Private equity and development: a bad joke that's laughing all the way to the bank
Bankwatch Mail | May 14, 2012
For ‘development’ activists used to fighting the excesses of project finance, it’s a bizarre shift. Instead of touting the usual dams and mines, in recent years ‘development’ banks have gone a step further: giving money directly to hedge funds, private equity firms and financial intermediaries, the croupiers of casino capitalism who almost ruined the world economy back in 2007-8 and are well on their way to ruining it properly this time around.
This article is from Issue 52 of our quarterly newsletter Bankwatch Mail
On one level (the most obvious one) it’s ridiculous, not to say obscene: those entrusted with a responsibility to help the world’s poorest and neediest are giving what they have to the world’s richest and least needy. Some might argue that transfer of wealth from poorest to richest is the basic point of the ‘development’ game (if it’s not the point, why does it keep happening?), but let’s leave such cynicism aside for a moment. Why, on their own terms, are ‘development’ banks getting into bed with private equity?
Private equity funds flourish in times of deregulation and cheap money, so it’s no surprise they picked up steam in the early 2000s. The combination of a glut of capital (mainly from Asian surpluses), low interest rates and buoyant credit markets meant that investors got greedy for bigger returns than safe, unspectacular government bonds could offer (not such a bad idea given what has happened recently to many of those bonds, but that’s another story). And thus was born the ‘hunt for yield’: hot money moving around the globe in search of ‘alpha returns’ of anything from 20-30 to several hundred percent a year.
What part of this model sounds compatible with basic human decency, let alone with development?
Fast forward to post-2008 and the distinctive feature of the post-bailout economies: thanks to governments advised by Goldman Sachs giving Goldman Sachs all our money to make up for the fact that Goldman Sachs lost all our other money (a process known as the Efficient Markets Hypothesis), we don’t have any money left. The private sector, notably the hedge funds, has it all. And therefore, according to a DfID official I shared a panel with recently, we have to “tickle and tease” them into “leveraging” their (or our) money for development. The fund he boasted about, the Emerging Africa Infrastructure Fund, has over 70 percent public money in it. Yet somehow the private sector is doing the public a favour by putting in a minor stake! It’s also registered in Mauritius, of course.
Seeing the combination of cheap assets, desperate governments and lack of competition, private equity firms assembled enormous war chests, putting USD 28 billion into infrastructure in 2010 alone. The model they use is fairly simple:
- Acquire assets with debt - often transforming a debt-free company into a massively indebted one in the process of acquiring it;
- Short-term investments (thus zero long term development);
- Take it private - get the company away from public scrutiny and regulation to a place where you can do whatever you want to it;
- Emphasise short-term value maximisation: fire staff, sell assets, particularly land and infrastructure, cut R&D (asset-stripping in normal language);
- Concentrate on making ‘alpha returns’ (30-300+ percent, though the managers of Actis, the holding vehicle of the UK’s development body CDC which was created when the top managers of CDC sold it to themselves for a pittance, allegedly made more than 5000 percent);
- Exit the company either by selling what’s left via an Initial Public Offering, or by recapitalisation, i.e. take a large advance in future profits out of the company.
What part of this model sounds compatible with basic human decency, let alone with development? The astounding thing about modern-day global capitalism is that it’s pushed the basic suppositions of what is morally OK as long as someone makes money to a point where Middle Passage slave traders would take one look at the World Bank’s order book and go, “Blimey, that is bang out of order.” One question, ‘development’ bankers: would you let these men treat something you cared about in that way?
The actual consequences of the private equity model in development are almost too numerous to list, as researchers at the Corner House and elsewhere have shown: massive government underwriting of private speculation; a failure rate of 70 percent; brutal reductions in people’s access to energy; total lack of transparency, due diligence and standards; the ubiquitous use of tax havens, and; a culture of deifying the rich and their criminal ruthlessness. But since we’re keeping it nice and light, let’s conclude with a story that sums it all up.
Various ‘development’ banks, including CDC and the EIB, gave money to a Texan hedge fund called Emerging Capital Partners. ECP invested in various Nigerian front companies used by associates of a man named James Ibori, governor of Delta state, to launder the profits of corruption. It did so despite the fact that the Nigerian Economic and Financial Crimes Commission had put Ibori and said associates all over the front pages of the Nigerian press by investigating them for corruption. In other words, ECP knew exactly who it was dealing with - that was why it was dealing with them! If you want ‘alpha returns’ in a deeply corrupt place, where else would you go? And the development banks knew it too. Or if they didn’t, it’s because they chose not to.
Two of the Nigerian front companies were banks, which collapsed as a result of being used for unsecured loans. The resultant bailout cost the Central Bank of Nigeria USD 2.6 billion. That’s poor people’s hard-earned taxes siphoned out to Houston and on to London and Luxembourg. Ibori has just been found guilty of ten counts of corruption in London. The whistleblower who brought the case to the attention of CDC and the EIB, a man called Dotun Oloko, was rewarded for his pains by having his name leaked to ECP, who put private detectives on his trail and ensured he can never return to Nigeria. The DfID Minister, Andrew Mitchell, had to issue a public apology. Nigeria's Economic and Financial Crimes Commission is now investigating ECP for corruption.
Well done, ‘development’ bankers. I hope you’re proud. Because thanks to what you do every day, the work that comforts you when you can’t afford that second home or those private school fees because at least you’re ‘making the world a better place’, there’ll be a whole lot more misery, corruption and despair where that came from. Guaranteed.
Anders Lustgarten works with the Bretton Woods Project in London and is part of the 'Counter Balance: Challenging the EIB' coalition. He has written widely on development and finance issues, including the report 'Conrad's Nightmare – The world's biggest dam and development's heart of darkness'.