Review: The Asset Class by Hettie O'Brien

Hettie O'Brien's The Asset Class helped make something opaque—intelligible and exciting. It was written partly like a novel where I felt I was zipping in and out of these places, meeting these people: former members of the industry, to organizers and activists. It raises interesting questions about whether private equity is capitalism at its zenith, or some ugly weird aberration of capitalism.

One complaint is I wish there was a glossary. The Investopedia definition of private equity is as follows:

Private equity is an investment class where firms raise capital to acquire and manage private companies or take public companies private, with the goal of ultimately selling them for a profit.

So a private equity firm is a firm that does just that (like Blackstone). Recently these firms were in the news for buying up sports teams like the LA Lakers. The fear, which O'Brien shows is substantiated, is that these firms treat companies the way house-flippers treat houses: you buy an undervalued house, repaint it, get rid of the greenhouse that was a suck on electricity, then sell it at a profit. Only with companies, the things that are a drain on (short-term) profit are often features that bring other kinds of value: interpersonal care at a nursing home, or having teammates who your home city loves, or just having water you can swim in without hitting trash and needles.

The virtue of public companies is they are accountable to the public. When a firm takes a company private, everything it does (including where the profit goes) is secret. They're also under enormous pressure to make profits fast because they buy the companies with debt. This is the infamous Leveraged Buyouts, followed by debt push-down scheme where the company in question becomes responsible for loan repayment. But repaying debt, or fees, can also be an excuse to shaft workers, while paying executives royally. Those who run private equity firms are insulated from their gambles because of debt-pushdown and limited liability: if the company they bought in an LBO can't pay off the loans, it's (A) not their money and (B) can't come back to haunt them direclty. This encourages both high risk-taking and asset stripping, which is not what you want with hospitals, housing, or water treatment (as she blisteringly documents in Kenya, the US, and UK respectively). These are the assets that PE firms target, though—services that people need to live (a ferry to the main land, a nursing home), or love too much to give up (the team you grew up with). There's then little consumers can do while they gut it, juice it, before off-loading it to the next buyer.

I think O'Brien could have teased out the last section more, but maybe in an expanded addition. She hinted at this vicious cycle where, as governments have cut taxes, they loose the money needed to run their programs. To raise capital, or off-load a service they can't afford, they will sell it to a PE firm. This is what PE firms want, of course. Favorable candidates will be those that cut taxes (which means more money for them too). There's been much talk in the current administration: the desire to privatize government, to make government fail so that private companies can "do it better." Hettie's book shows that it's a joke to think they will. When there are billions to be made, few reprecussions to face, and the patients and tenants and fans are all numbers on a spreadsheet (have you tried empathizing with numbers? it's hard), the chance to join the asset class (was the title supposed to be a pun) could be too hard to resist (if you're already starting out with a Machiavellian personality type).

Like anything, we need groups boycotting PE products, we need to elect representatives to pass regulations, for instance banning debt-pushdown, and we need a tax system that funds governments so they work (e.g. closing the step-up in basis, the estate tax loopholes, and introducing a capital gains tax)—so they won't be pressured to sell off their assets. And maybe most importantly (though O'Brien doesn't touch on this directly): if more people owned more stock it could be harder for firm to buy up the requisit amount of stock so they can take a company private. Paying employees in stock could be one step towards this, which could also help put them on the board of companies—another aspiration of the progressive left. If that fails, further legislation could limit how much debt could be used to buy companies, for force more transparency among PE firms.

4.5 / 5