| 12 mins read
Anya Pearson interviews Hettie O’Brien, a British author and staff writer at the Guardian. Before joining the Guardian, O’Brien worked for the New Statesman as an editor and writer, and as a trade reporter in Washington D.C. Her new book The Asset Class: How Private Equity Turned Capitalism Against Itself is a narrative investigation of the private equity industry.
Why did you decide to write The Asset Class: How Private Equity Turned Capitalism Against Itself?
Private equity owns just about everything, from care homes to housing, funeral parlours, vet surgeries, dental practices and student accommodation. On a basic level, I found that really interesting: this high-octane area of finance had wound up in so many of the things we use and interact with in our daily lives, particularly after the global financial crisis of 2008. I’d be looking into a story involving an apartment block, say, or a water company, and the same style of company would keep cropping up. But despite its ubiquity, the industry seemed to want to go unnoticed.
In fact, the story had the hallmarks of a great conspiracy: a deeply secretive and yet extremely powerful industry that didn't want to be scrutinised. I felt almost like a detective, trying to figure out how private equity had managed to amass so much power, tracing its relationship with politics and impact on everyday life. From a journalistic perspective, writing about private equity was an interesting challenge, particularly because the data can be so untransparent. When I was trying to find out how many care homes in Britain are owned by private equity, nobody could tell me, not even the research firms that businesses pay thousands of pounds to have the answers to this sort of thing.
You write in your book that the name private equity is “its own kind of camouflage”. How do you actually define private equity?
Historically, this form of ownership has involved buying things that are listed on the stock market and taking them private, which is really quite significant. A public company has to comply with rules and share accounts and information. This is supposed to give people a sense of what a company is up to, and more broadly, this transparency is necessary (but not sufficient) for civil society to try and hold corporate power to account.
But a private-equity owned company doesn’t have to comply with those same rules. While I was researching the book, I kept encountering problems that were caused or exacerbated by this extreme secrecy. Having said that, secrecy is only part of the picture. If you want to understand what private equity is, you have to understand something called a leveraged buyout, which is really the industry’s founding mechanism.
Please can you explain what a leveraged buyout is?
A leveraged buyout is the name given to your typical private equity deal. A private equity fund will buy another company using a small portion of its own money and a lot of debt. Put simply, the fund will then push the debt it borrowed onto the company itself. So the company goes into debt in order to pay for itself. Rather than fund managers being ultimately responsible for paying off that debt, it’s the company that services it. In effect, the responsibility for paying off that debt is outsourced to the company itself.
This is significant for a number of reasons. First, there’s the power issue. The debt can have lots of benefits for fund managers – juicing their returns, and minimising the amount of tax they have to pay, for example – but the benefits to the company itself aren’t so clear. So fund managers are effectively capturing the future cashflow of the companies to service debts that make those fund managers rich. And second, this vast buildup of leverage contributes to an economy that is less resilient and more exposed to shocks.
In your book you argue that private equity turned capitalism against itself. What did you mean by that exactly?
Private equity is radically different to other forms of ownership, and I was really keen to understand where it had come from. There’s the story that often gets told about the 1980s and the “greed is good” era, but to understand the origins of this industry you have to go back further in the history of American capitalism. During the postwar period until the 1970s, finance was considered pretty vestigial and the US economy was dominated by large bureaucratic corporations that were closely tied to the state. But by the 1970s, many of those firms were really flagging, and America’s economic performance started to decline. Private equity – or what were then known simply as leveraged buyouts – were pitched as a means of rousing capitalism back to health and injecting this idea of “entrepreneurialism” (a term which really hadn’t appeared so much before then) into the economic system.
The irony today – and the reason the subtitle of the book has to do with private equity turning capitalism against itself – is because the industry has drifted further and further away from this founding purpose. It has started to enter the basic institutions and spheres – such as care, water and housing – that society relies on. In undermining those, it’s also ironically helping undermine the institutions that capitalism (or at least the version of capitalism we’ve grown used to) relies on too.
And now you also have the fact that private credit, which is one of private equity’s inventions, looks like it could explode the financial system and pose an existential threat to capitalism. It’s the classic dynamic where a pendulum of history swings back and forth between people who think they're fixing something (and obviously growing inordinately wealthy) versus them becoming one of the problems.
To what extent do you think society's problematic conceptualisations of debt are to blame for the issues described in your book?
There are certainly double standards when it comes to debt. One of the people I became a bit obsessed with while I was researching the book was William E. Simon, former Treasury Secretary under Nixon. He came into government during the long aftermath of the Lyndon B. Johnson administration, whose Great Society programme was designed to target all sorts of issues to do with racial discrimination and poverty in order to make people's lives better, which was largely based on deficit spending.
The period in which Simon is coming up through government is one in which there is a real pushback against that. Simon is a real deficit hawk, as are many of his contemporaries. And yet, after Simon leaves government, he goes into business and starts doing some of the early leveraged buyouts, which involve an absolutely colossal amount of debt. In Britain, even now, there is this idea that austerity is a sensible move for public finances, but at the same time, leveraging public services to create private wealth is regarded as absolutely fine.
Water is a good example of this. We've come to rely upon private companies that have imposed vast debts upon our water system and enriched themselves. Meanwhile, they haven’t spent enough on the infrastructure that is needed to deliver water services, so this idea that we're saving money by allowing the private sector to do all the borrowing is a bit of a fallacy: the public still ultimately pays the price.
What did you make of Wes Streeting’s bid for a “wealth tax that works”, equalising tax on assets and income?
The wealth tax is a very popular idea but it's not a complete fix. Many of the problems with Britain’s political economy won’t be solved until everyone gets a fairer share in it. Otherwise, you’re stuck with a low wage economy where you rely on taxes and benefits to solve a series of much deeper problems that have to do with people basically not having enough to begin with, where they’re being forced to spend more and more of their wages on services that are growing more expensive every year, where unaffordability has been effectively priced into the model.
Take care as an example. In England and Wales, it’s not uncommon for the fees in a care home to go up 10% every year, which is way, way above inflation. You can see how this is a ratchet effect that consumes more and more of peoples’ incomes every year.
If you're going to address this, it means providing public services that are far less commodified. For example, by imposing limits on the cost of care or mandating a minimum level of investment. If you delivered public services in a way that truly works for the public, I would imagine that a lot of private equity funds wouldn't be interested in entering those sectors.
Your analysis of the Four Seasons care home scandal was difficult to read about. Why was it important to you to feature so many in-person interviews with those involved?
Very often, subjects like financial engineering and corporate accounting are written about in a way that makes them seem remote and irrelevant, even though they play a huge role in our lives. It takes a certain amount of perseverance to find the gripping story in a series of care home takeovers. You have wade through a lot of quite boring detail before you land on a really fascinating character or twist that brings the story to life. Doing reporting, and speaking to interesting people, or people who can tell you things that you’d never have known because those things don’t exist on the internet, is the best way of writing something about these subjects that people will actually want to read.
The Asset Class: How Private Equity Turned Capitalism Against Itself by Hettie O'Brien is published by Weidenfeld & Nicolson in the UK and Grand Central Publishing in the US.
