GUEST BLOG: Ian Powell – Changing face of capitalism: private equity threat to New Zealand economy

The Reserve Bank is “watching” the expansion of private equity in Aotearoa New Zealand in light of alarm bells being run by financial regulators globally.

These alarm bells included no less than the European Central Bank and Bank of England over possible risks to financial stability by the rise of private equity, including their lending practices.

Reserve Bank watching economic risk of private equity growth in New Zealand

This is the subject of a Newsroom article by its business reporter Andrew Bevin (6 November; unfortunately link presently not accessible).

The context is the combination of tightening banking regulation following economic recession and a trend away from stock market listings.

This is leading to non-bank lending and private equity playing an increasingly important part in the financial systems of capitalist economies.

At this stage financial stability risks from private equity funds are considered by the Reserve Bank to be “limited” although they “…pull back their supply of financing or be unable to repay bank loans if economic conditions became stressed.”

BlackRock a lightning rod for private equity risk concerns in New Zealand economy

Although 2023 was a “relatively quiet year for private equity activity in New Zealand, Bevin noted that private investment fund BlackRock had opening an office in Auckland.

SolarZero eye-opener

BlackRock is a global investment management firm whose activities include private equity. Recently it has become a lightning rod for concerns over the economic risks of private equity funds in New Zealand.

BlackRock owned GRP111 is the major investor in SolarZero which has just been placed into liquidation because of what it called “unsustainable operating losses and liquidity constraints”.

SolarZero workers now out of pocket

This was the subject of an extensive Radio New Zealand Nine to Noon interview with Cecelia Tarrant, Chair of the crown-owned Green Investment Fund, another SolarZero investor (6 December):

https://www.rnz.co.nz/national/programmes/ninetonoon/audio/2018967279/green-investment-fund-extremely-frustrated-by-blackrock.

Tarrant described the frustration and surprise of this sudden withdrawal. The liquidation has left around 15,000 customers in limbo. Other casualties are hundreds of employees out of pockets and contractors deprived of certainty.

Destruction and plunder

After listening to the Tarrant interview I was reminded of a revealing paywalled article by American historian Professor Kim Phillips-Fein (Columbia University) in the New York Review of Books (19 October 2023):

https://www.nybooks.com/articles/2023/10/19/conspicuous-destruction-plunder-brendan-ballou/.

Professor Phillips-Fein exposes the destruction and plunder of private equity capitalism

Her article reviews two new books on private equity. The first is Plunder by federal prosecutor Brendan Ballou. The second is These Are the Plunderers by journalist Gretchen Morgenson and researcher Joshua Rosner.

Professor Kim Phillips-Fein summarises them as together by asking the question:

What if private equity is not a perversion of capitalism (as the authors maintain), but merely a distillation of its contemporary values and practices? What if its leading financiers are an advance guard for our economic elite as a whole? Along with many other popular accounts of private equity, hedge funds, and high finance, the books imply that private equity primarily works by distorting and twisting economic norms. By looking closely, though, we also find the possibility of understanding the problems of today’s economic order.

A private equity fund is described in its most simple terms a pool of money managed by professionals to maximise returns for rich investors and with little regulation.

Their practice is to buy up all the shares of publicly traded companies thereby gaining complete managerial control.

Among her observations were:

• Eventually, after taking ownership, the private equity firm sells the company’s stock on the open market, in the hope of making profits that can be many times the initial investment.
• Today more businesses are owned by private equity firms than are listed on the New York Stock Exchange.
• Private equity firms create nothing and provide no meaningful services. Rather they actively undermine functional companies.
• Private equity seeks out low-wage industries in which the consumers are unlikely to complain. Many purchased companies purchased cater to the poor, sick, and vulnerable.
• While low wages, exploitation and the desire to escape regulation are also characteristics of capitalism generally, private equity firms add a new dimension. They remove companies from public view and scrutiny; from the “prying eyes of society.”
• As institutional investors, such as banks, have divested from fossil fuel companies, private equity firms have “swooped in to buy them” while also purchasing companies that specialise in disaster clean-up. This is “managing both to fuel climate change and to profit from its wreckage.”

Social protest movements

Phillips-Fein concludes by highlighting the need for what past social protest movements have done; challenge the elites of their day. She argues for the importance of this approach being applied to private equity firms which are elitist by their very nature.

In her words these past struggles “…all embodied “the principle that the economy must serve a wide range of needs, not just the self-satisfaction of an elite.”

United States focus relevant to New Zealand economy

I could not agree more. Professor Phillips-Fein’s focus is on the United States. But this raises questions about New Zealand as potential but realistic collateral damage. The collapse of SolarZero is an early alarm bell.

Private equity is not an aberration of capitalism. Instead it is a central part of capitalism’s changing face.

The role of social protest movements is critical if its plunder and destruction are to be prevented, both internationally and in Aotearoa.

 

 

Ian Powell was Executive Director of the Association of Salaried Medical Specialists, the professional union representing senior doctors and dentists in New Zealand, for over 30 years, until December 2019. He is now a health systems, labour market, and political commentator living in the small river estuary community of Otaihanga (the place by the tide). First published at Political Bytes