We must stop private equity acting like a private government
Over the summer holidays the Common Weal Daily Briefing will only appear occasionally when there is a subject of particular interest. Daily service will return in mid-August.
One of the arguments against socialism, communism, planned state provision and even basic social democracy is that all of these are attempts to 'buck the market', to grant to a small number of people the capacity to alter and affect conditions created by what critics consider to be the aggregate wisdom of free trade.
It is many, many people acting in self interest with all those self interests balancing each other out which is supposed to create something like 'the optimal good'. But what if 'the market' itself turns out to be a small number of people who have the capacity to alter and affect the conditions created by free trade?
Today the Guardian reveals that of every £11 spent by government in the UK, about £1 goes directly to companies owned by equity capital. Private equity has control of the market well beyond its own resources (given that it is investing the resources of others) and it uses that control for pure self interest – but without big enough players to balance that self interest.
It is important not to mistake what the business model of private equity is and what it is not. While there is much talk of 'investment', here the word is not being used in the way most of us are familiar with. We take 'investment' to mean spending money now to improve the performance of an entity by increasing its fixed, human or intellectual capital in pursuit of greater productivity.
In other words, you spend money to make your equipment better, your workers more capable, your processes more efficient or your product of higher quality, and so each hour worked by staff creates more value for the businesses owners. That is nothing like the meaning of 'investment' when used by equity capital.
While the term is now avoided, equity capital is often simply asset stripping. It is focussed not on productivity but on share value and asset value. Its goal is to do anything which makes the total value of the eventual sale of shares and assets bigger than the original price paid for the company. That often means breaking the company into bits to maximise the value of some bits while liquidising the rest.
Sometimes it means selling properties and renting them back to itself and writing off the value of the shares (if the assets are worth more). Sometimes it means slashing the workforce until the overheads reduce and increase the share price, even if it means the quality is going to decline rapidly.
In other words, there is no identifiable public good contained in the business model of private equity. Yet this comparatively small group of people carry enormous economic power and as a result also wield very significant political influence.
In fact there is an alternative way we could think of them – they are a private government for the wealthy. They shape society very substantially and they do so in the interests of a small section of that society. As this report shows, they are even in charge of spending large sums of public money.
The role and power of private equity has been obscured by substantial levels of spin. Regularly the role of private equity is presented as if it is 'traditional productive investment'. It comes in looking like 'the good guy', but that is not really what it is doing. There has been nothing like enough political discussion of the risks of the proliferation of private equity.
An easy response to this is to stop outsourcing. Companies which receive outsourced contracts are particularly attractive to private equity because those contracts are often long term and so act as valuable assets. And since public services generally maintain a comparatively high level of service quality, they are also ripe for stripping back and cost saving.
But, as the analysis shows, the outcome of this is a dwindling and declining physical asset base, lower quality public service and – crucially – decreasing long-term viability of the entities which are delivering those services. The widespread closure of care homes which have been taken over by private equity is the point – those closures are a financial success if more has been taken out than they paid for them in the first place.
As well as stopping outsourcing of government contracts, there needs to be other sources of reliable capital investment focussed on protecting and building businesses, not stripping and profiteering from them. That is what the Scottish National Investment Bank was meant to do, but it itself has been captured by the private equity industry.
Unless governments stop leaving investment policy in the hands of private equity, it will continue to undermine many parts of our economy in the process of making the rich richer at the expense of the rest of us.