Yesterday BBC Radio 4 aired a broadcast on ‘The Hidden Masters of the Universe‘ about the exponential growth of private equity capital since the 1980s. By coincidence the Financial Times (FT) recently had an article on ‘How asset managers took over the world,’ a review of ‘Our Lives in Their Portfolios: Why Asset Managers Own the World‘ by Brett Christophers.
It is not just hedge fund managers playing casino capitalism to make money out of money. Or, as in the case of the junk bond scandal, which crashed the world economy in 2008, making money out of bad debt. The fall out from that crisis pushed these vulture capitalists into genuine assets. The private equity market is now worth $8 trillion worldwide. It includes household names like Clarks Shoes, Morrisons Supermarkets and even Pornhub! But half the assets, worth around $4 trillion worldwide are social assets and infrastructure.
Once upon a time the welfare state was supposed to take care of us from the cradle to the grave. Now it is increasingly likely that private equity funds and their asset managers will have a controlling influence in our lives. Two of the largest chains of day nurseries and three of the largest care home groups in the UK are owned by private equity funds. According to the FT a lot of our infrastructure including housing, hospitals, schools, farmland and green energy are controlled by asset management firms working on behalf of investors which include not only private equity funds, but also pension funds, insurance companies and sovereign wealth funds.
The door was opened by the Tories with their private finance initiative to encourage private investment (PFI) in the public sector and the policy was expanded under Tony Blair’s New Labour as a way to expand services without increasing government borrowing. But these contracts take away political accountability and lock services into expensive service level agreements that increase costs and profits even when performance is falling. When Thames Water (owned by one of the big three asset managers) failed to meet its targets on water leaks because of under-investment, it still paid out £239 million in dividends.
In the care sector falling standards can have fatal consequences. Mortality rates in US care homes owned by private equity funds rose by 10% compared to the average. The care crisis in the UK sees massive profits, in the guise of debt repayments, sent to offshore tax havens while companies post losses and cut wages and conditions to the detriment of staff and clients.
Debt is key to how the system works. Alongside private investment funds more than half of acquisitions are financed by borrowing, and this borrowing is not borne by the investors. It is set against the assets of the company being bought. Clients, customers, tenants, workers pay the cost and, if the value of the company goes up, you can sell it on and still show a profit. That is how the Glazers bought Manchester United. But if you saddle a company with so much debt that it cannot make a profit it will go under. This is what happened to Debenhams.
The big growth in private equity finance and asset management took place against a background of very cheap credit. With interest rates going up, many investors will now be trapped in a version of negative equity. Sell at a loss or stay put. But, whether they crash and burn or go into steady decline, we will be left with the bill: lost services, cuts to wages and jobs; a public sector held to ransom by the crisis of capitalism.
The next Labour government would need more than tinkering with policies to close tax loopholes to deal with this. Vast areas of our economy, both public and private, are controlled by unelected and unaccountable asset managers. When Lion Rock Capital tried to use fire and rehire to impose a wage cut on Clarks workers in 2021 they came out on strike for eight weeks and won. That is the fightback we need to see off the hidden masters of the universe and the owners of our world. We wont get it by voting for Starmer and hoping for the best.
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