While critics of the economic horrors of globalisation argue, a new and even more brutal form of capitalism is in action. The new vultures are private equity companies, predatory investment funds with vast amounts of capital at their disposal and an enormous appetite for more (1).
Their names, among them the Carlyle Group, KKR, the Blackstone Group, Colony Capital, Apollo Management, Cerberus Partners, Starwood Capital, Texas Pacific Group, Wendel, Euraze, are still not widely known. And while still a secret they are getting their hands on the global economy. Between 2002 and 2006 the capital raised by these funds from banks, insurance companies, pension funds and the assets of the super-rich rose from $135bn to $515bn. Their financial power is phenomenal, more than $1,600bn, and they cannot be stopped. In the United States, the principal private equity firms invested some $417bn in takeovers last year and more than $317bn in the first quarter of 2007, acquiring control of 8,000 companies. One American in four and almost one Frenchman or woman in every 12 now works for them (2).
France is now their prime target, after the United Kingdom and the US. Private equity firms, mainly American or British, acquired 400 companies in France last year for $14bn. They now manage more than 1,600 French companies, including such famous names as Picard Surgelés, Dim, the Quick restaurant chain, Buffalo Grill, Pages Jaunes (the French Yellow Pages), Allociné and Afflelou, and they are looking at other big names on the French stock market index, the CAC 40.
Predatory funds are not new. They first appeared about 15 years ago but have recently reached alarming proportions, encouraged by cheap credit facilities and sophisticated financial instruments. The basic principle is simple: a group of wealthy investors buys up companies and manages them privately, without reference to the stock exchange and its restrictive rules and without having to answer to shareholders (3). The idea is to get round the fundamental principles of capitalist morality and back to the law of the jungle.
That is not quite how the system works, though. To acquire a company worth 100 units, the fund invests an average 30 units from its own pocket and borrows 70 from the banks, taking advantage of current very low interest rates. The fund spends three or four years reorganising the company with the existing management, rationalising production, developing new activities, and taking some or all of the profits to pay the interest on its debt. It then sells the company on for 200 units, often to another fund which repeats the process. After repaying the 70 units it borrowed, it will come away with 130 units for an initial investment of 30, a 300% return in four years. Not bad (4).
While the directors of these funds make private fortunes, they have no qualms about applying the four great principles of rationalisation to the companies they buy: downsize staff, reduce wages, increase work rates and relocate. With the blessing of public authorities who dream, as they do in France now, of modernising production, and to the detriment of the unions, for which the process signifies the end of the social contract. Some people thought that, with the advent of globalisation, capital was sated. It is now clear that there is no end to its greed.
Translated by Barbara Wilson
(1) See Frédéric Lordon, “High finance – a game of risk”, Le Monde diplomatique, English edition, September 2007.
(2) See Sandrine Trouvelot and Philippe Eliakim, “Les fonds d’investissement, nouveaus maîtres du capitalisme mondial”, Capital, Paris, July 2007.
(3) See Philippe Boulet-Gercourt, “Le retour des rapaces”, Le Nouvel Observateur, Paris, 19 July 2007.
(4) See Trouvelot and Eliakim, op cit.