Copyright 2004, Business Week

Pretty Liberal With The Cash
Ron Burkle puts his celeb Rolodex to work for a social agenda -- and CalPERS

By Christopher Palmeri in Los Angeles

What do rap music impresario Sean "Puff Daddy" Combs and former Vice-President Al Gore have in common? Los Angeles money manager Ronald W. Burkle backed each of them with cash from the California Public Employees' Retirement System.

Nobody cultivates the rich and famous quite the way Burkle does. The 51-year-old billionaire frequently hosts celebrity-packed charity events at his Beverly Hills estate. He has given millions of dollars to political causes, most of them connected with the Democratic Party. Even former President Bill Clinton is on his team, serving as a senior adviser to Burkle's investment firm, Yucaipa Cos., in return for a slice of the profits. But can Burkle turn his A-list Rolodex into high-powered returns for California pensioners?

In the past three years, CalPERS has committed up to $760 million to Burkle for investments that aim to help underserved segments of society while, of course, still making money for the retirement fund. He has been putting the money to work in a string of deals that he says will benefit minorities, women, and blue-collar workers. Last year, Burkle invested an undisclosed amount in Sean John, the urban-sportswear company founded by Combs. In May, he was one of the backers of Gore's planned $75 million cable-TV station, INdTV, which aims to provide news and entertainment for 18-to-34-year-olds. And in August, he paid $300 million -- some of it CalPERS money -- to buy TDS Logistics Inc., a Canadian auto-parts concern that had been hit by a strike the month before.

Burkle argues that the Combs and Gore deals not only reflect his social mission but are also good commercial investments. Combs's apparel business, he says, is one of the nation's fastest-growing companies, reaching nearly half a billion in sales in just six years. With Gore, Burkle says he was able to invest in a cable station -- currently running Canadian news -- at a very low price because cable operators had yet to renew their subscriptions. After Gore laid out his business plan, the cable operators quickly re-upped. Burkle says both companies employ minorities and women and are creating jobs in urban areas. In the case of TDS, Burkle brought in a Yucaipa labor-relations specialist to help settle the strike, which resulted in wage increases, adjustments in workers' shifts, and a commitment from the management to resolve several workplace issues. "We've gotten great returns by treating people well," Burkle says.

FOOD FOR THOUGHT
The son of a grocery-store manager, Burkle made a fortune in the 1980s and '90s buying and selling supermarket chains such as Ralphs Grocery Co. and Dominick's Finer Foods Inc. He says the rewards of socially conscious investing outweigh the risks. After the 1991 riots in Los Angeles, for example, Burkle says he spent $50 million to rebuild damaged stores and keep workers employed. Those stores were later part of a 1998 merger between Fred Meyer Inc. and Kroger Cos. (KR ) that netted Burkle $1 billion. In choosing him to manage money in May, 2001, CalPERS said Burkle had earned an average annual return of 45% over the preceding 13 years. How much CalPERS makes won't be known until the investments are sold in a few years.

The money committed to Burkle is a small part of CalPERS' portfolio. The nation's largest pension fund, with $166 billion in assets, CalPERS provides health-care and retirement benefits to 1.4 million current and former government employees in California. Three years ago, it began a big push into socially responsible investing. Burkle was one of 11 advisers chosen from among 67 who applied to manage this money. He got $200 million to invest in capital-starved urban and rural markets. A year later, CalPERS committed as much as $560 million more for Burkle to invest in companies managed in ways that don't hurt labor.

Burkle's deals also illustrate how the line between business, social connections, and politics can be blurred as pension funds come under increasing pressure from labor unions, politicians, and activists to pursue goals other than simply making money. Gore has said that his new network will not espouse any particular political beliefs. But the deal was brought to Burkle by San Francisco venture capitalist Richard Blum, another INdTV investor, whose wife is Democratic Senator Dianne Feinstein.

Burkle says he and Combs have been friends for about eight years -- since their meeting at a party at Burkle's house. Combs recently entered the political fray, starting a get-out-the-vote drive with the slogan, "Vote or Die!"

PARTY ANIMALS?
These relationships strike some observers of the pension-fund world as just a little too cozy. "We should be concerned as taxpayers," says Stephen M. Bainbridge, a professor of law at the University of California at Los Angeles. "I don't want them making investment decisions so they can get invited to Puff Daddy's next party or advance their political agendas."

CalPERS declines to comment, but Burkle says that is certainly not the case. And he says winning his contracts from CalPERS was equally above board. He says he never has used his connections to influence the awarding of state money-management contracts. Still, he told BusinessWeek, he will no longer contribute to the campaigns of the California governor, state treasurer, or controller while he pursues new business with CalPERS. Since 1999, Burkle has contributed more than $600,000 to campaigns for state office.

His focus, he says, is entirely on making money for California's pension system and bettering life for those less fortunate than him. "If I want to live in this big house, I have to feel good about myself," he says, sitting in the living room of his 32,000-square-foot mansion while a white-coated attendant serves him cranberry juice. California taxpayers better hope so.

By Christopher Palmeri in Los Angeles