Over the past few weeks, many in the US and the UK have likened the sense of impending collapse to the early days of Covid. Just as we watched, nervously waiting our turn, as China, the Philippines, and Italy fell to the virus and began lockdowns during February and March 2020, six years later we’re witnessing countries around the world implement “emergency energy conservation measures” in response to what the International Energy Agency has deemed the largest oil supply disruption in history.

In the coming days, the last tankers to have departed the Strait of Hormuz before the US-Israel war of aggression on Iran will reach their final destinations, perfectly in sync with the US’ deranged double-blockade of the Strait that will likely intensify the global supply shock.

It can feel, in other words, like events are in motion over which we have no control, sweeping us away in their currents with no end in sight.

This feeling of powerlessness, however, is not only due to the knowledge that something epoch-defining is occurring far away and will inevitably blow back on us here (if we’re lucky enough to not already be impacted).

Such events also reveal just how distant we are from power in our daily lives, be it over the cowardly political decisions to actively support an illegal war, a financial system that leverages the global economy to make massively risky bets on AI and data centres, or the public services in our local communities that could be hit the hardest.

In her new book, The Asset Class, journalist Hettie O’Brien enters the world of private equity to expose just how far finance and its government enablers have gone to erode democratic control over the most basic necessities of life all around the world. Through investigations into housing, care homes, hospitals, water infrastructure, and more, O’Brien expertly untangles the mechanics, ideology, and catastrophic human impact of private equity’s debt-driven financial warfare.

I spoke to O’Brien at the beginning of this month to discuss how private equity actually works, its ties to right-wing populism, and whether we’re actually seeing the industry’s last gasps as a private credit crisis looms overhead.

This conversation has been lightly edited for length and clarity.

The Asset Class is now available for purchase online and in bookstores in the UK. The US edition will be released in June.

— Evan Robins

Evan Robins: You begin the book with an example of the quiet presence of private equity in your own life – the ownership of the railway arches near your parents' house in southeast London – and then you expand to the far-reaching and devastating impact of private equity on care homes, housing, water infrastructure more, not only in the UK, but around the world. What was your personal point of entry into awareness of this “secretive world” as you describe it in the book, and why did you decide to expose this phenomenon by bringing all these disparate strands together?

Hettie O'Brien: It's a good question: why would somebody become so interested in what can seem like a kind of niche area of finance? I was thinking broadly about stuff that I think we're probably all thinking about in Britain ever since the financial crisis, which is that the economy feels stacked against people.

A lot of the time we hear explanations for this which have to do with things like the lack of growth, financialisation, inflation or the cost of living crisis. While these capture a lot of truth in terms of what is going on, they can seem quite abstract and a little bland as explanations. I also think there's a risk that those kinds of big explanations can leave us a little numb in terms of what to do next.

But it was through conversations with someone who worked at Blackstone that I knew, and through a sense after the 2008 financial crisis that while there was a lot of focus on banks, playing out in the background was this gigantic shift of power towards a much less regulated and much less visible part of the finance sector that we didn't really know much about. Whenever I was looking at things like housing, for example, the names of these companies would crop up quite repeatedly.

The more I learned about private equity, the more it seemed to me to be a kind of high octane version of finance which had particular techniques that it put to work in some really mundane places – the places that we want to be boring because we rely on them every day, places where we live and work and actually die.

It also seemed that a lot of what had been written – there was some really good stuff out there – but it was either quite academic in the sense of being aimed at people who already understood this subject and were invested in learning more about it – or it was narrowly American-focused. I wanted to join the dots between places at a more international level and reveal this to be a sort of, I suppose, international conspiracy in some ways, but also show how it's affecting the texture and reality of everyday life in profound ways. It's the story of what it's like when your apartment block is bought by a landlord whom you can't get in touch with and you have no idea who really owns it – and the story of what it's like to organise against a water company owned by a sovereign wealth fund and a private equity firm.

Let’s go into some of those particular techniques. Can you describe what’s distinctive to private equity and how it differs from other asset managers – in other words, what are people confusing when they mix up Blackstone and BlackRock?

BlackRock/Blackstone is the classic mistake that everyone makes, and actually BlackRock was originally part of Blackstone before being sold. The original techniques of private equity had to do with active asset management rather than passive asset management. BlackRock is a passive asset manager in the sense that it is known for largely buying shares in existing companies, though it does now dabble in private equity too. 

The history of private equity is one of buying things and actively doing things to those assets. In the story private equity tells about itself, it’s breathing life into tired corporations that need an injection of expertise and finance. That is, fitting them out with better IT systems and more experienced managers and then selling them. 

But to understand really what private equity does, you have to go a bit deeper. The term private equity often feels like a form of camouflage. It came about in the 1990s as a means of reputation management when the initial wave of what were then known as leveraged buyouts became quite unpopular with the general public. 

Before I get onto leveraged buyouts, there’s one important thing about the term private equity, which is the word private. If you think about your typical public company, they have to share certain amounts of information with the public, like quarterly reports and statements of what they're up to that filters down to you or I when we're listening to the radio in the morning. That then informs whether we want to buy shares in that company, or whether workers want to push for pay rises because they understand that the company's actually doing really well. That's not to say that public companies are beacons of democracy – I mean, Enron was a public company. But what they have to do is share information. And that is something that private equity owned companies don't have to do. 

Historically, when a private equity fund buys a company, it delists it from the stock market (increasingly, however, private equity is buying up companies that are already private and keeping them that way). When it delists a company, that information sharing disappears. It's been accused of taking a large part of the economy offline and shutting off a light across a big swath of economic activity. That's an important thing to understand in terms of like understanding the kind of quasi anti-democratic aspect of private equity. 

But the thing that really matters is the leveraged buyout. When you or I buy something, we go into a shop, hand over our money, and then we own the thing. Or we might buy something using a credit card, and that's using borrowed money. Private equity doesn't do things this way. It uses a sliver of its own money and a lot of borrowed money, and then it pushes that borrowed money down onto the thing it just bought. There’s this common phrase used to describe it: “heads I win, tails I also win”. It means that if the deal goes well, the leverage or the debt that’s been used acts like a crowbar to amplify the force, or in this case the return on investment, because you've put less money into a deal to begin with. But if the deal goes badly, you’re not actually responsible for the consequences of that debt in the same way because the company that you've just bought is responsible for paying it off. It shifts responsibility and consequences elsewhere by capturing the debt servicing capacity of a company in order to serve one’s own ends. 

It also means that when a company is crippled with debt, it can often be a heavy burden for that company to bear. This was actually once envisaged as a good thing and having a salutary effect, but what has happened is that debt has a really catastrophic effect. When I was reporting, I came across a paper which found that among care homes in England during the first wave of the pandemic, those with the most leverage had a death rate twice as high as those with no leverage at all. I think that really shows how the use of debt can have these terrible consequences when it comes to services that a company is supposed to be providing, because it means there's fewer resources to spend on the thing that the company is supposed to be spending on. 

Private equity's relationship to debt is central to your story and features across the book. How would you characterise its broader, political significance?

One of the things that I found really interesting when thinking about debt was [the life and work] of Michael Jensen, a finance professor who pissed loads of people off. He was a very ideologically committed figure who started out his career at the University of Rochester business school, which imagined itself as another version of the Chicago School of Economics. He started writing about public companies and sensed there was this problem with them that debt might be able to resolve, because essentially these public companies were stuffed with managers who were having the best time by basically treating themselves with their lavish expense accounts and furnishing their offices with fancy computers they didn't need. There's this one story that often gets told about the chief executive of RJR Nabisco who put his German Shepherd on a private jet. 

Jensen's main argument is that debt could have a disciplining effect on these companies. If you load a company up with debt, it would mean putting the self-indulgent managers under a lot of stress. And it would mean they'd have to start making really tough decisions about firing people, about cutting things that weren't profitable and basically making them zero in on the creation of profit. He doesn't actually offer any empirical evidence for the idea that this discipline of debt really works, but it becomes the justifying logic of private equity. 

That then led me to think more broadly about how we view debt. Growing up after the financial crisis, I politically came of age in the coalition government era in Britain when there was this conversation about how austerity was a necessary policy program that we'd have to go through to get somewhere better. There was this narrative that everybody needs to start living within their means and that the nation has overspent on its credit card – all of these metaphors that justify decisions that are pretty terrible. They all pointed towards this idea that public debt is something that should be always avoided, and yet at the same time, private debt was being embraced on behalf of high net worth investors who were massively investing in leverage investments and in private equity. 

The leveraged buyout isn't just a set of techniques or a business transaction, it's a metaphor for our entire approach to debt and the way that it shapes our politics and what we think of as being politically possible. 

We see this every couple months with the recurring panic about Zack Polanski's comments on the bond market and the notion that we could have a different relationship to public debt. 

Yeah. But it's also present in the sense that we're content to see water companies build up huge amounts of leverage in order to enrich themselves and put so much debt onto those essential utilities that they're unable to effectively do what they’re supposed to do. They’ve made such scant investment in their services that we're now paying twice for it. It's public austerity on the one hand, private leverage on the other.

The real-world consequences of private equity are stark: you write that the industry’s growth has made it a “mechanism for producing political instability, weakening governments and widening the chasm between rich and poor”. In this sense, the book traces the relationship between the breakdown of society's ability to provide the necessities of life and the rise of the populist right. The ascent of Nigel Farage and Reform UK, for example, occurs simultaneous to, and in relation to, the Labour government’s decision making. You note that last year the Treasury launched a consultation to further cut red tape for private equity in order to boost growth, which you surmise would likely have the opposite effect. How do you understand the relationship between each of the three leading parties – Reform, the Greens, Labour – to private equity?

Labour initially said they'd scrap the carried interest loophole [carried interest refers to the profits taken by fund managers for well-performing investments], and then went for this really incoherent policy approach in which carried interest is taxed slightly higher, but still not as high as income. This was the result of mass lobbying. I think that they have been extremely accommodating to the industry. Rachel Reeves has indicated that private markets should play a bigger role, and  that pension savers will benefit from a commitment to invest in private markets. At the same time, they want these institutions to play a greater role in terms of the delivery of infrastructure. It isn't really infrastructure, but things like data centers and other projects that the government likes to trumpet. Ethan Shone at openDemocracy has done some really good work exposing the onslaught of lobbying activities on behalf of the British Private Equity & Venture Capital Association (BVCA), and the way in which they have really lobbied around carried interest and access to pensions. 

On the right, you have to pay rhetorical lip service to the idea that we need to do more on the cost of living and that people are really unhappy with the state of affairs. I think this has been playing out more clearly in the US where Trump decided to ban institutional investors in single family housing. On the surface, this sounds like a slap to companies like Blackstone. But actually when you look at the details, you realise that it only applies to single family housing and therefore affects particular areas like suburbs and places in the Sunbelt where Republican voters are more likely to live. It doesn't affect the buying up of huge apartment blocks in inner cities where you're more likely to see Democratic voters living. So you've got this rhetorical posturing versus, in the background, quite cosy relationship. 

I think it's a similar story with Farage. On the one hand you have this rhetorical recognition that people are really upset with how water works in the UK. But on the other hand, there’s no real ambition to actually do anything about that. If anything, the policies that Reform is calling for, particularly its approach to democratic governance, would make it even more difficult to hold these actors to account. Some of the biggest backers within the finance sector for Brexit were from the landscape of “alternative investments” and private markets. There is an affinity there that is more than just a coincidence.

I think the Greens have been the most effective in terms of actually capturing the public mood and suggesting policies that might do something to alleviate the cost of living crisis and also make the economy more democratic. It was really interesting that Polanski did a recent speech in which he said the basics of life in Britain have been sold for profit and they've been privatised and rented back to people at a crushing cost. 

It’s clear that you’re thinking of the history and development of private equity as a transatlantic, Anglo-American story. Particularly in the seventies and eighties, there’s a back and forth between American and British characters, often in each other's countries, who are responding to political and economic crises and exerting pressure on the domestic regulatory environments. In doing so, they continue innovating and pushing private equity forward, or perhaps mutating is the better word. And the relative influence between the two countries appears to be ever-shifting. At one point, you refer to “Wall Street and its British imitators”. Then, referring to more recent events, you describe Britain as the guinea pig for using leveraged buyouts on water companies and you quote an American private equity fund head who says that the UK has “served as a model to the world” on this front.

At this moment when the ties between the US and the UK are under intense scrutiny, what do you feel the history of private equity reveals about this relationship? 

I don't think it was even something I noticed myself, but I think you're right. I really enjoyed going to the National Archives and looking through some of the letters that were being sent and back and forth between Thatcher and her ministers. They pointed to this deep insecurity on behalf of British ministers at the sense in which Americans do things better. They felt there was this nascent industry of venture capital there that was emerging and they wanted to copy it and bring it back home. They end up not really with venture capital at all – not in the ideal sense of building the supercomputers of the future. Britain just ends up with a kind of poor man's copycat version where there's a lot of buyout shops and it’s the dregs of this model. 

There’s been a lot written about the extent to which Britain is now a vassal state of America. I don't think that's entirely true, because when you look at some of the biggest owners of real estate in our cities, it's like actually the Middle Eastern sovereign wealth funds. But there remains this desire to have a more entrepreneurial version of capitalism that is tied to what the Americans are doing. 

You end the book by considering the question of whether we've been seeing the death of private equity over the past few years, particularly following Covid and Russia’s invasion of Ukraine. The book has been released into the world in the midst of or, depending on your perspective, on the precipice of, another global financial crisis, which is prompting a new round of existential concerns for the industry and fears of what that might mean for everyone who's exposed. The FT recently published an article that said there’s nearly $4 trillion of potentially overvalued private equity deals that are proving hard to exit amid higher interest rates and geopolitical turmoil, and that the loans backing the deals are showing cracks. Similarly, there's been a huge spike in redemption requests from private credit funds, and the funds themselves are limiting withdrawals. But despite this, the piece concludes with private equity heads responding to the current crisis with optimism and confidence.

That’s just people trying to sell you on why their Ponzi scheme is still working. The narrative has long been that it's a superior form of capitalism that basically does business in a better way, but also offers you better returns than anywhere else you can get them. And that has been consistently disproven.  

The economic conditions that you or I grew up with are probably never going to be repeated. I'm not saying it was the best time, but there was a sense in which things were inherently quite more predictable than they are now. You could go into a supermarket and you could assume that things would cost the same the next day as they did the day you were just there. Now, I think supply chain shocks, inflation, and war are just part of the mood music of how we live. And with the climate crisis, that’s not going to change any time soon. 

Ever since Covid, warning signs have been flashing up within the industry. One question has been, in the era of rising rates, how can private equity possibly survive? I think that question is very much the right one to be asking today, because private equity is not the right match for the kind of times we live in. 

That point about redemption requests is often one that arises where private equity has attempted to open itself up to retail investors, and that is partly a sign of desperation. Previously, the value proposition of private equity was that it was kind of like a cruise ship, and you could only get a ticket on the cruise if you were really rich and the kind of person that knows what to do with money because you have so much of it. That's why you can navigate the complex fee situation with private equity and make the most of the returns that it's offering. It was never pitching itself to your average worker who has a 401k account or people like you or I. Part of the reason it's felt the need to expand its orbit and open the gates to the middle classes is because of this deep sense of crisis within the industry. 

There was that crazy Bloomberg story that there's more private equity funds than McDonald's. When you've got that many funds competing over returns and competing over investors, you need to find another way to offer those investors returns. That means you are going to be squeezing the companies that you own even harder, or investing in things that are quite speculative, like AI. But you are also going to be looking for ways to keep money flowing into your quasi Ponzi scheme, which is why private equity has now opened itself up to people whom it had never had an interest in previously: because it needs the capital. It's maxed out on all of the other forms of investment where it could possibly find the money. 

One of the people I quote in the book is a short seller, Nate. I was speaking to him about the way in which, shorting private equity is now kind of like shorting the government, in the sense that its continued existence is no longer tied to its actual performance. It's just tied to the extent to which it can manufacture consent amongst its supporters.▼