17 May 2023. Generations | Business
Wrestling with the Great Chain of Being. // Why private equity companies are bad for our economies.
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1: Wrestling with the Great Chain of Being
On Monday, I wrote the first part of a review of John Higgs’ book The Future Starts Here. He argues that every civilization has a big narrative, or a ‘circumambient mythos’—and that the secret to a less dystopian future is a different narrative.
In the first part of the book, he suggests that our present future narrative is Tragedy—the inescapable flaws of the central character drag them to their doom. But he thinks we might be able to change this to Comedy. As a narrative form, this is about a character flaw that can be overcome or resolved.
The mechanism for this eventually reveals itself as generational change, or more precisely, generational change informed by fluent access to social media and digital networks. This insight comes from an unlikely source: watching John Hughes’ 1980s film The Breakfast Club with his teenaged children. The film is set in the detention class of an American school. He had fond memories of it from his GenX youth. They hated it. (One of its stars, Molly Ringwald, has also written about why the film is problematic).
(Author John Higgs. Source: johnhiggs.com)
I’m not going to go back through the plot of The Breakfast Club here, but Wikipedia is your friend. I’m confident that if it were shown on television next week it would come with one of the those presentation voiceovers advising that it includes “social behaviours, attitudes and language of the time.”
To this (younger) generation, the villain of the film is the very character that my generation viewed as the main male hero, the bad-boy teenager Bender. To the eyes of Generation X, Bender was a character who refused to bend to authority... To the eyes of the post-Millennial generation, Bender is just a bully. He deliberately makes others miserable and takes delight in doing so, and no amount of bad-boy charm or troubled backstory can disguise the fact that the character is an unredeemable arsehole (p121).
Higgs draws heavily on the current mainstream views of generational change. Boomers are a sprawling generation born between 1945 and the mid-1960s; a smaller GenX (of which he is a part) between the mid-60s and the beginning of the 1980s; Millennials between 1980 and the mid-90s; Gen Z from 1997 (p124ff). Gen Z are the first generation to grow up fully immersed in the internet.
Much of the current commentary on GenZ and the internet sees it as a problem—for example causing mental health issues. Higgs suggests that something else is also going on here: GenZ sees that world as networked, and this changes their worldview:
Generation Z inherited from the Millennials a belief in the importance of individuality and a belief that they had the right to be exactly who they wanted to be. But their ability to think in terms of networks added an extra insight to this, which is that individuality can only work when everyone is allowed to define who they are. It is only when everyone accepts how everyone else defines themselves that the world can be trusted to allow you to be yourself (p 145).
The different mythos come with different imagery. In the mediaeval world, this was the ‘Great Chain of Being’, with God and the top, then archangels, angels and other creatures from the spiritual world, and then mankind, itself finely graded from kings down to peasants and slaves. Below them came animals (also graded), trees, plants and then minerals. The Great Chain of Being was a statement about authority: each layer had power over the ones below it.
As Higgs observes,
The problem is that our circumambient mythos still has the great chain of being buried at its heart. For as long as we believe that we have the right to exploit the natural world as much as we want, attempts to rein in our use of the natural world to sustainable levels will be interpreted as some form of painful restraint (p284).
Our version of the great chain of being may actually be worse than that of the middle ages. The Enlightenment, he suggests, sliced off the religious layers, leaving humankind at the top. This may have worked when the world’s population was 880 million, but not when it is eight billion:
As the naturalist Michael McCarthy has pointed out, ‘Most Britons remain blithely unaware that since the Beatles broke up, we have wiped out half our wildlife’ (p283).
This story is, in its narrative form, a Tragedy—even if schemes such as E.O. Wilson’s ‘Half-Earth’ project have the potential to turn it into a Quest.
There’s a subtext to this discussion about networks that plays out in Higgs’ research method. To test the idea that one’s own networks might be enough, he chooses to speak only to people he knows in walking distance of his home in Brighton, on the English south coast. (He is lucky once, when he bumps into someone he wanted to speak to who lives in London in the street in Brighton). Reading the book, I had noticed this, but had not realised it was an explicit choice until he revealed it. Initially, he thought this might have been a mistake:
Very quickly, however, I found that talking to trusted peers helped me understand all sorts of issues in a way that interviews with experts didn't... What I learnt from my peers was qualitatively different from what I would have learnt from experts... The act of learning from them was qualitatively different also. The connections between people are mysterious things that are a lot richer than we usually give them credit for (p331-332).
What he learns from this experiment, and from the his research, is that culture is a stronger source of change than he had realised—and this in turn gives him ground for optimism:
It is no use assuming that your own biases and prejudices will be common in the years ahead... Culture is constantly evolving and being born just a few years earlier or later is enough to give people noticeably different values. We can trust that the culture of any given moment will be a logical reaction to the world at that time. In the words of the cognitive historian Jeremy Lent, 'culture shapes values, and those values shape history' (p.336-37).
Which takes us back to the values of the GenZ generation and those that follow it. Higgs makes an explicit link between network thinking and the kind of systems-based understandings of the world that will be necessary if we are to escape from the Great Chain of Being to a more reciprocal view of our relationships with the more-than-human world.
Our current crises, he suggests right at the end of the book, are about this fight between two utterly different worldviews. Writing in 2019, he sees populism—in forms such as Brexit and Trump—as the last stand of a “the individualistic fundamentalist, single-vision philosophy” of the twentieth century:
The young are watching all this play out. They are not seeing anything that appeals. Ihey are certainly not seeing anything that works (p345).
He argues that this generation has the same transformative potential of the so-called ‘Greatest Generation’ of the 20th century, which rebuilt the Depression economies and fought the second world war. There’s a commonality there that he doesn’t spell out, which is that both these generations grew up in the middle of economic and political crisis. (They are both ‘Fourth Turning’ generations). They are, he suggests in the last metaphor in a book that is full of metaphors, “the antibodies” that can finally see off the “virus” represented by our dominant but failing ideologies. We’d better hope so.
2: Why private equity companies are bad for our economies
I’ve been meaning to write something about private equity here for a while, partly because I had a bad experience with a business that I have some dealings with. It used to be family-owned but is now owned by private equity. Margins went up, service went down, the Chief Executive increased their salary by a factor of three, and the business’ tax structure was changed so profits ended up going through Jersey, probably for reasons of tax avoidance. (This is mostly from the last set of accounts.)
In the UK as in the US, private equity is largely invisible. It likes businesses with good cash flow, like retail, care homes, and other service businesses. Morrisons is owned by a private equity company. So is TalkTalk. So is John Laing. So is G4S. So is Northumbria Water. Investment tends to fall, staff numbers tend to be reduced, service tends to get worse. In the care sector, people tend to die.
In short: while not many people understand how private equity works, as a business investment model it is often profoundly damaging to the businesses it invests in—and by extension to the staff and customers of those businesses. Now Brendan Ballou, a former prosecutor in the Anti-Trust Division of the US Department of Justice, has written a book explaining how it works, at least in the US context, and why it is bad for us.
(Image from the cover of Plunder via Literary Hub)
And mostly, the reasons why it is bad in the US are the reasons why it is also bad in the UK and Europe. The book’s title is Plunder: Private Equity’s Plan to Pillage America, so he’s not pulling any punches. Lynn Parramore interviewed him in Brave New Europe.
What we now call “private equity” started life in the 1980s as “leveraged buy outs” (LBOs), in which financiers bought under-valued companies, often on borrowed money, restructured them to make the most of the assets, and then sold them again. (The great business book Barbarians at the Gate caught the first big LBO moment.) LBOs got a bad name, and the sector re-branded as “private equity”. Now that private equity has got a bad name, we’re starting to see new euphemisms such as “alternative asset management businesses”.
Given that the phrase is a bit of financial jargon, let’s start with a definition of what they do from the interview:
A private equity firm uses a little bit of its own money, a little bit of investors’ money, and a whole lot of borrowed money to buy companies. Then it tries to impose operational or financial changes with the ambition of selling them for a profit a few years later. It’s a simple idea but it has three basic problems. One is that private equity firms tend to invest in the short term to get a return on their investment in just a few years. The second is that they tend to load up the companies that they buy with a lot of debt and extract a lot of fees from them. The third is that private equity firms tend not to be held legally responsible for the actions of their portfolio companies.
The case that private equity advocates make is that private equity makes businesses more efficient, and that they make under-performing business perform better. But this doesn’t seem to be true. In her introduction to the interview, Parradine says:
Advocates say private equity makes companies more efficient when they buy them, but Ballou finds that their real specialty isn’t managing companies – they often screw that up, big-time – but finding legal and regulatory holes that allow them to make profits quickly and shift the risks and costs to somebody else.
More broadly, a lot of private equity management is about forms of financial engineering that are extractive. And no matter how the business does, the private equity company will pick up fees:
Often private equity firms make their money from the companies they buy through “management fees” that the company has to pay every quarter or every year... They also charge transaction fees, so if the private equity firm directs the company to sell its own assets, a portion of the sale actually goes directly to the private equity firm – not even the firm’s investors. Then there are what are called “dividend recapitalizations” – that’s when the portfolio companies are borrowing money to pay dividends to the owner... It’s like being able to use someone else’s credit card.
One of the consequences of all of this, typically, is redundancies. In the US retail sector, the Center for Popular Democracy estimated that private equity firms are responsible for about 600,000 layoffs in the past decade —at a time when the retail industry generally was adding jobs.
Because many of the private equity founders are now extremely rich (as in multi-billionaire rich), they are also able to play the political system—notably in the US—to keep the pressure off them. Private equity has, in the US, “given an estimated 900 million dollars to federal officials and candidates since 1990.”
All the same, Ballou thinks the rise of private equity marks the end of an era of capitalism, not the beginning. He likens it to the growth of the US trusts in the late 19th and early 20th century, which was a response to a period of business stagnation. The response to that was a political response—a period of popular pressure that ended up creating anti-trust legislation (hence the name) and breaking them up.
Ballou also thinks that there’s a simple first step to start limiting the adverse effects of private equity ownership:
BB: I would want private equity firms to be held legally responsible for the actions of companies they control.
LP: Like some kind of fiduciary duty?
BB: Exactly. You can align responsibilities so that private equity firms are responsible for their actions. That would fundamentally change incentives and make their business moves a lot less destructive in a whole range of industries.
In the US, this can be done by a variety of agencies, at state and national level. In the UK it would have to be done centrally. There’s also a good review paper on private equity by the House of Lords Library from last year that points to a couple of routes. The first is that private equity companies get some surprising tax advantages—so it would be fairly straightforward to shut those down. The second: you could actually enforce the legal duties of directors under the 2006 Companies Act to
have regard, among other matters, to: the likely consequences of any decision in the long term; the interests of the company’s employees; and the impact of the company’s operations on the community and the environment.
If you prefer your information in audio form, Brendan Ballou is interviewed on Andrew Keen’s podcast about the book (33 minutes).
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