In some ways this is a very brave book. Dan Schwartz took on the issue of private equity as an asset class just as the global financial system was entering its most significant crisis since the Great Depression. But Schwartz is convinced, and I agree with him, that private equity, including buyout and venture capital funds, is here to stay as a central institutional form in modern capitalism. Readers of this book will, I believe, come to the same conclusion. And along the way they will learn a great deal about the new global financial environment.
Schwartz is in an ideal position to observe and analyze the private equity ("PE") environment. He has run the Asian Venture Capital Journal for fifteen years based in Hong Kong. Right away that should alert readers to the fact that PE is indeed a global asset class, important not only in Europe but Asia, the Middle East and, of course, the Americas. Schwartz has also had access to all of the top players in the PE environment and the book is filled with useful case studies and discussions of the most important PE transactions of the last several years.
More fundamentally, Schwartz argues that PE plays an important role in shaping the institutions of corporate governance. Here, Schwartz and I are very much on the same page and in fact Schwartz interviewed me for the book. His argument for the impact of PE on corporate governance, however, is unique and is well worth serious consideration.
At the heart of the argument is that PE helps resolve the "agency" problems that plague public companies. Public companies divide ownership and control between outside shareholders and insider managers. When a buyout or venture fund invests in a business, however, they close that gap between insiders and outsiders with unique governance mechanisms. This can help boost the value creation process and that is what makes PE such a powerful and important force in modern capitalism.
Academics may immediately recognize the historic origins of this governance problem in the classic work of Berle and Means in their 1932 text on capitalism which set the tone of much debate then about the financial markets and corporate structure. Schwartz adapts their view and considers it in light of today's global capitalism. His argument for a new "+" theory of corporate governance is an intriguing evolution of the dominant modern idea of corporations as a "nexus of contracts." Particularly interesting to me is his suggestion that the PE form of unifying ownership and management is a natural direction for Asian capitalism. And indeed the continuing role of families and the state there suggests that he has tapped into an important dimension of the global economy.
Of course, since at least the buyout side of PE relies on leverage it is possible that if the financial engineering is not carefully done problems will result. Schwartz does not shy away from the downside of PE: that heavily indebted deals can lead to cost cutting and layoffs that destroy more value than they create. This has led to considerable, and understandable, tension between the PE world and some on the left, particularly the labor movement. Schwartz argues this must be resolved by a larger commitment by PE to be accountable to wider society. Of course, given the drive for efficiency that motivates many PE deals that may be a challenging circle to square.
Schwartz is also fully aware of the impact of the debt market collapse of the last two years and makes clear that the current period will see some shakeout in both the venture and buyout wings of PE. But rumors of the death of PE are, as Mark Twain said, greatly exaggerated. And already there are signs of renewed health in PE as investors look for above market returns in an fairly tame investment period.
Readers of The Future of Finance will be better equipped than other investors to assess this important asset class.
I teach business law in a law school and will recommend this book to my students of corporate law and finance. I think it could also be a useful text for MBA students, economics classes and sociology classes.