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Masters of the universe

by The Drawdown 25 September 2018

Spend any length of time covering the private equity industry and, sooner rather than later, the four-word line will crop up. Four words, and the mind darts back to the champagne-infused LBO binge of 1980s Wall Street. Four mere words, and a picture immediately forms of an industry – despite its profound transformation since that decade – still caught in a contradiction; a conflict between its impulse to use its considerable power, and the need to accept such power must face, for responsibility’s sake, certain limits. Masters of the universe, indeed.

[su_quote cite=“Miriam González, Dechert”]

I think we’re all witnessing the same thing, this new way of understanding politics ... for this form of leadership, the short term is all that matters” [/su_quote]

Whatever its past, the reality for private equity is today’s world has new masters. Donald Trump. Vladimir Putin. Viktor Orbán. Marine Le Pen. Geert Wilders. Boris Johnson. Jeremy Corbyn. Their world views and electoral successes may differ but they all share a knack for tapping into long-festering public anxieties; an ability to ignore the rules of the game, and win. “I think we’re all witnessing the same thing, this new way of understanding politics,” says Dechert partner Miriam González. “Look at the US president turning to Twitter to comment on the investigation around Russia’s influence in the elections. Our democratically built political systems are designed to tackle issues in the long term but for this form of leadership, the short term is all that matters.”

Make protectionism great again
This new political philosophy wants to shatter decades of carefully built consensus politics, and is already chipping away at it. In the few weeks it took to research this feature, Trump alone has escalated an existing trade war with China, waged a new one with Turkey, and built fresh barriers to foreign investment. The US president may have been particularly hyperactive, but he is not alone. From Russia’s annexation of Crimea to China’s military exercises in the Pacific, Philippine’s war on drugs and Italy’s refusal of migrant boats, regimes worldwide are shunning international cooperation as they decisively act to defend their own interests.

The private equity ranks do not appear, for now, to be overly troubled. The operators approached for this feature – GPs, trade bodies, LPs, lawyers, politicians, political advisers, former trade negotiators – all shared the same apathy towards the long-term implications of geopolitical disruption. Sure, some conceded, the protectionism underpinning the Washington-Beijing trade feud could impact global supply chains, drag out fundraises and deal negotiations. However – or so the assertion runs – private equity is lean and nimble, able to make the best of both macro booms and busts; an industry with its own distinct, long-term investment cycles to ward off the worst of any short-term political volatility.

[infogram id=“_/9c33ML5plA0glXyZ3GNX” prefix=“7FU” format=“interactive” title=“Masters of the universe”]

Given its current robust health, private equity could easily be tempted to write off geopolitical disruption as one of many trends worth following, but not acting on. After all, the age of Trump and Putin will not last forever; it could well be followed by a return to the more moderate politics many hanker after today. “I feel optimistic. To me, this doesn’t feel at all like the turn of an era; just a power shift towards the east, which explains the anxiety of the US and others,” says González, herself a former EU negotiator. “If you look at political movements, the action and reaction dynamic is always there – citizens may well want one day to replace today’s short-term, more extreme form of leaderships with precisely the opposite.”

However, focusing exclusively on the leaders themselves risks losing sight of the deeper dynamics at play. The fast-paced politics of Trump and the rest may be eye-catching but GPs would do well to remember their very rise was only made possible by citizen anger. Applying the “populism” label indiscriminately can sometimes obscure the fact that protectionist ideals would likely win fewer elections if global inequality wasn’t rising every year.

Ultimately, a disenfranchised global citizenship – rather than the politicians it votes in and out of power – could be the master who will endure regardless of political cycles, the master private equity needs to understand and work with.

Power to the people
From books on the “self-serving plutocracy” to newspaper investigations into the “left behind” who made Brexit and Trump happen, the body of literature on citizen unrest grows every month. Private equity has faced negative headlines long enough not to recognise the same signs. Michael Collins, CEO of industry body Invest Europe, says “discontent with the status quo” appears to be spreading across jurisdictions, creating appetite for outsider candidates. “[There is] a sense of unfairness of one form or another that the elite, which may look different in places, has not listened to the concerns of those who feel left out and the established parties and mechanisms have not delivered any change,” he says.

[su_quote cite=“Michael Collins, Invest Europe”]

There is a sense of unfairness of one form or another that the elite, which may look different in places, has not listened to the concerns of those who feel left out and the established parties and mechanisms have not delivered any change” [/su_quote]

Acknowledging the existence of social anxieties is not the same as acting against them, though. Some would question the need to devote time and resources to a slowly building threat; a far less tangible, immediate challenge than fundraising and deal sourcing in today’s competitive arena. To be sure, much as we learned with demographic change when we looked at millennials in April, political volatility is nothing new. What is new, however, is the disruptive environment where it is unfolding today: a technology-powered landscape that allows citizens to connect, articulate their grievances and gain momentum in ways unseen until now. KKR’s takeover of Toys ‘R’ Us in 2005 was greeted by headlines about the “new masters of the universe”; those following the social media aftermath of Toys ‘R’ Us bankruptcy in 2018 would likely extract a very different reading.

Building bridges
If private equity wishes to help shape the new world order, working with politicians is a necessity. However, perhaps fund managers needn’t look that far for their starting point. An industry employing millions worldwide always has the option of direct engagement with those whose jobs depend on it. Some employees and unions are prepared, as our feature shows, to fight for their distinct views on private equity ownership. An honest, unmediated conversation to understand their needs might strengthen the bond, and stop some from backing populist parties out of a feeling of economic alienation.

Only time can tell how such a citizen charm offensive would work for private equity. The industry certainly does have good news to tell – its positive contribution to economy and society, recognised by world authorities – and could build new bridges if the will exists to share the same table as citizens. Perhaps it will be that very strategy – wielding power, but also understanding the implications for all stakeholders – that will prove the must-have trait of a true master; a responsible, respected power broker fit for an age of disruption.

José Rojo, Senior Reporter

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