A new capitalism – brutal and conquering – is moving in. It's the capitalism of a new category of vulture funds: private equity funds with the appetite of an ogre that command colossal amounts of capital.
The names of these titans – The Carlyle Group, Kohlberg Kravis Roberts & Co. (KKR), The Blackstone Group, Colony Capital, Apollo Management, Starwood Capital Group, Texas Pacific Group, Wendel, Eurazeo, etc. – remain little known to the general public. And, sheltered by that discretion, they're in the process of taking possession of the global economy. In four years, from 2002 to 2006, the sum raised by these investment funds, which collect the money of banks, insurance companies, pension funds, and the assets of the richest individuals, went from $137 billion to $524 billion. Their financial firepower is phenomenal, exceeding $1.6 trillion. Nothing withstands them. Last year, in the United States, the main private equities firms invested $424 billion in repurchasing companies, and more than $322 billion during just the first semester of 2007, thus taking control of 8,000 companies. Already one American employee out of four – and close to one French employee out of 12 – works for these mastodons.
The phenomenon of these rapacious funds erupted about 15 years ago, but is now on steroids. Thanks to cheap credit and ever more sophisticated financial instruments, that phenomenon has lately taken on a worrying scope. The principle is simple: a club of wealthy investors decides to buy up companies that they then manage privately, far from the stock market and its restrictive rules, and without having to account to fussy, fuddy-duddy shareholders. The idea is to circumvent the very principles of the capitalist ethic by betting on the laws of the jungle only.
Concretely, two specialists explain to us, this is how things go: "To acquire a company worth 100, the fund takes 30 out of its pocket (on average) and borrows 70 from banks, taking advantage of the very low interest rates of the moment. During three or four years, it reorganizes the company with the management in place, rationalizes production, develops activities and captures all or part of the profits to pay the interest... on its own debt. After which, it will resell the company for 200, often to another fund that will do the same thing. Once the borrowed 70 is repaid, the firm has 130 left in its pocket for an initial bet of 30, or a return of over 300 percent on a four-year investment. What could be better?"
And while they personally are earning insane fortunes, the directors of these funds practice, without any squeamishness, the four great principles of corporate "rationalization:" reducing employment, squeezing salaries, increasing the work pace and outsourcing. Encouraged in all that by the public authorities, which, as in France today, dream of "modernizing" their production apparatus. And to the great displeasure of the unions, which call it a nightmare and denounce the end of the social contract.
Some thought that, with globalization, capitalism was finally sated. We see now that its voracity seems limitless. Until when?
Abridged from Le Monde Diplomatique. Translated by Leslie Thatcher.