“What we do is behind the scenes. Nobody knows we’re there…”. The occasion was a 2018 interview with the Financial Times, and the speaker was Bruce Flatt, the CEO of a Canadian firm called Brookfield Asset Management.
Legion stories about the modern world are told through the lens of Silicon Valley. Home to the world’s leading tech giants, the Valley is, for many, a metonym for contemporary capitalism, a symbol of its relentless dynamism and growth.
Flatt’s remark to the FT speaks to a different story about how the modern world works. This is a story about companies operating not in the full glare of publicity but out of the spotlight, in the shadows. It’s a story about a species of financial actor that has taken control of our lives in no less significant fashion than Silicon Valley’s tech companies: asset managers. Who are they?
Asset managers – the best known include BlackRock and Blackstone – are financial firms that manage money on behalf of investors such as pension schemes and insurance companies. These investors hold enormous amounts of money to invest. In the past, they mostly did the investing themselves. In recent decades, however, a growing share of institutional investors’ money has been invested indirectly, by specialist asset managers who charge fees for their services.
Much of the money handled by asset managers is invested in financial assets, such as shares and bonds – but not all of it; and less and less of it. Asset managers have been investing ever more of the money clients entrust to them not in financial assets but in assets of two other crucial kinds.
The first is housing, such as apartment blocks, detached homes, and student accommodation. The second encompasses all those physical things typically grouped together under the capacious term “infrastructure”. This denotes the basic physical “stuff” that enables modern society to function, from water supply networks to roads, and from hospitals to electricity transmission grids. As the geographer Deborah Cowen says, infrastructures “build and sustain human life… Without infrastructure, life as we know it stops”.
Today, asset managers collectively own global housing and infrastructure assets worth, at a minimum, $4trn. The upshot is that asset managers are intimately implicated (albeit without most of us being aware of it) in everyday social life. They own, and extract income from, things – schools, bridges, wind farms and homes – that are nothing less than foundational to our being. Forty years ago, it would have been unthinkable that we would buy our gas from, make our parking payment to, or rent our home from a company like Blackstone. But this is the new reality.
In a very physical, if also strangely intangible respect, all of our lives are now part of asset managers’ investment portfolios. Arguably, this is truer in Britain than anywhere else. Consider the quiet county of Kent in south-east England. The entire infrastructure of wastewater collection and treatment in the county, including tens of thousands of kilometres of sewers, is controlled by Macquarie, a leading Australian asset manager. Macquarie also controls much of Kent’s infrastructure of water supply, the rest of which is controlled by another Australian asset manager, Morrison & Co. Meanwhile, a joint venture between two asset managers – Global Infrastructure Partners of the US and Flatt’s Brookfield – and one Canadian pension scheme owns all the pipes through which gas is distributed to heat Kent’s homes.
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Housing? Blackstone owns rental properties in the small Kentish town of Paddock Wood. Student housing? Chicago-headquartered Harrison Street owns digs in Canterbury. Care homes? New York-based Safanad controls homes in Dartford and Gravesend. Electricity generation? The UK’s Foresight Group owns solar farms at Paddock Wood, and Abbey Fields in Faversham. Transportation? Legal & General Investment Management owns parking spaces; Sweden’s EQT Partners owns charging stations for electric vehicles; PSP Investments of Canada owns train rolling-stock. Telecommunications? Luxembourg’s Cube Infrastructure Managers owns the large ultra-fast fibre broadband network Trooli. Social infrastructure? Asset managers whose investment portfolios contain Kent hospitals or schools include Amber Infrastructure, Innisfree, and Semperian PPP Investment Partners, all UK companies. Quietly, without attracting much attention, asset managers have colonised Kent’s built environment, stitching themselves into the very fabric of the region’s social metabolism.
The striking extent to which British lives are already fashioned by asset managers made it all the more jarring when it was reported recently that the Labour leader Keir Starmer and shadow chancellor Rachel Reeves have furtively been conducting a “charm offensive” with senior executives at Blackstone, Brookfield and other leading industry groups.
Asset management has not always been a central pillar of the capitalist economy. It is a simple business. It entails the creation and management of investment vehicles that pool together money from multiple investors, who therefore have a shared ownership interest in whatever it is that such vehicles invest in. Over the years, these collective investment vehicles have been given various names and legal forms – funds, trusts, partnerships and so on – and have come in myriad shapes and sizes, but the principle is always the same.
Almost as early as there was organised trading of company shares in the 16th and 17th centuries, there were schemes to facilitate collective investment – essentially, crude forms of asset management. Professionally-managed investment vehicles emerged in the 18th century, principally in the Dutch Republic.
But the history of asset management as we know it today is a US story; indeed, the contemporary asset management industry is overwhelmingly an American-led one. The industry emerged during the stock market boom of the 1920s. A new band of “investment trust” managers such as Waddill Catchings and Harrison Williams ascended to positions of power and fame. These were professional investors – stock pickers – who managed money on behalf of hundreds or even thousands of individuals, all of whom were wealthy, and many of whom themselves worked in finance.
But after the 1929 Wall Street Crash, confidence in financial investment, including professional asset management, evaporated: it would take 25 years for the main US stock index, the Dow Jones Industrial Average, to regain its peak level of 1929. It was only after the Second World War that the asset management industry began to grow again.
The period between the 1960s and 1980s were key decades that saw asset management transition from being a niche business into the leviathan that it is today. What drove this transition? Various forms of US pensions legislation in the 1970s substantially expanded the pool of capital available for investment. The growth of retirement savings didn’t guarantee that this capital would be invested via asset managers: pension scheme trustees could choose to invest directly, eschewing external managers. But the Seventies and Eighties also saw the rise of business outsourcing. Everything, including investment, was increasingly contracted out to “experts”.
There were also crucial changes within the asset management sector itself. In the 1960s, managers expanded their market by promoting their services to the public, rather than just high-net-worth clients. In the 1970s, they expanded it further by launching a revolutionary new type of investment fund – the market-tracking index fund – with much lower fees and so wider accessibility. The stage was set for one further crucial development: diversification.
Until the 1980s, asset managers invested exclusively in financial assets, such as stocks and bonds. What they did was far removed from the everyday lives of most people. This changed when asset managers started investing money in physical assets as well as pure financial ones. Their activities began to have a direct social impact because the “real” assets they bought included ones – housing and infrastructure – on which people rely from day to day.
The story of how asset-manager ownership of these assets went from zero in the 1980s to over $4trn just a few decades later involves both opportunity and opportunism. The opportunity was provided mainly by privatisation. Before the 1980s, it would have been difficult for asset managers or other private-sector investors to accumulate substantive holdings of housing and infrastructure simply because there wasn’t much available to buy. Infrastructure and – to varying degrees – rental housing was owned by the state. But when governments around the world began privatising infrastructure and housing, opportunities for private investment abounded.
It wasn’t inevitable that asset managers would grasp such opportunities. In his memoirs, Stephen Schwarzman, Blackstone’s long-time CEO, recalls trying to invest in housing in the early 1990s, when, in the wake of the US savings and loan crisis, huge numbers of homes were available at knock-down prices. Schwarzman asked those whose money Blackstone managed – mainly insurance companies and pension scheme trustees – to approve a major program of housing investment. They refused: housing, they argued, like infrastructure, was not yet an established “asset class”, familiar to investors. It had to be turned into one. This required opportunism.
In housing, the US pioneers included high-profile rivals to Blackstone such as Starwood Capital, led by Bob Faith and Barry Sternlicht. They showed institutional investors that housing could be a good investment. In Europe, there were similarly prominent trailblazers. Foremost was England’s Guy Hands, who, first at the asset management division of Japanese bank Nomura and then at the asset management firm Terra Firma Capital Partners, pulled off a series of acquisitions of state-owned housing, principally in Britain and Germany. By 2005, Terra Firma, which Hands founded, was Europe’s largest owner of residential real estate, its portfolio containing around 270,000 dwellings.
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Meanwhile, the initial centre of gravity of infrastructure asset management was in Australia. The opportunists were a motley crew. One was Mike Fitzpatrick, a former star of Australian rules football, whose Hastings Fund Management in 1994 became the first asset manager to create an investment fund dedicated to infrastructure. But Hastings was soon eclipsed by the Australian firm that would come to dominate infrastructure asset management globally: Macquarie, the so-called “millionaires’ factory”. It was an epochal Antipodean conjunction of opportunism and opportunity. Writing two decades later, the infrastructure finance expert Georg Inderst reflected that Australian financiers had “invented infrastructure as an asset class”.
The modern asset-management industry is designed to extract maximum profits from housing and infrastructure. Where they buy infrastructure and real estate, asset-management firms typically earn fees of two main sorts: a recurring management fee, based on the amount of money that investors put into their funds; and a share of the profits generated by these funds. The individual investment professionals who manage the funds participate directly in this profit share. This motivates them to maximise investment returns.
Then there are the pledges to investors. One of the main reasons pension scheme trustees and the like invest in actively managed funds dedicated to housing and infrastructure is that the managers of those funds promise returns higher than are available elsewhere. This rationale stands to reason: if not in the hope of making more money, why would investors accept paying fees that are orders of magnitude higher than those charged by, say, index funds? They wouldn’t. Thus, managers of infrastructure and real-estate funds must squeeze maximum profit out of whatever it is they buy. Otherwise, they risk leaking business.
It is also the case that the faster the turnover of infrastructure and real-estate assets bought and sold by asset managers, the higher the returns. It doesn’t pay for fund managers to buy and hold the asset: it pays to buy it, and then sell it for a quick profit. They do whatever is needed to grow the incomes (such as rents or water rates) that the assets generate. They cut to the bone the costs incurred in operating those assets. Eying quick disposals, they have little interest in carrying out asset maintenance or repair for the long term.
The dire consequences for the ordinary households whose lives are embedded in this asset manager-made world barely need stating. Being dependent on a real asset acquired by an asset manager – for shelter, energy supply, water or transportation – generally means higher costs and poorer-quality service, followed by considerable disruption when ownership changes hands just a few years later.
It may also mean a greater chance of death. A recent study found going to an asset manager-owned US care home increased the probability of death (relative to for-profit homes more generally) by about 10 per cent for short-stay Medicare patients. The implication is that some 20,150 Americans lost their lives between 2004 and 2016 specifically due to asset-manager ownership.
Asset managers’ stealthy, unseen takeover of the built environment has already transformed the lives of hundreds of millions of people around the world in profound ways. In buying vast swathes of infrastructure and housing, asset managers today increasingly stand in for governments, which used to own and manage those things. And as the Australian journalist Gideon Haigh once remarked, asset managers and governments are profoundly different: “An [asset manager] undertaking roles previously performed by government is anything but a like-for-like swap. A government is elected on the basis of what it may giveth; an [asset manager] is chiefly interested in what it can taketh away.”
Of course, the pandemic years saw the return of government intervention. The state, the FT’s Martin Sandbu observed in December 2020, was “back in a big way”. But few of the many who heralded the “return of the state” registered the true nature of that return. For all that governments borrowed and spent on a relatively grand scale, the ownership and control of what they were spending money on remained the same. Governments have been relinquishing the ownership and funding of housing and other critical infrastructures for decades. For all the hype about the return of the state, Covid-19 did not change that. The state that has “returned” remains a neoliberal one that is first and foremost a handmaiden of capital – and especially of asset manager capital.
There is one domain where we will see this trend continue: climate. The climate crisis is also a crisis of infrastructure. We are ruining the planet in large part because existing infrastructures – of energy, transportation and so on – are carbon intensive and because we are not building decarbonised infrastructures fast enough.
Confronting this colossal infrastructure crisis, governments have tended to rely on the private sector to build the new infrastructure we need, with government’s own role reduced to that of “de-risking”, chiefly via subsidies to private investment as and where required. President Joe Biden’s 2022 Inflation Reduction Act – with its clean-energy tax credits – is a prime example of the government backstopping private initiatives. Labour evidently has comparable plans for Britain: asset managers’ role in “financing the energy transition” was reportedly discussed at Reeves’ and Starmer’s recent meetings with industry executives. Predictably, asset managers, led by the familiar names of Brookfield and BlackRock, are swarming to invest in clean energy projects.
The Climate Finance Partnership, for example, is a new investment fund managed by BlackRock for which it has raised $673m. Of this, $130m was “catalytic” capital provided by development banks and philanthropic institutions, who will take any losses before BlackRock itself and its private investor clients. The fund will invest in climate infrastructure, including renewable power, in the Global South, initially targeting Kenya, Morocco, Egypt, Peru and Vietnam. If readers are wondering whether there exists a prototypical model for the likely future of climate infrastructure investment around the world as the climate crisis intensifies, then BlackRock’s Climate Finance Partnership may just be it.
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