Michael Musuraca is Senior Advisor of ESG and Labor of Blue Wolf Capital Partners LLC. The Blue Wolf Capital Funds (www.bluewolfcapital.com) are a family of innovative private equity funds that have committed to responsibly transforming companies, strategically, operationally and collaboratively, to create sustainable value for stakeholders and investors. Mike is an internationally known leader in the fields of responsible investing, pension fund and corporate governance, and collective bargaining, and advises BW’s partners and portfolio companies on these matters.
From previous articles in the Thursday Espresso, we know that BW (editor’s note: BW is a long-time Heartland sponsor), aims to manage challenging situations and complex relationships between business, customers, employees, unions and regulators to generate superior returns and build value for stakeholders. The firm includes investment professionals with extensive private equity investing experience, senior government service, and working with and for organized labor.
Prior to joining Blue Wolf in February 2009, Mike was an Assistant Director in the Department of Research and Negotiations, District Council 37 of the American Federation of State, County, and Municipal Employees (AFSCME), AFL-CIO. District Council 37 is one of the largest public-sector unions in New York City, representing 125,000 members who work for the City of New York, its covered organizations, and certain agencies of the State of New York. He worked for District Council 37 from 1988 to 2009.
Mike helped lead NYCERS and New York City in developing a strategic, long-term investment response to the damage done to the city after 9/11.During 9/11, his own office and the entire AFCME headquarters, close to Ground Zero, was shut down.
In the , we proudly featured Michael, a founding Board member of the UN Principles of Responsible Investment (PRI), as one of Labor’s leading “aviators” of investing responsibly. Today, the UN PRI, co-designed by trade unionists, provides the global standard for responsible investing.
We spoke to Mike during our preparation for the new book. While we’ll have more to say about Blue Wolf and its hard-driving Managing Partner, Adam Blumenthal, we’re happy to present this very interesting profile about our friend, Michael Musuraca.
Blue Wolf Capital Partners was an early signatory to the UN PRI. When did Blue Wolf begin offering a responsible investment framework to your investors?
Blue Wolf has a core set of beliefs that guide how it invests, a central pillar of which is investing responsibly. This means that we integrate environmental, social, regulatory, and governance risk assessments into our investment process because we believe this approach leads to successful and sustainable results. This approach has been at the core of the firm since inception.
You have an impressive portfolio of investments, and we've reported on some of those. Why have you focused on these sectors? Can you tell us about some of those investments?
Blue Wolf has done a number of deep dives into a variety of industries, including health care, pulp and paper, construction materials, and defense, that have convinced us that our makes of talents and skills could add value to middle-market companies in these sectors.
How do you raise the discussion with portfolio firms about collective bargaining, and the value added by those relationships?
Blue Wolf views workers and the unions that represent them as valuable partners in the businesses we invest in.The management teams that run our portfolio companies understand that and are held accountable for implementing to this standard.
We were impressed with the PRI document that your firm help lead, "Integrating ESG in Private Equity." Can you tell us how that came about?
Blue Wolf was one of the first private equity firms to sign onto the PRI. The “Integrating ESG in Private Equity” document was driven by a principal at Blue Wolf, who sat on the PRI’s Private Equity Committee for a number of years and understood that there was a need to help interested firms (GPs) and their (LPs) navigate how to approach implementation and reporting.
What attracted you to the pension investment field and the responsible investment framework?
I was appointed by AFSCME District Council 37 as a Trustee on the NYCERs Board on September 1996. I wanted to represent our members and be involved with the investment programs of the pension funds.I had worked as a budget analyst for the union, analyzing the budgets or the city and state, and I had done some bargaining.
At that time, the City’s pension funds were riding the crest of an equities boom, obtaining double-digit returns.Returns were high until the beginning of the dot-com recession of 1999-2000, but then our funds were hit hard.Pensions did not recover quickly.
As I came to understand the likes of Enron, Worldcom and the bloated tech bubble in this market downturn, I became concerned about the role of outright corporate fraud and pension fund mismanagement in destroying the value of workers’ pensions. I began to question how our funds are stewarded and how the markets are managed.
These irresponsible investments, fueled by these failed risky managers, caused huge financial losses and led to lower returns for our members. That left New York’s retirees with lower payments and the City with a bigger bill to pay.
Beyond good corporate governance and the importance of financial markets reforms, we asked how else could one view the investment strategies of these large pools of assets, held in trust for our members. Obviously, we had to look toward increasing diversification and reducing volatility during these years.
I began to think about ESG and how things would look differently if we began investing responsibly. We had to deal with hard realities of the global economy and also how to protect workers’ benefits, as there was a fierce counterattack against defined benefit pensions.
Then 9/11 hit. The city’s capital markets fell into a deep freeze, and no one was investing. But people still needed affordable housing and the city needed to rebuild its infrastructure. I worked with NYCERS and many other partners to help kick-start re-investment in the city.
While the 2001 bubble led institutional investors to diversify, moving investments into large alternative asset managers, investors did not take enough responsibility with alternative assets and other less regulated assets. So, the pension world was lured into another bubble, this one caused by subprime mortgages and other toxic assets, unfortunately.
So, bubble to bubble, we suffered another financial markets crash in less than a decade. The crash of 2008 led to the Great Recession. During this timeframe--1996 to 2009— the powers that be increased household debt to prop up the economy, and that resulted, especially after the crashes, in increased income inequality.
I laid out some of these developments in a chapter that I wrote for Tessa Hebb’s book, The Next Generation of Responsible Investing (Springer, 2012).
The UN PRI has now signed up signatories with over $62 trillion in assets. That’s an incredible amount of money, a large chunk of the global capital markets. How do you understand the scale and potential impact of this pool of capital, which also includes a large share of working peoples’ assets?
I gave a speech in San Francisco years ago to an international labor group on workers’ capital. The late Mavis Robertson, a long-time, beloved labor leader in Australia and founder of the Superannuated Funds (retirement system) heard my talk, and invited me to visit Australia. At the time, the Super system was overseeing a lot of capital, as was NYCERS (which has grown to over $53 billion in assets). This is a lot of money. As Ms. Robertson knew, one had to get over the dis-aggregation problem. Institutional investors had to take better control.
Like the Australians, global institutional investors were thinking the same thing. There are gradations of who’s doing more or less. Many of the European pensions—the PCGM, APG—are doing much more. And they are working more and more in concert over global investments.
We started the PRI in 2006, an effort to usher in a global responsible investment platform. As I mentioned in my chapter in Tessa’s book, as institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that ESG issues can affect the performance of investment portfolios. We hoped this ESG approach would align investors with the broader objectives of society.
But the ESG approach needed to take larger view of how these booms and bubbles created by alternatives and public equity markets affected people. We need to examine the role that inequality plays in our booms and busts cycles. Institutional investors will ultimately have to accept responsibility because there is more scrutiny.
Each fund has its own DNA. Together, though, we need to work together to responsibly influence corporations and markets. We can’t do it alone. A great example of working together is the campaign that was waged against Massey Energy spearheaded by Mike Garland, Corporate Governance Assistant Comptroller of New York City, CalPERS Director of Corporate Governance Ann Simpson, and Bill Patterson, then Executive Director, Change to Win Investment Office.
Working together, this group representing public and multi-employer pension funds waged successful shareholder campaigns to hold the CEO Don Blankenship and Board of Directors of Massey Energy accountable for the mine explosion that killed 29 West Virginia miners in 2010. Shareholder anger over safety and risk management failures forced the firm’s board of directors to strip the longtime CEO of his board chairmanship position. This allowed the shareholders to play a significant role in restructuring the company. The CEO was then was removed from his company position, indicted for conspiracy to violate federal mine safety and health standards, and imprisoned.
NYCERS similarly worked with CalPERS in adopting an emerging markets investment rule that held countries to the standard of law, especially international labor standards. To ensure we were not investing in countries that violated core labor rights, our Emerging Markets Program utilized a ranking of 26 emerging markets countries, using a quantitative assessment that employs 42 indicators of labor standards compliance – the first such framework of its kind to be used for investment purposes.
If we begin to project a way for capital stewards around the world to work in concert, especially on the concerns of working families and people in emerging markets, then we can really begin to have a significant impact.
Given the recent election and the news about infrastructure investments, it’s important to note that Organized Labor and some US pension funds have been pushing hard for some time on the development of some interesting responsible infrastructure strategies. What is your view of how that’s shaping up?
Yes, our friends in Labor have been making some good strides on this.
There are obvious potential conflicts between public employees and those who are investing in infrastructure. It is similar to the conflicts that we’ve had in private equity. It’s not just the question of privatization, but also of excessive costs and fees, and financing structures that don’t fit the long-term timeline for infrastructure. Governments have been financing public works for decades, and fixed income bonds are obviously the cheapest and safest way to invest in this asset.
Wall Street sensed that cities and states had problems raising new debt, so they created a failed PE investment approach that was built on the 2 and 20 model (which begs for an early exit). But infrastructure has a long-term investment profile, and the costs should be dramatically lower to reflect that.
We need to understand that returns on investment need to be lower and time frames should be lengthened. New debt models should be considered. And as in real estate, we need to ensure that there are responsible contractor policies. These approaches would align with broader markets.
OMERS, in Ontario, was an early mover in this respect by creating a well-known infrastructure investment program, the Borealis Infrastructure Fund. It has a lot of capital and has a lower cost profile from the Wall Street PE funds. So, a number of pension funds are partnering with Borealis. They want to ensure that that OMERS will protect their returns, but they also want know the impact of those investments on workers and communities, and agree to a common set of responsible investment policies to guide those investments.