-based advocacy group, to promote and defend the industry and ward off proposals to change its tax status. The council has criticized the SEIU’s April report for being thinly researched. It stresses that public pension funds across the country have made large returns from investments in private equity firms — a point that Allers agreed with insofar as the Minnesota board’s investments in KKR are concerned.

The council cites two studies, from A.T. Kearney and the Financial Times, to argue that investing in private equity firms “often results in long-term employment growth and enhances the economic viability of a business to the benefit of all stakeholders.”

The SEIU counters by pointing to a newer study, a portion of which was released last week at an American Enterprise Institute event, that suggests private equity investments lead to fewer jobs. Researchers from the graduate business schools at the University of Chicago and Harvard University contributed to the study.

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