"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way."
The most well-known passage of Charles Dickens’s novel, A Tale of Two Cities, seems an appropriate starting point to discuss private equity, one of the topics of the latest BBC/Open University The Bottom Line broadcast. Belief and incredulity appear to characterise our present epoch of financial booms and crashes, during which private equity firms are painted as the pantomime villain in capitalism’s triumph and fall: asset strippers in name and deed.
The relationship of Dickens’s tale of London and Paris, at the time of the French Revolution, to the financial centre of the City of London seems metaphorical and real. Joseph Addison had described London as an “Emporium for the whole earth” a century earlier, and in the emporium that is the global financial entrepôt of today, private equity firms are as much a part of its landscape as the trader of the 17th century. In the late 20th century, the leitmotif of the City of the furled umbrella and the bowler hat gave way to the yuppie and the mobile phone; the gentleman giving way to the player. For some commentators, these changes represented a revolution whose genesis rested on private equity firms and their ilk.
Businessmen shaking hands.
photo © copyright Jupiterimages Corporation
Private equity firms operate on the basis of buying and selling a portfolio of companies to extract returns of 20 per cent on their investment over a three-to-seven-year period. They institute cost cutting and disposal of parts of companies in order to sweat the assets they have invested in. For defenders of private equity firms, they create long-term value. For critics, they are the manifestation of the UK-based asset strippers of the 1970s; Jim Slater, John Bentley and ‘Tiny’ Rowland amongst others, whose activities were called the “unpleasant and unacceptable face of capitalism” by the then Prime Minister, Edward Heath. The language of private equity activities are, in this view: a climate of fear; downsizing; the casualisation of work and so on. This litany is universal to these firms, whether expressed in the English or any other linguistic form. For the famous economist Joseph Schumpeter, entrepreneurship represents the revolutionising of the economic structure which enables new activities to be born, phoenix-like, from the ashes through the process of “creative destruction”.
It is the important question of language that formed the second topic of The Bottom Line discussion. English is claimed to be the universal language of business, with its own cross–national dialects, so that knowledge of other languages is deemed not to be as important as it once was. But language is like football, the rules of the game may be pretty much the same but the variants are as numerous as the array of cities in the world. It is a linguistic truism to say that language affects the way in which one thinks. Knowledge of local customs may be useful upon introduction to a client, but knowledge of the rudiments of the local language is an important part of business engagement and sustainability. For example, in China, saying yes to a question does not signal agreement but rather that the speaker has been heard. These are important considerations for companies that engage in international transactions. It can be argued that globalisation will only be completed if the law of one price operates. That is, all prices in the world converge with the only differences being accounted for by transport and administration costs. Similarly, if English became the first language of everyone in the world it would become truly global.
Capitalism, as Schumpeter and others remind us, is a revolutionary system in which “all that is solid melts into air, all that is holy is profaned…” Private equity is part of that system and provides a vehicle for “revolutionising the conditions of production.” A single global language would be part of that revolution, and if that is not generally understood then change does need to be made. Blaming private equity firms and hedge funds for the financial crisis is a bit like Canute blaming the Moon for his failure to control the tides. There are compensations with more than two cities and more than one language in the world which makes us all richer, whether materially or culturally. The globalists, in whatever guise, make us all poorer as heterogeneity is sacrificed for homogeneity.