GCM, with $55 billion under management, has invested in three such ventures since last year, and it is staring at an American landscape full of private-sector targets, not to mention trillions of dollars in public projects governments can't seem to afford to tackle. Partnering with unions to raise capital and create value in investments seems a win-win, but such relationships could create conflicts of interest, or undercut returns if labor strife arises.
"Clearly, pensions are a big portion of private equity's capital foundation, but as it goes beyond that, then I start to have greater problems with the conflicts it creates," says Tim Kelly, a former private-equity professional now coaching students at the University of Chicago Polsky Center for Entrepreneurship & Innovation.
Some of those same union members' pensions likely have investments with GCM and that sets up the potential conflicts, Kelly says. If unions are both workers and investors in the projects, then other nonunion GCM clients, if there are any, might be put at a disadvantage, and any labor-induced shutdown of the work could hurt returns for all, he says. From a union point of view, Kelly also wonders whether union interests in bolstering investment returns might potentially diverge at times from creating jobs.
GCM, led by CEO Michael Sacks, declines to provide a comment, but the firm's press statements and regulatory filings provide insights on its "labor impact" strategy.
The firm said in a September filing with the Securities & Exchange Commission that it was raising $670.2 million for its new Labor Impact Fund, but it may not be done. Firms often decline to comment when they're still raising money. GCM describes the strategy like this: "collaboration with labor to unlock opportunities and generate high-quality risk-adjusted returns." That's a sharp contrast to private equity's image of shaving jobs as it makes acquisitions.
While the firm's website provides $55 billion in assets under management, including $5.5 billion for infrastructure, a person familiar with GCM's operations says the updated figures are about $56 billion for the firm, $5.6 billion for infrastructure and $840 million for the Labor Impact Fund.
GCM this month injected $85 million of debt financing into retooling a defunct Bakersfield, Calif., oil refinery, aiming to revamp part of it to produce renewable diesel fuel with nonfossil oils, waste fats and greases that can reduce greenhouse emissions. Ultimately, it expects to sell the renewable diesel fuel to a multinational oil company under a long-term agreement.
As part of the Bakersfield project, GCM says it will create 255,000 union work hours across different trades and generate more union work after the 18- to 20-month retooling is completed.
In another transaction in December, GCM paid $150 million for a 49.9 percent ownership stake in a Hannibal, Ohio, energy terminal that has a power plant under development and already includes barge, train and truck access. That Long Ridge terminal, co-owned with an affiliate of the giant Fortress Investment Group, "will serve as a reliable low-cost energy provider to the region for many years to come and, equally important, as a hub for new jobs and economic development," Sacks said in a statement at that time. Construction work on it is expected to require 900,000 union work hours.
In a third transaction last year, it's partnering with a "cold storage company" to develop a platform of some sort across the U.S. and Canada. There are fewer details on that deal, and GCM said only that the arrangement was expected to yield "a substantial number of union work hours."
The 10-year track record for global infrastructure investing as of September 2016 was 7.1 percent, and that was better than other types of niche private investing but not traditional global buyouts, according to benchmark provider Cambridge Associates. But the research firm at that time forecast a decline in returns as more investment firms moved into the arena, thanks partly to President Donald Trump's pledge to invest $1 trillion in refurbishing U.S. infrastructure. While that campaign promise faded for a time, he renewed it this month.
There's plenty of need. Business consultant McKinsey estimated in 2017 that $3.7 trillion of infrastructure work would be required every year between then and 2035 to shore up and expand the world's aging roads, railways, ports and airports as well as power, water and telecom systems.
While GCM had been investing in infrastructure since 2003, the labor partnership approach began in 2018 with the firm's hiring of former Chicago Federation of Labor President Jorge Ramirez to lead that strategy with a "pro labor agenda." (Sacks also teamed with Ramirez and the federation in investing in the Chicago Sun-Times.)
In 2018, GCM also recruited Matthew Rinklin to spearhead the new strategy with Ramirez. Rinklin previously focused on infrastructure investing at Los Angeles private-equity behemoth Oaktree Capital Management.
GCM, also known as Grosvenor Capital Management, has long had tight ties to labor. It's drawn investments from union pensions for years and counts at least 20 unions as clients across all its funds, not just the labor strategy. They include pensions like the Carpenters Pension Fund of Illinois and the United Scenic Artists Welfare Fund.
Calls to more than a half-dozen GCM union clients weren't returned. The unions, which sometimes are managing relatively small pension investments, in the tens of millions of dollars, are less likely to issue statements, too.
North America's Building Trades Unions has embraced partnering with investors, such as the Tennessee Valley ity, to have a hand in the infrastructure work.
Indeed, another challenge for GCM is competing with the growing field of 30-plus infrastructure investment funds, some of which are starting to land on the idea of harnessing labor in their investments. Washington-based Ullico, an insurance and investment company owned by unions, has teamed with labor on infrastructure investments since 2012. A few East Coast behemoths in the industry, Carlyle Group and Blackstone Group, have set up partnerships with labor as well.
GCM may have been early to the labor approach, working past potential conflicts, but it may have carved a path for competition now, too.