Capitalism Against Itself: An Interview with Hettie O’Brien
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What made you want to write The Asset Class?
I first heard of Blackstone when I was a student. A friend had worked there, and he used to speak about it as this legendary firm staffed by incredibly smart people. It was only a few years after the financial crisis, so the banks were getting a lot of attention at that point, but it seemed to me that there was this other group of financial firms – private equity firms – that existed outside the public eye and were growing immensely powerful. Then, a few years later, I was living in Spain doing some research on housing, and Blackstone’s name kept coming up in meetings organised by the Plataforma de Afectadas por la Hipoteca, a grassroots housing rights campaign. People were incredibly angry at the firm, which had been buying up homes in Spain. I was interested in these wildly divergent impressions: Blackstone was the largest and most successful private equity firm in the world, but it was also capable of eliciting this intense hostility.
As an industry, private equity is highly secretive. Its presence is masked through complicated strings of holding companies, offshore entities and so on, and it gets away with sharing as little information as possible. These were the kind of traits that made writing about this subject – at least in an interesting way – sometimes feel like an unsustainable challenge. But as I spent more time with the material and reporting, and spoke with my editor, it seemed as though this story had the hallmarks of a thriller: a secretive, astronomically powerful thing that exists at the margins of our consciousness while covertly penetrating the most intimate spheres of everyday life. Once we’d worked out this framing, the detective work of trying to figure out what lay inside the black box became part of the story.
I suppose I’m drawn to the idea that there are lots of fascinating stories buried in things that might seem dry or technical, and that the dry or technical nature of these things ensures people don’t pay too much attention to them. Private equity is one of the most significant inventions of the twentieth century, but it remains a bit obscure, partly because most of the writing about it is either dry and academic or worthy and polemical, and neither of those styles hold much interest to me as a reader. Whenever I’m writing, I’m thinking: is this going to be enjoyable to read? Am I doing a good enough job at making it interesting for readers? I firmly believe that anything can be interesting so long as it’s written about well enough, but I think this subject really deserves to be made interesting, and written about well, because it’s so important to our lives.
Can you tell us a bit more about the process of gathering interviews and the reportage that went into writing the book?
It was a lot of work and there were many moments when I felt, why on earth have I dedicated my time to such a tricky subject? Why didn’t I write a book about something that was less evasive? But I was really happy with how it came together in the end. The whole process took about four years in total. When I’m reporting, I cast the net wide and talk to as many people as I feasibly can. A lot of the material ends up getting cut, but the value of this way of working is that you’re able to find good characters and show readers things that they don’t already know, by going and speaking to people and finding out stuff that doesn’t exist on the internet. And this act of speaking to people necessitates approaching the world without too many preconceptions, and instead letting yourself be guided by your own curiosity, which I find really satisfying.
I think reporting can also help resolve a number of issues that arise with non-fiction writing, where a book either feels like one great essay followed by a series of chapters that restate the same argument over and over again with diminishing impact or – relatedly – a sort of literature review of other books and newspaper articles. When you’re reporting something, you’re doing primary research and ideally you’re bringing something new to the conversation. And by focusing on people, and on actions unfolding over time in a particular place, or series of places – the basic components of a narrative – you end up with something that is more vivid and convincing than a series of facts or quotes from theorists interspersed with newspaper cuttings. I think, stylistically, that’s also why I tend not to use quite ugly words like ‘financialisation’: there’s a clarity that comes from focusing on the narrative and the characters, and thinking about the reader’s experience of these things, because you’re thinking more about telling the story and inhabiting the perspective of the people you’re writing about, and so you end up swerving language that can often feel like a way of masking rather than clarifying a story.
I was surprised by the number of people that you interviewed who are sympathetic to the mechanics of private equity that are now also critics of the way that it has played out.
It’s easy to find critics of private equity, but it would have made for a pretty dull and predictable book had I just interviewed them. I was keen to also speak with people who believed it was basically a good thing – so I interviewed employees, fund managers, founders and so on. I think at some more basic level, I’m drawn to moral ambiguity, and I find it more enjoyable to write about characters who aren’t black and white. Partly that’s also a trust thing: I want readers to trust that I’m being accurate, and approaching a story in good faith, and I think part of that trust extends to how characters are presented. Nobody is perfect, everyone has flaws, and nobody wants to think of themselves as the bad guy. So faithfully representing those imperfections feels like a better way of building a relationship with your reader where they’re going to trust you if you show them that the people you’re writing about are complex and imperfect, like them.
Interestingly enough, since the book came out, a few people who work in private equity, or in venture capital, have come up to me after events or have messaged on LinkedIn to tell me that they agree with it or really enjoyed it. One person who had been advising private equity firms for three decades told me that while he didn’t have a problem with leveraged buyouts in the 1980s, he just couldn’t get on board with this industry buying up care homes. That was a recurrent theme: people who had once been defenders of this invention who found its modern incarnation pretty ominous.
Debt is a central concern in your book. Can you elaborate on how financiers understand the concept and what books have been influential in helping you understand it?
I became a bit obsessed with Michael Jensen, a financial economist who came up with this idea in the 1980s that debt could have a disciplinary effect on firms where managers were basically having too good a time, spending the company’s money on shooting weekends and golf course memberships and doing very little to create value for their shareholders. Jensen came of age when corporate America was still dominated by large, listed public companies that emerged during the post-war era. But in the 1970s, rising competition from Japan and European firms posed an existential challenge to this model, and a number of these companies started to be targeted by financiers doing leveraged buyouts, which is where you borrow a lot of money to buy a company, and heap all of the money that you just borrowed onto the company itself.
Many people argued that this massive build-up of debt was a terrible idea that would lead to a huge number of redundancies and produce weaker and less resilient companies. But Jensen argued that debt was actually a good thing, because when a company had to spend more of its cashflow on servicing this debt, its managers wouldn’t be able to indulge themselves and instead they’d have to remain zealously focussed on the bottom line. And if that meant firing workers, or shutting down subsidiaries, or cutting expense accounts, then so be it, because the companies would become leaner, meaner and more efficient. Or at least that was the idea.
His argument provided the kind of intellectual scaffolding for leveraged buyouts, which then got renamed ‘private equity’. What seemed ironic to me, while I was reporting the book, was that in the years after the financial crisis, when private equity expanded massively into public services, the idea of debt had taken on a similarly disciplining effect, particularly in Britain, where politicians argued that the nation had to make cuts in order to pay down its debts, and it’s partly this argument about public austerity that has since provided a justification for the state’s reliance on private capital. I’m not the first person to write about private equity’s foray into public services – Brett Christophers wrote an illuminating book called Our Lives In Their Portfolios, and I found Melinda Cooper’s book, Counterrevolution, interesting on the relationship between public austerity and private extravagance. But to me, leveraged buyouts are emblematic of the way debt is treated entirely differently depending on who benefits from it. A water company running up debts to enrich its investors is permissible, but a government that borrows to invest in the public realm, not so much.
A recurring theme in the book is class resentment. Can you tell us a bit more about the origins and consequences of this resentment?
There are two different stories you could tell about class, and about how the rise of private capital has played a role in remaking the class politics of finance. One is about America and one is about Britain. The American story is tied to the New Deal and the types of corporations that emerged during the post-war period – huge, publicly listed organisations like General Electric. In the post-war period, some commentators feared that these gigantic firms were creating a stultifying type of corporate groupthink, turning out likeminded executives who lived in boring suburban houses and were married to women who cooked them steak dinners and hosted Tupperware parties. In the 1980s, when a small group of financiers started using junk bonds to finance takeovers of these vast firms, there was a real sense of horror on the part of both the corporate managers and Wall Street’s old guard – people like Felix Rohatyn, an investment banker at Lazard, who wrote in The New York Review of Books about the culture of greed that was corrupting Wall Street. During that period, within America’s corporate economy, power was starting to shift towards a small group of renegade financiers who used to be outsiders to this class – guys who previously would never have dreamed of being able to get their hands on America’s largest corporations. Thanks to the creation of the junk bond market, they were able to take over big-name listed firms without asking for anyone’s permission, and they got fabulously rich from doing so.
In Britain, the story about class has more to do with the aristocratic class system. Even after the Second World War, this class still dominated industry and had deep links to the Tory party. Britain had lost its empire, and its supremacy was waning on the world stage: compared to America, Britain’s economy looked pretty vestigial. Its businessmen were quite complacent because they could still count on some of the export markets in the former colonies that guarantee willing buyers for their goods, and finance played a really tiny role compared to today: by the late 1950s, only about a third of working British people had their own bank account. There were a few developments that really shook up the class dynamics of British finance. First, you had the Big Bang in 1986. After that, the City became much more international, and you had a lot of American banks setting up shop in the UK, and a lot of the old merchant banks disappearing. And then you had the emergence of what sometimes gets called ‘alternative investments’, i.e. unlisted investments such as private equity and hedge funds. By the time of the financial crisis, London is really Europe’s preeminent financial centre for these types of investments, which is why Britain, alongside Luxembourg, is one of the main opponents of the EU’s attempts to regulate this sector after 2008.
Interestingly enough, a few years later, when you look at the donations to the EU Referendum campaign in Britain, there is an overwhelming proportion of donations to Vote Leave that come from this part of the finance sector. Two academics – Marlène Benquet and Théo Bourgeron – crunched the numbers on these electoral donations, and found that, of the donations made during the referendum, ninety percent of money given by hedge fund managers and seventy percent of the money from private equity fund managers went to Vote Leave. So by 2016, Britain has become very favourable to this particular form of finance, and there is a desire to entrench these interests in the face of European regulation. More generally, I think finance tends to be discussed as one gigantic blob, particularly among progressives, rather than an industry where there are different power blocs and competing interests. So I was really keen to go back to specific moments in time and look at how the class dynamics change by telling the stories of the people involved in these shifts.
It seems to me that private equity has inverted the ‘cradle-to-the-grave’ formulation of the welfare state to ensure that profit is wrung out of every life-stage.
I think that’s particularly the case with care. It’s interesting that wealthy boomers who own property that has exponentially shot up in value might feel like they’re doing pretty well from Britain’s political economy, but if they then need care, they will likely have to fund it by selling their house, and spend this money at a care home where fees increase above inflation each year. Investors identified care as a major opportunity: buying up care homes was effectively a means of getting their hands on untapped housing equity that would otherwise have gone to peoples’ children and grandchildren. It’s almost like there’s a group of apex predators sitting above the ‘winners’ – by which I mean the boomers with houses worth hundreds of thousands of pounds – who have worked out a way of capturing this wealth for themselves.
I’m surprised this doesn’t elicit more anger, particularly in a property-obsessed country like Britain’s, where inheritance now plays a big role in shaping peoples’ life chances and has become a kind of social insurance in lieu of the welfare state. Perhaps that’s because it’s only something people tend to think about when they’re directly affected by it. Or perhaps it’s because social care is one of those subjects that, again, fails to inspire people and needs to be written about better.
Although you detail some of the successful cases of resistance against the encroachment of private equity in our daily lives, an underlying theme is the difficulty of being able to do so. Why is this the case?
In Britain, politicians and civil servants can seem terrified of antagonising people they think are responsible for economic growth. When it comes to private capital, there is a totally misplaced notion that governments must rely on the industry because it’s capable of mobilising the type of capital ‘investment’, which is a word that gets widely abused, that the state can no longer afford. I think most people, when asked, would say that this industry shouldn’t be delivering public services, particularly those used by vulnerable people. But unpicking this dependence will be expensive and politically difficult. That’s not to say it’s impossible. In Britain, the cost of living crisis and the premium people pay for life’s essentials have resulted in a renewed interest about who delivers public services such as water or care, and how much money they should make from them. Right now feels like a very good moment to be asking these questions and doing something about this.
Some economists have argued we are no longer living under the auspices of austerity. Yet the dismantling of state power in favour of privatisation continues. What do you make of this trend?
We’re living in an age of oligarchy and resurgent mercantilism, aren’t we? You have the concentration of wealth in a form that is completely opposed to democracy and social progress, and you also have resurgent types of collusion between the state and businessmen, or ‘favoured merchants’, as Adam Smith would have called them, and a willingness on the part of, particularly the American government, to use state power in order to redirect public wealth and resources towards this group of favoured merchants. One of the things I thought was really interesting was the second Trump administration’s decision to allow private equity access to 401(k) accounts, which are retirement saver accounts in the US. This is presented as a means of ‘democratising’ this asset class, but it looks more like a case of using state power to enrich a small class of businessmen. What we’re seeing now is a very explicit willingness to use the power of the government to make markets work for a very small group of ultra-wealthy, politically connected beneficiaries.
Do you think the golden age of private equity is over?
On one level, yes. The industry has taken in far more money from its investors than it has paid back over the last few years. Funds have been struggling to sell assets and have been loading even more debt onto already indebted portfolios as a means of releasing cash to their investors. All of these things are warning signs. But the problem with financial markets in general is that value has become totally untethered from reality. How much a company’s stock is worth has more to do with its ability to bend politicians’ ears. So being a sceptic of the industry’s prospects is a bit like being a sceptic of the American government’s prospects, insofar as its endurance is determined not by whether it’s doing a good job at creating value, or improving peoples’ lives, but by whether it’s able to manufacture enough political support.
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Hettie O’Brien is a staff writer at The Guardian and the author of The Asset Class.
Sruti Basak works as the Subscriptions and Editorial Assistant at The London Magazine.
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