A labor-backed nonprofit is pushing state and local pensions to reconsider their ties to H.I.G. Capital LLC, a $34-billion private equity firm that owns one of the nation’s largest providers of food services to prisons.
The Private Equity Stakeholder Project is calling on public pensions in states such as Massachusetts and Ohio to stop investing with H.I.G. if the firm refuses to shed its ownership of food services and commissary company TKC Holdings Inc. and inmate health care service provider Wellpath, claiming in a report that they’ve cut corners to rake in huge profits at the expense of inmates.
The effort is the latest pushback against the for-profit prison industry by advocacy groups that say public pensions shouldn’t invest in a mass incarceration system that disproportionately locks up minorities and houses immigrants fleeing violence.
The campaign to divest from the prison industry is having some success. The California Public Employees’ Retirement System and the California State Teachers’ Retirement System, the two biggest public pensions in the U.S. with more $600 billion in assets combined, have sold their investments in prison operators CoreCivic Inc. and Geo Group Inc.
Yet that campaign comes at a time when public funds are turning to alternative investments in search of higher returns to cover a growing gap between how much they make and how much they owe to retiring government workers.
”If you want to get a return and you haven’t been meeting the actuaries’ guesses in the public markets, you think about the private markets,” said Joshua Gotbaum, a guest scholar at the Brookings Institution and former director of the Pension Benefit Guaranty Corp. “It’s a challenge, because it used to be that people said to pension funds, ‘we don’t care what you do with the money as long as you make a profit.’ ”
Although the funds managed by H.I.G. have investments in TKC Holdings and Wellpath, neither company nor H.I.G. has a financial interest in any owner or operator of a correctional facility, H.I.G. said in an emailed statement. Investments in TKC and Wellpath represent less than 1% of the investments they have managed, the firm said.
“The trend toward privatization of services is driven by the ability of companies like TKC and Wellpath to provide superior services in a more efficient and cost-effective manner,” especially compared with the main alternative like government authorities, H.I.G. said. “TKC and Wellpath work to improve the health and wellbeing of prison populations, and inmate satisfaction rises significantly once either takes over from prison authorities.”
Jim Baker, who leads the Stakeholder Project, said pension funds that invest in firms such as H.I.G. face financial and political dangers that aren’t worth the potential return. Loans issued by two prison phone providers, for example, dropped in value to record lows this month amid concerns that the industry might attract greater political scrutiny ahead of next year’s presidential election.
In fact, Sen. Elizabeth Warren, who’s running for the Democratic presidential nomination, signed onto a letter sent at the end of September to a group of private equity firms, including H.I.G., expressing concerns about a business model they say often delivers poor services for high fees to a customer base that’s literally “captive.”
“For both the private equity firm and the pension investors, there are very real headline risks to investments in prison companies like Wellpath and TKC Holdings,” Baker said.
“At H.I.G. Capital, we are extremely proud to have built a highly successful private investment firm with a thoughtful approach to socially responsible investing,” H.I.G. said, adding that the firm doesn’t focus on prison service providers though they have invested in food service and healthcare companies.
The drive for returns remains an obstacle to convincing public funds to drop private equity holdings in prison companies.
Despite the S&P 500 index gaining more than 70% 2008 to 2018, pension funding levels have stagnated. State and local governments have a combined $4.2 trillion in unfunded liabilities — the difference between what has been promised to workers and how much money the funds estimate they will have to pay that tab, according to federal reserve data.
That’s pushed them headfirst into private equity and other alternative assets, with the average allocation by pension funds with more than $1 billion reaching 16.2% in the third quarter of this year, up from 8.1% at the end of 2008, according to Wilshire TUCS Universe Service data.
And the legal structures in the contracts between private equity firms and the funds gives the pensions little control over what kind of companies the firm is invested in. They can’t simply require a private equity firm to sell its prison holdings.
The most a pension fund could do is use a promise of a future investment as leverage to get changes, said Larry Laubach, chairman of the corporate practice group at Cozen O’Connor.
“Generally, you don’t have the right to get anything changed,” Laubach said.
The State Teachers Retirement System of Ohio did not respond to multiple requests for comment. Cosmo Macero, spokesman for the Massachusetts Pension Reserves Investment Management Board, said it has not made any additional investments in H.I.G. since 2014.
“PRIM was recently made aware of concerns raised by third parties regarding HIG’s prison-related private equity investments, and those concerns were relayed to HIG,” he said in emailed statement.
That need for returns coupled with pensions’ lack of control over the private equity investments can put a public fund in a position in which its own investments can clash with the best interest of taxpayers, especially when private equity invests in public services, said Ludovic Phalippou, a finance professor at the University of Oxford’s Saïd Business School.
“Whenever they get into something that’s public services or something that has to do with people, it gets very tricky,” said Phalippou. “Their incentive is to make as much money as possible and sometimes you cut corners to do that.”
Chronic understaffing, food shortages and ordering issues pushed Michigan last year to decide not to renew its $158-million three-year contract with TKC subsidiary Trinity Services Group after it racked up more than $2 million in fines for poor service. Inmates at one jail in the state’s Upper Peninsula rioted in 2016 supposedly over the quality of the food.
The change means public employees will again staff the kitchens within state prisons there.
“Food is something you can’t get wrong in a prison,” said Michigan Department of Corrections spokesman Chris Gautz. “It leads to major, major problems.”
Fola Akinnibi writes for Bloomberg.