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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Cometh the hour, cometh the protest. In recent years, investors — and journalists — have watched in amazement as the private equity world has boomed to a once-unimaginable degree.
One sign of this emerged on Monday, when FT calculations revealed that the leaders of entities such as Blackstone, KKR, Apollo Global, Ares Management and TPG enjoyed a more than $40bn rise in the value of their holdings since January 2023.
Then on Tuesday, the personal finance guru Tony Robbins told US television that “If you had a million bucks and you put it aside in the S&P 35 years ago . . . it’s worth $26mn” — but if you had put that sum into private equity “it’s $139mn.” Gulp. No wonder a survey from KKR this week also showed that 28 per cent of family offices plan to invest more in private equity. For private credit, the figure is 45 per cent.
However, even beneficiaries are starting to protest. Take Calstrs, the $327bn US pension fund that is one of the world’s biggest backers of private equity. This week, Christopher Ailman, Calstrs outgoing chief investment officer, warned that while “it’s great [private equity funds] make money for our retirees — who are teachers — and for other funds . . . they need to also share the wealth with the workers of those companies and with the communities they invest in”. In plain English: risks of a backlash loom.
What should the wider world conclude? There are three key points. First, chatter about a backlash is (yet another) sign that years of cheap money have created bubbles.
After all, history suggests that protests rarely emerge in the beginning or middle of a bull cycle, but at or just after the peak. And in the past year, there have been multiple signs of froth: BlackRock reckons that private funds are sitting on $4tn of capital (aka “dry powder”) they have been unable to deploy; funds are shuffling assets and taking on debt to juice returns, as exits slow; there is endless gossip about valuation losses and underperforming assets that are still largely concealed; and it has become hard to raise new funds.
The second key point is that the sector’s leaders need to learn from financial history about what not to do when faced with protest. Consider investment bankers in the noughties: when that sector boomed — and then faltered — most of its luminaries initially ignored protests or dismissed them, making their problem worse. So, too, with hedge funds a decade earlier.
Some private equity leaders understand this, and have tried to counter unpopularity. Pete Stavros, co-head of private equity at KKR, for example, has in recent years thrown huge energy into an initiative called Ownership Works, which gives a stake in private equity-owned companies to employees.
Cue uplifting videos of workers at entities such as CHI Overhead Doors, a Michigan manufacturing company, celebrating their financial gains. And with other firms, such as Apollo, TPG, Warburg Pincus and Advent International, now also backing Ownership Works, the initiative hopes to generate more than $20bn in worker wealth by 2030.
But such projects will need to become more ambitious and more mainstream still if the sector wants to avoid a backlash. That $20bn target, after all, is still only half the level of private equity leaders’ gains last year.
That leads to a third point: insofar as the private equity world is trying to refashion its image and social contract, this is contributing to subtle-but-important shifts in how we imagine capitalism. In the 20th century, it tended to be synonymous with public equity markets. Indeed, they were viewed as the key pillar of the free-market, profit-seeking forces championed by the 18th-century economist Adam Smith.
In some senses, this was ironic, since Smith developed his vision in an era when commercial enterprises were partnerships or proprietorships, usually family companies. The one notable exception was the “joint stock” framework used by the East India company — which Smith disliked.
Of course, since Smith’s era shareholderism has exploded. But the private capital boom is echoing his world: entrepreneurs such as Elon Musk are building vast privately held companies, as “unicorns” (private companies with $1bn-plus valuations) multiply. Family offices are exploding in scale. Private credit and equity funds have boomed.
There are obvious dangers in this. Some unicorns have terrible governance. Their assets are hard to trade; the London Stock Exchange, say, is still waiting for permission to start an “intermittent trading venue” for privately owned companies. And opacity makes it difficult to tally valuation losses or potential systemic risks.
But it seems unlikely that the private capital boom will go into reverse any time soon; after all, public equity markets have challenges, too. That is why Calstrs’ comments are striking: insofar as private capital is here to stay, more scrutiny is inevitable, not least because the media and politicians alike are slowly realising that the 20th-century image of capitalism-as-public-equity is misleading.
So if the luminaries of groups such as Apollo, KKR and Blackstone are as smart as their pay implies, they should double down on initiatives such as Ownership Works — and pay their taxes too. That is not just because it is good PR, but because it is also the right and moral thing too. Just ask the ghost of Adam Smith.
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