Rating: 7.9/10.
Our Lives in Their Portfolios: Why Asset Managers Own the World by Brett Christophers
Book about private equity, how it works on investments in housing and infrastructure, and its effect on society. Private equity has bought lots of housing and capital infrastructure, managing them in an unregulated way: eg, they are not hesitant to evict tenants if it is profitable to do so. In many cases, it is more profitable to own private equity than equity in public companies. Asset managers take various forms; they can be generalists who invest in many types of assets, including providing other types of financial services, or specialists who focus on something specific like real estate. They have varying degrees of involvement in operations, but they often own a company that operates the asset, with the cash flow eventually going to the asset manager. Funds are often highly leveraged, using debt to buy assets. A fund manager’s compensation is based on how much and how quickly they can generate returns, so they are interested in maximizing short-term cash flow.
A history of how private equity came into being: the first asset managers started in the 1990s when a lot of infrastructure became available for private ownership. Many governments thought it was more efficient for private entities to manage and operate infrastructure. Asset managers generally buy existing assets rather than invest in new ones, preferring those that are easiest to operate. In the 2008 crisis, they expanded into residential real estate since a lot of it was available at discounted prices. Recently, they have been expanding into developing economies, but the penetration has so far been limited.
Asset managers tend to invest in larger assets since it is easier to manage a small number of them than a large number of small ones like residential real estate. They prefer assets that generate predictable cash flow, so multi-unit apartments are more common than single-family housing. They invest in lots of infrastructure like energy production and distribution, railroads, highways, telecom, water supply, hospitals, care homes, etc. Asset managers are all in the Western world, and they mostly invest in the Western world, but sometimes they invest in developing countries as well. However, housing investment is only prevalent in North America and not in Europe. The largest asset managers are Blackstone, Brookfield, and Macquarie, although they are all complex corporate structures that take some work to analyze.
The asset manager structure has large costs to society. One reason is that asset manager structures are typically short, about 5-10 years, which is the duration of a typical fund length. They must generate as much return as quickly as possible, so they like to buy undervalued assets and raise rates. This raising of rates is not important for cash flow as much as to make the asset look more attractive financially so it can be sold for a higher price than it was bought for. Often, this is sold when a fund is close to expiring, and asset managers are incentivized to invest as little as possible into it, which is bad for infrastructure that needs long-term investment. Investment is only done when it allows an immediate return, such as when renovating an apartment unit allows you to evict or re-evict the existing tenant. It is problematic when crucial infrastructure is sold out: eg, in Chicago, parking meters were sold in 2008 for about $1 billion as a 75-year lease. The contract stipulates that the city must pay compensation damages if it makes the parking spot unavailable for any reason, like street festivals or taking the space for bus lanes. This has ended up generating negative cash flow for the city and preventing public transit infrastructure from being developed from the parking space. However, courts have ruled that there is no way for the city to renege on the contract, even though it is a bad deal.
In their marketing, asset managers like to sell the story that the funds are helping ordinary people with pensions, such as teachers and firefighters. However, people with pensions represent a relatively small percentage of the overall investor base, and most of the investors are wealthy individuals. Thus, asset funds essentially serve as a way to channel capital upwards to the wealthiest. The asset managers are highly compensated, and the fee structure is set up so that they make money regardless of fund performance. They also use debt and financial instruments to avoid taxes and lobby against the government when it tries to fix these tax loopholes.
The last chapter is about recent developments since COVID-19 and afterwards. Recently, many Western countries have been experiencing a housing crisis due to rising interest rates and inflation, which make construction difficult. Additionally, COVID-19 has reduced the value of a lot of commercial real estate, thus residential real estate is becoming a more popular investment instrument for asset managers. There is also a climate crisis, and new investment into climate technology has mostly been done by asset managers rather than the government, since they have the capital. The long-term trend is that more and more of the world’s infrastructure, housing, and other real assets will be owned by them.
