The Future of Finance: How Private Equity and Venture Capital Will Shape the Global Economy (Wiley Finance) [Hardcover]

Dan Schwartz has written a comprehensive review of the state of the private equity and venture capital business - no easy task.
What's good about this book is its breadth and in-depth coverage of several troubling issues facing the industry today. Dan interviews dozens of industry experts, including such leaders as David Rubenstein of Carlyle. It can be challenging to get time with the titans of private equity, but Future of Finance succeeds. Dan also paints a global picture of the business--not just from Asia, his expertise. The tables that are included in the book additionally offer a wide lens on the size and shape of funds and deals.
While offering a chapter-by-chapter look at several industry crossroads, the book reads like part text book and part journalistic reporting. Some chapters, like the beginning one which defines industry terms, are a primer for newcomers--and could have been better placed as an appendix. Others, which sum up thought leaders' views on various issues confronting the business--sour relations between limited partners and private equity partners, for one--veer toward straightforward reporting.
I would have liked to have seen Dan take some of the material he gathered from interviews to the next level and synthesize some of these remarks rather than quote them in long paragraphs. The book also would have benefitted with more 'color' to supplement the heavy topics and perhaps give readers an idea of the interesting personalities and their experiences in playing key roles that are shaping its outcome.
Written during the depths of the financial crisis, Future of Finance could have been hopelessly out of date by now. But the book's futuristic spin and well-researched detail keeps much of the content still relevant.
The book is best when Dan offers his own opinion on where the business is heading. His section on the so-called "+ theory" goes a long way toward arguing for a new collaborative framework for conducting business and doing deals. Likewise, his upbeat view on the resilience of the business is convincing. Both are points that could have been elaborated upon in the concluding chapters.
I should point out that I worked with Dan for nearly a decade and he endorsed my own book, Silicon Dragon (McGraw-Hill, 2008) Silicon Dragon: How China Is Winning the Tech Race. What I have tried to do here is offer a fair review of The Future of Finance that will be helpful to industry practitioners and students alike.

My perspective on Dan Schwartz's "The Future of Finance" is as a general partner (manager) and as a limited partner (investor) in Asian venture funds since the 1970s. Dan's book is a must read for all fund managers of the private equity and the venture capital asset class. I would recommend it as well to MBA students, politicians and economists.

Dan presents a straight forward well written analysis and excellent thesis as to what is wrong with the relationship between investors (in such as public companies, hedge funds, private equity funds) and their managers and their board of directors.

He ties this thesis well into the financial crises of 2007/2008/2009. Dan then makes excellent points about how to "do it right" and change the loss of alignment and the absence of "value added control" by those (managers of companies hedge funds and direct equity funds) who are supposed to act for "the investors".

I agree his points on how the managers of the private equity and venture capital funds can and have executed a very useful and effective "model' for how public company directors should function in the future.

This model for how to align the interests of management and the investors - and how to add to shareholder value while avoiding excessive fees is well presented by Dan through his use of fascinating interviews with many successful and industry leading general partners of hedge funds and private equity/venture capital funds globally.

As for the future in Asia for venture capital funds (to which I can speak or comment only), Dan mentions the shake out since the late 1990s between Asian venture capital funds managers and the previous group of "LPs" who supported the early and growth stage smaller more entrepreneurial deals/funds.

The issues Dan mentions of alignment with investors and value added control investing are always on the table for venture capital fund managers in Asia due to the longer term of these funds compared to late stage private equity funds.

Fortunately, as mentioned by Dan, there are some new industries such as green investing and water purification that require a longer view and some new more long term investors showing up for the Asian venture capital fund managers to address.

I have benefitted from Dan's insights and those of the industry giants he quotes. Dan's book is a great voice of both optimism and a reality check for GPs in Asia (venture capital and private equity) as to their "forthcoming" new relationship with the LPs and as to their key role and prospects if their job is done right.

Big kudos to Dan for his clear written prescient thesis and forecasts, his interviews with global financial leaders are a treat for all who would learn from recent financial disasters.

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.