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How asset managers came to own everything and you failed to notice
25th March 2024 • The Rhodes Center Podcast with Mark Blyth • Rhodes Center
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Listeners of the Rhodes Center Podcast have probably heard of companies like Black Rock, State Street and Vanguard. You’ve also probably heard how, through ETFs and other investment products, these types of investment firms own a staggering share of the world’s biggest companies (20-25% of the S&P 500 by some estimates). 

But in this episode, you’ll hear about a whole other side of asset management; one that’s more opaque, and possibly much more influential (and corrosive) to our daily lives.  

Brett Christophers is a geographer and professor at Uppsala University’s Institute for Housing and Urban Research, and author of the new book “Our Lives in Their Portfolios: Why Asset Managers Own the World.” In it, he explains how asset management companies like Blackstone and Macquarie Asset Management do more than passively own shares. Over the last few decades, they've begun to invest in and actively run a growing portion of our infrastructure and essential services: hospitals, care homes, water treatment plants, bridges and even parking meters. 

On this episode, he talks with Mark Blyth about the economics of this new subspecies of asset management, and how they’ve begun to reshape our society, economy and planet in ways we don’t fully understand. 

Learn about and purchase “Our Lives in Their Portfolios: Why Asset Managers Own the World”

Learn more about other podcasts from the Watson Institute at Brown University


[JAZZ MUSIC PLAYING] MARK BLYTH: From the Rhodes Center for International Finance and Economics at Brown University, this is the Rhodes Center Podcast. I'm the director of the Rhodes Center and your host Blyth. Listeners to the Rhodes Center Podcast probably know something about Vanguard, State Street, BlackRock, and other big asset managers. They own some of the world's biggest companies, or at least they own 20% to 25% of them, by some estimates. They sell you ETFs. You probably got a pension investment with them whether you know about it or not.

But as my guest today explains, there's a whole other side to asset management, one that's less well understood, and possibly much more influential and even corrosive to our daily lives. Brett Christophers is a geographer and Professor at Uppsala University's Institute for Housing and Urban Research. He's the author of the new book, Our Lives in Their Portfolios, Why Asset Managers Own the World. It it he charts how asset management companies, like Blackstone and specialist asset managers like Australia's Macquarie Asset Management, do more than passively own shares. They buy and own real stuff.

Over the last few decades, they've begun to invest lots of our money in our infrastructure and essential services. I'm talking about hospitals, care homes, schools, water treatment plants, bridges, and even parking meters. And they're not doing it because they want to be nice about it, they're doing it because they're making money out of it. The result is that they own and manage more and more of our quote, "public goods," and are reshaping our society, economy, and even our planet in the process.

On this episode, I talk with Brett about how this came to be, why it's likely to continue, and what it means for the future. This episode's a little longer than usual for the typical Rhodes Podcast, but I think you'll find the topic is fascinating and important as I do. Here's mine and Brett's conversation.

Brett, it's great to have you back on the show.

BRETT CHRISTOPHERS: Thanks for having me back.

MARK BLYTH: So, I want to link this for listeners. You may remember Brett a couple of years ago came on and did this wonderful book focused on the British economy called Rentier Capitalism. And in that book he basically said, people are puzzling about why Britain's got this big productivity problem. Well, possibly because nobody does any actual entrepreneurship or investment anymore. If you look across all the leading sectors, it's one or two firms and they all run kind of moat and castle or tollbooths. And they basically charge fees. And if you can do that, why would you ever bother innovating or doing anything like this.

And one of the firms that popped up in this, which I'd never heard of, in fact, he opens this book with it, is a firm called arqiva. These are the folks that somehow manage to snag all of the broadcasting towers, et cetera, from the BBC and then sell it back to them. So that the taxpayer, basically, has an asset, they sell it to a bunch of people in the private sector. They then lease it back to the people who used to own it. And the taxpayer then pays twice. And I was just always struck by this as like, what a strange business model?

In this book, which you've now got out, Our Lives in Their Portfolios, Why Asset Managers Own The World, you start, again, with Arqiva, and say, actually, there's a peculiar subtype here. This is rentierism, but it's a very odd version. Let's start there. What exactly is this asset manager model? And why does it differ from like a digital platform charging you fees?

BRETT CHRISTOPHERS: It differs insofar as we're talking about a particular type of investment and owner institution that invests with and through a particular type of investment model that brings together all the relevant stakeholders, the different users of the assets, those who need access to the assets, and those, not least, who provide the funding that is used to buy the asset. It brings them together at a very, very particular way. And what I would say is that the book emerged directly out of that Rentier Capitalism book, insofar as when I was doing that book and when I was looking at this kind of rentier model across the length and breadth of the UK economy.

One of the things I noticed was that I kept coming across these asset managers. And I didn't really know anything about them. I knew a little bit about them. I'd heard of BlackRock and Vanguard and all the big guys, but I didn't know much about them. And I certainly didn't know that they owned these types of assets. And so, this kind of put a little puzzle in my head, which was like this is something to come back to. And so this grew directly out of that book insofar as this is a particular category, I think, of rentier institution is the best way I can put it.

MARK BLYTH: So let's talk about the key idea animating the book. You're a geographer, and as a geographer you have a slightly different language from economists and political economists. And one of the key concepts that you keep putting out there is social reproduction, and the idea that infrastructures are particularly important for social reproduction. Just unpack that for the listener. What do you mean by those two terms? And why are owning infrastructure so crucial for it.

BRETT CHRISTOPHERS: Right. So the way I understand social reproduction is in a very, very straightforward way, which is the things we do to reproduce ourselves as human beings and our society. And obviously part and parcel of that is the realm of economic production, where we produce goods and services for one another in society.

But there's also a whole other realm that has traditionally been understood by economists, at least, as existing outside the sphere of economic production per se. How we get to work, how we feed ourselves at home, how we bring up our children, how we look after our near and dear, and so on and so forth. So it's the length and breadth in the broadest sense of everything we do to reproduce ourselves.

Now, the reason the infrastructure is key to that is that there are a whole series in society, a whole series of large scale physical things that have increasingly been given that encompassing term infrastructure that are pivotal to that entire realm of social reproduction. So you can think about things like hospitals and schools, where health care and education provided.

You can think about the transportation networks that we use to get around. You can think about energy systems that provide electricity, gas, and so on to homes and businesses. And you can think about telecommunication systems. But you can also think about things like farmland as well. So infrastructure is that kind of very capacious category that refers to the physical things that play a really pivotal role in enabling us to live our lives and to reproduce ourselves on a daily basis.

MARK BLYTH: So this gives me an opportunity to make a demarcation. So Ben Braun, someone who we know. I didn't put him on the podcast, but I did a video about his work on what he calls asset manager capitalism. Now this is the big three firms that own assets, but they're mainly financial assets, right? These are the big financial players.

And what you're talking about is asset managers society. That is to say they own real assets, and those real assets are exactly as you said, in the energy sector, the water sector, transport, telecoms, social infrastructure, farmland, that sort of stuff, right? So at the start of the book, you kind of try and map out what this asset manager society looks like. Can you do a bit of unpacking for us now?

BRETT CHRISTOPHERS: Yeah, absolutely. Essentially, the world he is talking about is, as you say, it's the big three asset managers. BlackRock, State Street, and Vanguard. It's not only them, of course. Fidelity is a big player, and Mondi, and others. But the vast bulk of the business model of those three big players is owning financial assets, so principally, obviously, shares and bonds, and owning them principally through passive index tracking funds that charge very, very low fees. And essentially it's what Ben and others call a universal ownership model. Essentially, you own everything and the share of everything in the financial asset world that you own is proportionate to your market share of the money that investors have put into those types of funds.

So again a statistic that lots of people cite is that BlackRock, Vanguard, and State Street, between the three of them, own somewhere between 20% and 25% of the shares of the average S&P company, and all other companies that are publicly listed in the US. But its publicly listed financial assets that they own. And they own them in a very passive way, for the most part.

And if you're BlackRock and you own shares in 20,000 different companies, but your corporate stewardship team has 10 people in it, you're not actively involved in controlling those companies. That's not part of the business model. In fact, you try to avoid it at all costs precisely because there is a cost associated with that and no great return associated with it.

Now what I'm talking about in this book is very different. It's still asset managers, so they still invest through funds, and we can come back to what those funds look like. But the big difference is are these. First of all, I'm talking about where they don't own minority shares in financial assets. I'm talking about where they control, so we're talking about majority ownership, they control the assets.

And the assets that they own are the physical assets. They own those things themselves. And therefore, they have control over how those assets are managed. They have control over how much is charged for ordinary people to access and use those assets, whether it's a toll road or a parking meter system, or whatever else it might be. So it's very, very active. And it's based upon control. Both of those things are completely opposite to what's going on in BlackRock, Vanguard, and State Street.

MARK BLYTH: Let's put some adjectives behind these abstractions. What we're talking about our desalination plants on the West Coast of the United States. We're talking about parking meters, literally the right to take money from parking meters in Chicago and garages. We're talking about schools and hospitals in Kent, in the Southeast of England. We're talking about apartments in Berlin and Stockholm. I mean, we're talking about wastewater and water management, sewers and sewage treatment facilities all across the world. So this is not a small thing. But how do you get there? Like how does the money work? Let's geek out on this because I actually find it super fascinating, right?

BRETT CHRISTOPHERS: Yeah, it is fascinating.

MARK BLYTH: How do these firms operate? What is the business model? Because a good contrast is, if you take, let's say for example, Vanguard, right? Vanguard owns the shares. I remember when I was trying to get my head around this sort of thing, I'm more familiar with private equity than anything else. And in this case, it is a bit more like PE. The firms themselves don't really own stuff. It's a pile of investment pools that they put together that own stuff. And that's important. How does it all work?

BRETT CHRISTOPHERS: Yeah. And it is fascinating. So essentially, if you are, say, Blackstone, which is a big player in this space, or Macquarie, or someone like that. they're Australian asset management firm. If you want to invest in some of these assets. Let's say it's a wind farm or a parking meter system.

The way it typically works is you establish an investment fund, which is essentially a vehicle for pooling other people's or other institutions money. So you would launch a fund. Let's call it the Blackstone infrastructure fund. And you go on the road, and you go and talk to the big money holders, the big holders of surplus capital, which is pension funds, sovereign wealth funds, endowments, and so on, and you say, hey, look, we're going to invest in these types of assets. We think it's going to be a good investment.

And let's come back to why it might be a good investment or why it might not be a good investment. Give us your money, so you California Public Employees Pension system, give us $500 million to put into this fund. You, the Pennsylvania Employees Pension fund, give us $200 million, and you, the Sovereign Wealth Fund of Saudi Arabia, give us $1 billion. We'll pull all that money together and then we're going to do a bunch of investments in this area. And it pools together that money.

Normally, they'll put in maybe 1% to 2% of the capital into a real estate, or an infrastructure fund, so they can at least give the impression that they've got some skin in the game and that their interests are aligned with their clients. But essentially, it's other investors' money. They carry out the investment. They might potentially sell some of these investments. And we'll come back to the importance of sale, I'm sure, later on. But it's the fund that owns those assets, right? And Blackstone manages the fund. But it doesn't own the fund. It is the so-called general manager of the fund, the general partner.

And all the entities, which are in almost all cases institutional investors rather than retail household investors, they are so-called limited partners in the fund, rather than general partners. And it's their money that goes into the fund. They have no control over how it's managed. It's Blackstone and manages it. And these asset managers they make money principally not through the investments they make, right? They make money by charging fees to those whose money they are investing. And that's very, very important to understand.

Now, just another really important couple of things to say is that all of this is relatively recent in capitalist history, right? So asset managers themselves, they are a relatively recent thing, Nineteen Seventies, Nineteen Eighties, is when they began to become important. And then, asset managers investing in quote unquote, "real assets" rather than financial assets, that's an even more recent thing.

So all of this is relatively new. And it required both sides kind of getting into the bargain. It required asset managers being willing to carry out this type of investment, but just as importantly, it required an appetite on behalf of their clients, the pension funds, the insurance companies, and so on, to invest in these types of assets if their clients had continued to say, no, no, no, we just want you to put all our money into financial assets, this would never have happened.

MARK BLYTH: Just to flag it for the listener, right? One of the things that you'll get out of this industry is all we do is sit-in the middle of long-term assets and long-term liabilities. We're a matchmaker, right? So you're a pension fund, you've got long-term liabilities. We find this asset that's got a long-term steady income stream, a wind farm, sewers, whatever it is. Or alternatively, a government contract to run something for 30 years. It's all about the long-term fees and the long-term returns. That's our business model. The punchline we're going to get to the end is, that's probably bullshit. That's not what really is going on at all. But to build up to that, it's important to give a couple of distinctions here right? So the first one is what exactly is the difference between listed and unlisted funds and open and closed funds? Because that's kind of important for building up to that point?

BRETT CHRISTOPHERS: Yeah, it is. So a listed fund is simply one that-- so, like a company can either be listed on the stock market or not have its shares listed on the stock market, it's the same thing with the listed infrastructure fund, so-- or a listed real estate fund. So essentially, a listed infrastructure fund is a fund where you or I, or anyone else for that matter, can invest in shares in that fund or units in that fund on a public stock market, like the New York Stock Exchange, or whatever else it might be.

An unlisted fund is a fund where you and I cannot go and buy shares or units in that asset because there's no market on which to do that. You are-- the only way to invest in it is if you're asked to invest in it by the manager of that fund. And that's a private transaction. A pension fund gives the $500 million to Blackstone to invest in that fund, but it doesn't do it by making-- carrying out a market transaction, it's a private transaction with Blackstone.

And here's the thing, the bulk of investment in real estate and infrastructure is carried out through unlisted funds rather than listed funds. So this is-- that's the bulk of it. And that's why the book focuses on that rather than the listed sites. And most of it is occurring through these unlisted and therefore opaque and difficult to get your hands on types of funds. That's the first thing.

Now those come in all sorts of different shapes and sizes. And they can be kind of cut inlots of different ways. But as you say, one very, very important way of cutting them is in terms of and I think the best way probably to put this is in terms of the lifetime of that fund or the expected lifetime of that fund.

And there are basically two different types here. So one is the open-ended type, where there is no fixed lifespan to that vehicle, so a pension fund can put money into this vehicle with a view to that money being there, in principle, ad infinitum. At the outset, there's no indication that vehicle is ever going to be wound up at any point and the money returned to the investors that put money into it. The idea is that it's a long-term vehicle receptive to long-term investment. And there are normally sort of rules about when you can take out your money. But that's the open end structure.

The other type of investment vehicle, and this is the vehicle that's more familiar from the private equity world, has a fixed lifespan. These are the closed end funds where from the outset, the fund has a life, it might be say, 10 years or 12 years. And what that means is that by the end of that life, the asset manager has to have sold everything that the fund has bought.

So if it's bought a set of apartment blocks, for example, it has to have sold them in order to be able to return all the money that was originally put into the fund to those that put the money into the fund in the first place. And those are-- and we can talk about the kind of relative numbers or so on. But those are the larger part of the asset manager world that I'm talking about in terms of investment in housing and infrastructure

MARK BLYTH: So just to put a focus on this and bring it together. If I was a genuine matchmaker for assets and liabilities over the long term, you would expect my funds to be open. And you would also expect them to be listed. But in fact, the vast majority of them are unlisted, and they're closed, and they have a time limit and everything has to be sold, and the purpose of the sale is the extraction-- not just the return of capital but the extraction of profit.


MARK BLYTH: So one last thing on the tecky side of this. Why is debt such an integral part of this? And let me put this in a wider context, right? You, like me, follow Premier League teams. Everton is about half a billion in debt, and yet, somebody wants to buy it. Why would they want to buy it? Well, you can keep basically increasing the revenues and pay yourself dividends and the debt stock never goes down. And eventually you sell it to a bigger fool. And it seems to me that this type of debt financing has become sort of ubiquitous in capitalism, in all its forms. But particularly here, why is debt so important as the financing mechanism to make profits?

BRETT CHRISTOPHERS: So if a, say, Brookfield Asset management property fund decides to buy an apartment block for 200 million canadian dollars, buying an apartment block in Toronto say, and it's got a nice big fat property fund that is raised from its clients of a couple of billion dollars, what it doesn't do, absolutely doesn't do is take $200 million out of that fund and use that to purchase the asset.

What it will normally do is take, say, I don't know, 40 to $50 million from that fund, and use that to pay a quarter of the purchase price for the apartment block. Then it will turn around, normally to banks, and say, OK, could you lend us the other 150 $160 million. And why do they do that? Well, I mean, we could talk about Everton, we could talk about Man United, but maybe the easiest thing for listeners to think about is if you buy if-- you're in a lucky position of buying a home.

If I'm buying a home for $200,000. If I have to go into my bank account and find $200,000 worth of cash to buy that home, and then five years later I can sell it for $220,000, then I've got a 10% return on investment, right? I've got a $20,000 profit based on $200,000 of my capital. But if I only put down $10,000 and I borrow the other 190,000 and I get the same profit, then lo and hold I have a 200% profit rather than a 10% profit, right? Debt supercharges returns. And that's one of the great things about capitalism is debt supercharges returns, which is all well and good when you are generating profits. Not so pretty when losses are being generated.

MARK BLYTH: So all that debt is accumulated on someone's balance sheet. And it's neither the people who are giving you the money and it's neither the people who are investing the money. They're indemnified against losses and ultimately, somebody has to pay that up. Presumably the payments on that debt are going to reduce those profits, right? So how do they get around that?

BRETT CHRISTOPHERS: So the first thing to say is yes. And it's important to think about a loss scenario, right? So what happens if an investment is a complete disaster and and it's been heavily leveraged? Well, as many listeners know. Well know, debt is senior to equity in terms of the repayment of losses.

So so if, for example, that apartment block has been bought and when it comes to being sold, it only gets sold for instead of $200 million say for $100 million, then that 100 million, all of that will go to the debt providers who put in whatever it was, 150 million. So the debt providers will lose a third of their money, but the investors will lose all of their money, right? They'll lose all of the equity went in because any repayment will go to repaying the debt first. So there's a risk there.

Although let's not forget that risk is borne by the pension fund and not by Blackstone because it only-- Brookfield, or whoever it is, because they only put in 1% or 2% of the fund. So again, there's this lovely relationship between risk and reward there for them. But yes, absolutely, the payments on the debt are paid out of any profits that are generated.

But the whole idea, right, is the idea of these types of investments, as it is with private equity, is that during the lifetime that you own that asset, the profits that asset generates, which in the case of an apartment block is essentially rent, less any maintenance or capital expenditure that goes into it, progressively pay off some of that debt while it is under ownership. So that by the time you sell that asset, you make an even bigger profit precisely because you've been able to pay off some of that debt, so there's less of it to be repaid at the end. So that's one thing you can do.

But the other thing you can do is you can use the debt to essentially extract profits while the asset is owned, rather than waiting from selling it. So if you put debt into buying that apartment block at the beginning, for example, two years later, even if the operating company doesn't require any debt, what will often happen is that the asset manager will get it to borrow even more money in order to pay a dividend out of the entity to itself, into the investors that it represents, which is called a form of dividend recapitalization. It's very, very common in this world, private equity world, real estate, and infrastructure investment world.

Or the other thing you can do, and this is a really tasty one as well, is that they can use what are called shareholder loans, where the loans are provided precisely by the asset manager themselves. So they're essentially kind of lending to themselves, but what they do is they charge really kind of fat and juicy interest rates. And so, it's like dividend recapitalization. It's simply another way to extract income from the asset.

MARK BLYTH: Extractivism.



BRETT CHRISTOPHERS: That's exactly It.

MARK BLYTH: It's All about extraction.


MARK BLYTH: Right. So let's-- we've been up in the clouds. We've been geeking out in our sort of like, oh, isn't this a cool way to destroy the taxpayers base and make lots of money for the insiders. Let's get simple. Let's get back down to the stories here. Tell us some stories about this. I want to call this part of this invoking the richest guy in this industry, Stephen--

BRETT CHRISTOPHERS: Stephen Schwarzman.

MARK BLYTH: Steve Schwarzman, right.

BRETT CHRISTOPHERS: Yes. Friend to Donald Trump.

MARK BLYTH: Yes. He doesn't like risk, which is odd for a capitalist, because we have this idea that you do the risk and you get the reward. And what they've managed to do is engineer purchases and buy assets where there's all reward and no risk. So I want just two examples. Number one, the Chicago parking meters. And number two, the schools in Kent.

BRETT CHRISTOPHERS: Yeah. What happened in the case of the Chicago parking meter system, which was acquired under a-- it was either a 70-year or a 99-year contract by an investor consortium in which Morgan Stanley infrastructure partnered. So Morgan Stanley's infrastructure asset management arm was the lead investor and had a controlling position. And it wrote what proved to be an incredibly advantageous contract with the city of Chicago, where basically all the-- whatever the period was, 70 or 99 years, all the payments that were generated by the parking meters would accrue to the investment consortium.

Not surprisingly, within about a couple of years of that change of control of the parking meter system occurring from the city of Chicago to Morgan Stanley, Chicago went from being one of the cheapest places to park in America to being the very most expensive. But not only that, the city entered into these ridiculous conditions where if, for example, there was a street parade that was arranged that might mean one or two parking meters not being available to receive payments for a couple of hours, the city was required to provide some kind of compensatory mechanism to the poor investor that would be losing out.

And so there was a whole ream of these compensations that were written into the contract. Which was brilliant for the investor, but it was a nightmare for the city. Not least because what happened, and this is really, really important, was that the city and its planning professionals increasingly found themselves to be hamstrung by this contract. Because what happened was that when they were doing things like trying to plan a new system of cycling lanes, for example, for the city, instead of thinking primarily about what would be good for cyclists, what they found themselves focusing on was what would be least costly in terms of impinging on the terms of this contract with Morgan Stanley. So it came to shape the very planning of the future of the city in Chicago in this ridiculous way.

Now you might ask, and many people do ask, why on earth would cities or national governments do that? But here's the thing, right, and this is where it connects to your work. If you as a national government or a city government have decided or been persuaded that it is no longer within your remit to own infrastructure or invest in new structure, and if, as a result of that, the private sector is the answer to your investment requirements as a city or as a national government, what else are you going to do?

Because as soon as you start saying to the private sector, we're going to impose all these conditions, when you try to do that, the asset managers turn around and say, we're not going to invest. We'll go somewhere else. And that's what the UK, for example-- the water sector is a classic example of what the regulator has repeatedly over the years said, oh, we're going to impose much stricter regulatory restrictions. And the very same day, the big investment groups say, well, we're just not going to invest in the UK anymore. And the government shits its pants and basically gives them everything they want.

And so in the case of the schools and prison facilities and hospital facilities in the UK, the best example of that has been that basically, the entities which enter into these contracts with asset managers to provide prison facilities, custodial suites, new hospitals, new schools, and so on, have essentially entered into contracts where they are guaranteed payments for the maintenance and provision of these infrastructures over 20, 25, 30, 35 years, even if they're not being used.

And so you end up with these situations where schools are vacant, custodial suites are vacant. But the asset managers are still being paid millions of pounds a year by the state and by the taxpayer, because the contracts removed all semblance of risk from the shoulders of the asset manager investors.

MARK BLYTH: One of the crucial things there is let's go back to where starting about Chicago. Because you just said this very casually, right. They wrote a contract for-- it was either 70 or 90 years. Why would you assume you would have parking meters in 50 years? Right? I mean, the length of this stuff.

Thames Water. I mean, this is the super long term contract for the biggest watershed and basically providing Londoners with water. It's a multi-multibillion dollar enterprise. And the contract terms on it, I think, were, what, 25 years for the original contract or something like this, right. And yet what happens is when you look at all of these things, the average life of these things is before they sell it. And that's where we're building to, the sale, right? They hold them for about four or five to seven years.

BRETT CHRISTOPHERS: Yeah. It's exactly right.

MARK BLYTH: But I mean, it's a huge failure of governance, right. If you identify critical infrastructure. And let's think, we're talking about care homes for the elderly that are funded by the taxpayer, right. We're talking about the sewage system for the water you drink. You're talking about electricity supply, right. It's a fundamental screw-up of government.

If you're signing a 25-year contract and the full knowledge that all you need to do is look at the track history of these firms. And they flip them after four years.


MARK BLYTH: Why are they even surprised by this?

BRETT CHRISTOPHERS: I have no idea. I mean, I think part of the answer surely is revolving doors between government and the private sector. US would be a classic case of that. The Treasury under Obama was chock full of people from Blackstone.

MARK BLYTH: Yeah, head of Biden's Economic Council.

BRETT CHRISTOPHERS: From Blackrock. Absolutely. So I mean, huge revolving doors here. I mean, I think the other thing is they continually want to believe what they're told.


BRETT CHRISTOPHERS: Even though the evidence should be telling them something different. And actually, I think a lot of it is-- it's like the hope that eventually, the promise will be fulfilled even if repeatedly it isn't.

MARK BLYTH: Yeah. So we spoke earlier about matching long term liabilities and long term investments. And we hinted that that might not be the case. When I first started getting interested in this part of the world, it's interesting reading the book, they've changed the language. Because these investors now, when they're showcasing their prospectus, et cetera, when they're selling themselves the pension funds, they talk about-- and their justification when they come into criticism is we make money for nurses and firemen, right.

Now 20 years ago when I first started looking at this, the location was slightly different. I don't know if you know this one. It used to refer to-- it was policemen and firemen. And the funds were called guns and hoses.


BRETT CHRISTOPHERS: I didn't know that.

MARK BLYTH: So we're the guys that put the money behind guns and hoses. But it's the same rhetoric that goes on. Ultimately, the small guy gets a whatever. And what you saw in the book is that the people who make out like bandits on this are the insiders themselves.

BRETT CHRISTOPHERS: Exactly. Yeah. Yeah, that's right. So it's an interesting point. I mean, the more general point is that the industry, the asset management industry, when it comes to things like real estate and infrastructure, it is well aware of a lot of negative publicity about what it's doing, right. But these are smart people. They're not dumb. They didn't get into their positions of earning a lot of money. Because they're dumb.

So obviously, they erect very superficially compelling defenses for what they're doing. So on the asset side, they say, look, we're doing good because we are good custodians of these types of assets. Yeah, tenants get better service for us when their homes are owned by us than by mom and pop landlords that don't have the resources to look after their properties, that kind of thing.

And you're correct. On the other side, they say, to the extent that our funds perform well, that's a socially beneficial thing, because the beneficiaries are those whose money is put into the fund. And that's ordinary nurses and teachers and firefighters. And that's a line straight out of Blackstone's annual report that's been there for the last 10 years that's right up front and center as a form of self-justification, self-legitimation for the industry.

I go to some lengths in the book to tear that apart. Because I think it's a completely unjustifiable argument. And one is right, yeah, even before any money gets to the end investors, the clients, there's a huge whack that goes into the fees that are paid.

MARK BLYTH: Yeah, which, there's a reason Mr. Schwarzman's worth $40 billion.

BRETT CHRISTOPHERS: There is. There is, yeah.

MARK BLYTH: It didn't come from nowhere. He didn't find it in a lucky bag.

BRETT CHRISTOPHERS: No. The fees are extraordinary. And we can talk about how that works if you like. But then even after those fees, there's the question of, who are the investors that are benefiting? And I think there are three things to think about here that I would point out. A, the proportion that is retirement savings is in general declining. So more and more of it is money that is put up by investor leaders around whom it will be much harder to spin a positive public relations story. So the sovereign wealth fund of Abu Dhabi or Saudi Arabia.

Banks. Big insurance companies, whoever else it might be. Not pension scheme. So that's one thing. The second thing, and this, I think, is very, very important, is very often, those big sovereign wealth fund investors are able to negotiate better fee structures with the asset manager than the trustees of the public pension funds are. There's lots of evidence showing that the Saudi Arabian pension fund, for example, secures much preferential terms. Pays lower fees, and therefore, its fees are effectively being subsidized by the public pension fund. So that's the second thing.

And the third thing is like, well, yes, a lot of the money is retirement savings that's being invested through these funds. But like all forms of wealth in capitalist society, retirement savings wealth is incredibly unevenly distributed. And yes, nurses and teachers and firefighters have pensions. But so do doctors and consultants and asset managers themselves. And lo and behold, the top 10% or 5% or whatever it is of the wealth distribution in the US owns, I don't know, 50% or 60% of retirement savings.

So once you get to post fees, post other types of investor, post other types of retirement saver, you've got a tiny, tiny little bit left for your nurse and your firefighter and your teacher. Whereas they're pretending that that's the people they're investing for.

MARK BLYTH: So it's not guns and hoses, it's not nurses. It's not for the long term. Let's go for it. I think the real punchline in the book is it's actually all about the sale. It's important that we focus on the fact that they say that they're going to honor a 50-year contract, and they're out in five. Now why are they out in five? Why is so much money made in the sale of these assets?

BRETT CHRISTOPHERS: The first thing to say-- there's some research that's been done that shows that historically, around about 90% of investor commitments of capital to unlisted infrastructure funds managed by asset managers has been to closed end unlisted funds rather than those permanent open ended funds. So 90%. And it's something roughly similar on funds that are investing in residential real estate as well as infrastructure.

So most of the money is going into these closed end vehicles, even though the rhetoric that you hear from the asset managers, oh, we're into long term investment vehicles. Most of it is going into these vehicles that have a fixed life. OK, so that's the first thing to say. And the second thing that follows immediately on from that is, let's think about a typical fund life of, say, 10 years. Well, the first year or two of that fund life, the asset manager is focused on raising capital for that fund. She is on the road, she or he is on the road asking clients to put money into that fund.

A lot of the actual buying of the assets occurs between, say, years two and four of that 10-year life. Well, if you're in year four already or even year three and you know by year 10 that you have to have not just sold all the assets that you've bought, but also returned that money to the investors ideally with a profit, then essentially, as soon as you've bought that asset, the only thing you're really thinking about is, well, I need to sell it pretty soon. And therefore, what can I do to maximize the likely profit at which I'm able to sell the asset?

So there's this short-termism that is inscribed in the business model that's entirely antithetical to the wider rhetoric about long term investment. The third thing is, let's think about how asset managers make money. So there are two main types of fee they charge. So one is what's called the management fee, which is the two in, the two and 20. So basically, if you are a pension fund and you put $100 million into this fund and you commit it for the 10 years of the fund life, you will pay a fee to the asset manager that is calculated as a percentage of that committed, typically as a percentage of that committed capital. And that's historically for private equity 2%. So you'll pay $2 million a year management fee every year. So you'll pay $20 million over the life of that fund in management fees.

There are then what's called performance fees, which are the fees that asset managers earn for making profits for their investors. And that's the so-called 20 in the two and 20. And that is calculated as a percentage of the capital gain that the asset manager generates for its investors. So if it makes a $20 million profit for that investor that put $100 million into it, it will take $4 million of that profit as its profit share, essentially.

Now the way I like to think about this is if you think about all people working in high finance, asset managers have-- the individual professionals themselves, they have their base salaries, right. But they also have their bonuses. And effectively, the way it works in the asset management world is that those management fees are their base salaries.

MARK BLYTH: That's the get-in-the-door fee.

BRETT CHRISTOPHERS: Which the likes of you and I would think, bloody hell, that's a lot of money. But for them, that's just the-- that's the tip of the iceberg or whatever other metaphor you want to use.


BRETT CHRISTOPHERS: It's the performance fees that are in a good year eight, nine, 10 times the better. And so their bonuses essentially are the performance fees and their base salaries are the management fees.

MARK BLYTH: So to bring all this together, because there's a lot going on here, what we've got is a set of incentives that basically say, I need to juice up the price of this thing because I need to sell it.


MARK BLYTH: And a huge part of the majority of my compensation is coming from how much I juice the price.


MARK BLYTH: Now if we then take the example of, let's say, housing. Right, for example, Blackstone loans 300,000 homes at one point. What do you do? You basically put together a shell company that owns the homes. You fire all the people that were traditionally associated with it. You cut down on as much as you can at least on the maintenance costs, et cetera, et cetera. You cut down your wage bill, et cetera. Right, it's very standard private equity move on this side, right. And that's one way of getting it.

But the other way of getting it is the fact that what you're doing is increasing the asset value. And how are you doing that? Well, to take the example of houses that you use, you start jacking up the rent. So then the investors look at this and go, wow, those rents have gone up 25%. But look, the net asset value has gone up, the internal rate of return has gone up. They're making money hand over fist. This fund got this for $200 million. This has got to be worth at least $300 million.

And on that $300 million, I'm getting 20%. So I am making out like a bandit. So the entire thing is geared towards the big payoff. The exit that they used to call it in private equity and venture capital, right. It's really no different. Except that there's this elaborate dance and pretense that this is all about the long term and stewardship of these assets, et cetera.


MARK BLYTH: Is there any wonder that infrastructure everywhere is in terrible nick?

BRETT CHRISTOPHERS: It's the inevitable outcome of that model of ownership. And so the way you've described it is exactly right. So you jack up the rent as much as you possibly can. You cut down on maintenance, which is not surprisingly why so many people report horrible experiences of being tenants in housing owned by asset managers.

But the key thing is you don't carry out any investment, any capital expenditure, where the benefits of that capital investment are likely to accrue in significant part beyond your time horizons as an investor. So if your time horizons are three or four years, why on earth would you-- like in the case of water or wastewater infrastructure, why on earth would you replace the pipes and spend all that money when actually you can just put a sticking plaster on those pipes that will-- yeah, it won't work after four years' time, but you don't care if it's going to work after four years' time. It's a Band-Aid solution.

And so, yeah, I mean the UK water and wastewater industry is a case study in all of this, where asset managers have become the dominant owners over the last decade or so. And is it any wonder that that infrastructure in general is in disrepair and you have sewage being leaked in millions of liters every day into-- no, it's not a surprise at all. As I would say, it's the inevitable outcome of that ownership and investment model.

MARK BLYTH: Trying to bring all this to a close. There's so much we could still talk about. I want to go with two things. One is I'm going to put on my investor hat for a minute and pretend I'm one of these guys. And say, all right, so let's say there's lots of problems with this. We could maybe finagle this sort of stuff.

But here's the deal, and you've alluded to it. You don't really have any alternative. We've convinced ourselves that states can't and shouldn't spend any money under any circumstances. What's going on with labor and Keir Starmer just now and just ditching pledge after pledge is a great example of this. Germany is the same way. They're terrified of their own fiscal shadow.

So if you want anything, you're going to have to come to us. And we actually have skin in the game here. You know all those green assets that you want for your green transition? We're the people who build them. You know all this divestment that you want from fossil fuels? We are the people who are divesting. So we're the ones that are going to build this. Now you might not like that, because you want some kind of just transition and transfer of ownership and all that sort of stuff.

But listen to me, it's a capitalist society. It always has been. Are you really surprised that capitalists own all the infrastructure? Aren't we just going back to, in a sense, what it always was before there was this weird period after World War II when states mattered?

BRETT CHRISTOPHERS: Yeah. I mean, maybe we are. I mean, Adam Smith's always a good place to go back on this stuff, right. And some of the stuff that many of his admirers don't like to talk about. But he was a great believer in the idea that there are certain areas where there is inherent market failure within a capitalist system. And the state must and can and should step in to provide those things where the market fails. And for him, what he called public works, by which he meant infrastructure was the classic example of that. So that's the first place to start.

The second thing I would say would be that while I by no means am someone who thinks that fiscal deficit simply don't matter, I do also think that rich country governments, and I emphasize the word rich and I would include the UK within that, have much more latitude to invest and borrow than they have persuaded themselves that they do. In particular, to invest in what are typically revenue generating assets, right. I mean, this is to invest in things that themselves are revenue generating.

MARK BLYTH: Right. If you build the houses rather than Blackstone, you get to keep that on your balance sheet. And it's a positive addition on your balance sheet. The parking meters generated revenue. Giving them away generated costs.

BRETT CHRISTOPHERS: It did. Exactly. So that's the second thing I would say. The third thing I would just say is even if, yes, this is going to be a purely capitalist model because governments have decided it is going to be a purely capitalist model, there are better models than others for this type of investment. And I would go back to the question of pension funds. I think this is good.

So pension funds, they have very long term liabilities. And they can and should be investing in long term assets. And I don't necessarily see a problem with pension funds being owners and custodians of some of these types of assets and generating the levels of returns that would be quite sufficient for their investors of, say, 5%, 6%, 7% a year. But doing so directly rather than bothering with asset managers and these ridiculous funds that enable the asset managers to extract these enormous fees and all these great risks with all the leverage attached to it.

And some pension funds do that. Some of the Canadian pension funds then don't necessarily all do it, always do it perfectly. But personally, I think that's a better model than the asset manager model that has become dominant in so many different parts of the world.

MARK BLYTH: One thing in closing. Inflation. At the end of the book, you make a very interesting argument which sums to this essentially. These are real asset buyers. And people like real assets when there's inflation. And the reason being if I buy a house and I rent out the house, it's pretty easy for me to put up the rent.

So are we in a world whereby despite the fact that the multiple dysfunctions, social and political of this, the economic one is debt? We just keep piling debt onto these vehicles, and eventually that debt has to be paid, is private sector debt. There's no magic money tree in the private sector, even if there are rumors of one in the public sector. So having said all that, is this model sustainable?

BRETT CHRISTOPHERS: Yeah, that's a very good question about the sustainability of it. And there's a great quote that I include in the book from the chief executive of Brookfield Asset management. And he says, we're in the early part of a 50-year transition in infrastructure ownership. And at the end of that 50 years, pretty much all the infrastructure in the world is going to be privately owned. He doesn't say by asset managers, but obviously he means by asset managers. And we're five years in or whatever the number he gives. I can't remember.

So that's their vision. The extent to which that's true or not I think is really hard to say. I mean, there's so many different variables here. And the one that I think would point to is this. And it goes back to where you started your question, which is the point about inflation. As you say, at the end of the book, I said, well look, this took off in a very low inflation, low interest rate world. We're now in a high inflation, higher interest rate world. But I think it's going to continue regardless, because these assets are good hedges against inflation and so on.

And I think on the housing front, that's actually proven true. Infrastructure, it hasn't. Because there's been a bit of a collapse in this type of investment in infrastructure. Although I think there's big expectations about to return, and Blackrock wouldn't have bought global infrastructure partners a few weeks ago if it didn't think it was going to return.

But what happened there was that when interest rates were 0 or 1% or whatever it was, infrastructure returning 7% or 8% was a very healthy investment. But when treasuries are paying 6% or whatever it is, suddenly 7% or 8% doesn't look that attractive. And so I think that's why there was this big downturn in the last 12 months in infrastructure investment. So what do they expect to change? That's the key question.

Well, clearly they think interest rates are going to come down. But I think the other thing they're expecting is that governments are going to pony up. So they're expecting that governments will further augment their mechanisms of risk absorption. And that's what the Inflation Reduction Act was. That was the American government basically saying, OK, we've been whittling down these tax credits for renewables investment from 30% to 24% to 22% to 20% to 18%. And now you're not investing. Shit. We'll return them to 30% and we'll extend them and broaden them at home.

I think that's the Blackrock bet when it's buying global infrastructure, is that it's expecting governments hamstrung by the deficit ideology to basically provide the greater risk reduction that they require in order for that investment in infrastructure to be revivified.

MARK BLYTH: And then we will all have green electricity, but no one will know who owns it. And if it ever breaks, you'll never know what number to call.

BRETT CHRISTOPHERS: Exactly. That's exactly right. And one of the interesting things here is infrastructures of fossil fuel extraction around the world are substantially owned by public sector actors. Renewables generation infrastructures are not. Across the West, it's about 96%, privately owned. As we move into a decarbonizing world, we are moving increasingly into what is a privately owned energy world.

MARK BLYTH: And we just don't even notice that one either, do we?


MARK BLYTH: Brett, it's always a pleasure. You're incredible. You're a machine. You produce one book after another. But it's not just the production, it's what it says. It's the quality. It's the depth. It's the analysis. You really changed the way that I think about capitalism with your last two books. All the best.

BRETT CHRISTOPHERS: Thanks very much, Mark. It's great to talk to you, as always.


MARK BLYTH: This episode of the Rhodes Center Podcast was produced by Dan Richards and Zach Hirsch. If you like the show, leave us a rating and review on Apple, Spotify, or wherever you listen to podcasts. And if you haven't subscribed to the show already, please do that, too. You can learn more about what we covered in this episode and the other podcasts from the Watson Institute at Brown University by following the links in our show notes. We'll be back soon with another episode of the Rhodes Center Podcast. Thanks.