As global banks became the visible figure of recklessness and imprudence after the financial crisis, what you describe as a “new powerful financial actor” began to emerge in the form of the asset manager. But rather than the conventional focus on investing in financial assets – such as stocks and bonds – asset managers created investment funds that started to acquire essential infrastructure – or “real assets” – from housing to farmland, and roads to hospitals.
Can you explain what has happened over the last 30 years in the financial sector and the real asset economy that supports your claim that we now live in an “asset manager society”?
I think the best place to start is with a very simple question – what is an asset manager? And what are its assets? An asset manager, or an asset management firm, is a very straightforward entity whose defining characteristic is that while they are essentially financial investment entities – in other words, they invest money – they predominantly invest other people’s capital. Sometimes they invest a little bit of their own capital alongside that of third parties, but that’s normally a very marginal part of their business. Essentially, they are investing other people’s or institutions’ money, and they charge their clients fees for carrying out that investment on their behalf.
The main kind of mechanism whereby they do that is to create fund vehicles in order to carry out an investment. This is like an envelope into which they can put the money that they raise from those third parties, and then pool it together and carry out that investment. Their clients come in all different shapes and sizes: they include regular individual investors like you or I who can easily open an account with an asset manager and say, look, I don’t want to invest this money myself – please do it for me and I’ll pay you a fee. They range from that all the way to pension schemes or sovereign wealth entities that have £1 trillion to invest – and everything in between.
Asset management has been around really as long as capitalism has existed. But it didn’t become a significant business until the 1980s and 1990s. Until then, there weren’t really any significant sovereign wealth funds or retirement savings available to be invested, but from that time there was a massive growth in surplus capital, principally held by pension schemes, but increasingly by other entities that needed to be invested. Prior to the 1980s and 1990s, the asset managers that did exist invested the money on behalf of their clients exclusively in financial assets, such as shares, or bonds, which are essentially loans issued by companies and governments. It wasn’t until the 1980s and 1990s that they began to buy ‘real’ assets, physical things like housing, and various forms of infrastructure.
With the financial crisis, these entities that had been in the background until then suddenly became much more significant. More and more of this money was put into the physical things in which our daily lives as ordinary people are fundamentally embedded. When asset managers were just buying shares in Microsoft, or bonds issued by a local municipality in the US, for example, those activities were pretty far removed from the daily lives of you and I. Whereas now if they buy your home, or the gas network that supplies the central heating to your home, or the wind farm that generates the power delivered to your home, or the toll road or bridge that you drive over on the way to work – all of a sudden they become much more directly connected to your daily life, because it’s they that set the conditions on which you access that infrastructure. So that’s what the book is about: how asset managers become a much more significant force in our daily lives.
In terms of housing, I’d encourage people to think about the conditions under which it might become possible and attractive for a big financial investment institution to own housing. The UK is a good example here as a country in which this actually hasn’t happened very much. In the UK, the ownership of housing is very fragmented. It’s either owned by the people that live in it, in the case of somewhere between 60 to 65% of dwellings in the UK, or it’s owned by either the state. Or it’s owned by private landlords, who might own one or two dwellings. So if you were a big financial investment institution and you have, say, £300M to invest in housing, it would take an inordinate amount of time and effort for you to actually spend that money because you would have to carry out thousands, potentially even tens of thousands, of individual transactions, because the most you can buy is one or two houses at a time. That’s the main reason why asset managers, such as Blackstone, haven’t really been able to own housing in the UK, because the opportunity of getting their hands on big portfolios hasn’t really arisen. Now contrast that to Germany where in the 1990s, after reunification, lots of huge portfolios of housing that had been owned typically by the public sector were sold off, not to the tenants who were living in them, like the Right to Buy in the UK, but lock, stock, and barrel to private investors. So the likes of Blackstone and other financial investment institutions were able to make lots of big purchases, which were very efficient for them because they could buy ten or even 100,000 dwellings in one fell swoop.
Probably the best known example would be the US, where after the financial crisis, there was a huge foreclosure crisis in which between five to ten million US mortgaged homeowners lost their homes. What happened then was that a lot of that housing became available for purchase again in bulk, in particular in geographically concentrated regions such as Seattle, Phoenix, and Atlanta. So again, it became possible for financial investors like asset managers to buy up lots of housing very efficiently at scale. While asset managers had been marginal investors in housing in the US, after the financial crisis they became big investors. There are now regions of the US – Atlanta is a very good example — where in a particular neighbourhood there are significant proportions of housing owned by asset managers.
Farmland is another good example. It’s one of those asset types where much of the activity of investment by asset management institutions has been in the Global South. Most asset manager investment in real assets in the past has been in the Global North – in Europe, North America, Australia, and so on. With farmland, there has been quite a lot of buying in Canada, the US, and Australia, but also significant amounts bought in Eastern Europe, and in South America, not least in Brazil, where big, Global North-based asset managers have bought millions of hectares of farmland. The issue, at least as critics see it, when asset managers become owners of farmland, just as when they become owners of housing, is that they are ruthlessly and scrupulously focused on profit, specifically on short-term profit generation. It is a business that is all about operating an asset with a view to maximising the cash flows that those assets generate for the owner, which is to say the asset manager. What’s really important to emphasise here is that they do that for two reasons. One is that it puts more money in their pocket in the short term. If you increase the rent on a house that you own as a landlord and you reduce spending in terms of maintenance, refurbishment, and so on, then you maximise the short-term income that the asset generates. However, that’s not the main reason asset managers do that. The main reason is that they are in general predominantly short-term focused investors. They buy assets in order to subsequently sell them, and they generally do not hold those assets more than a maximum of seven years in most cases. As soon as they buy an asset, they turn their mind almost immediately to how they can best enhance its value to other buyers in a few months’ or years’ time. And that’s why they focus very heavily on maximising the cash flow that the asset generates, precisely to increase its market value, to increase its desirability to other potential buyers. That is far from ideal if you happen to be someone living in or farming that asset; or at one step further removed, if you’re relying on the food that is generated by that land.
As an investor in real assets, UK water infrastructure is a very good example of this issue. If you think about this from the perspective of an owner who knows they’re only going to be around for a few years, why on earth would you spend lots of money to carry out substantial repairs and infrastructural improvements? If you know that you’re not going to be the owner, you’d have an instinctive preference for sticking plaster solutions that will address things for the short term, but not worry about the long term. I would argue that it’s not remotely coincidental that asset managers became very significant owners of UK water and wastewater infrastructures in the 2000s and 2010s, precisely during the period at which the problems with the UK water and wastewater infrastructures, in terms of a lack of long-term investment that everyone is now aware of, began to become systemic. Thames Water is probably the prime example of that: between 2008 and 2017, I think, it was controlled by Macquarie, which is an Australian-based asset management firm, and it was under Macquarie’s tenure that many of the significant problems that have now come home to roost began to emerge.
New renewable energy infrastructure is a major part of climate mitigation, but ‘clean assets’ also represent the highest level of investment from asset management funds. You argue that private ownership of clean assets is as much – if not more – of a problem than dirty assets, given that half of fossil fuel assets are owned by the state or public companies, while only 10% of clean assets are owned by public institutions. In short, ‘climate infrastructure’ development currently involves a huge transfer of control to the private sector.
Given the role of renewable energy in addressing the climate crisis, what are the implications of these extreme levels of private ownership?
Right now, I don’t think it makes a huge amount of difference that so much of the global renewable energy infrastructure is owned by the private sector. I think that it could become a problem in the future. Currently, though, those private sector owners of wind and solar farms do not have a significant say over the terms and conditions under which electricity is bought and sold in most parts of the world. This continues to be decided predominantly by governments, and actually, to the extent that private interests are able to influence those policies around electricity markets, it’s still fossil fuel interests that probably have the biggest say in that. But that will change as we go forward, as fossil fuel interests incrementally die out and we move towards a much more renewables-focused energy system. Then I think history shows that the main private interests in that system will more and more be involved in setting the terms under which the products of that system are commercialised, in other words, how electricity is bought and sold. I think it’s easy to imagine a situation in a country like the UK, where 90% of electricity generation is from renewables, and 90% of that 90% is owned by the private sector, of which a significant amount is owned by, say, Blackrock or Macquarie. These asset managers would then likely have a significant say over how electricity markets get configured in the UK, and in a way that is very much to their advantage, and perhaps not quite to the same advantages for UK households.
So that’s one thing as we move towards a more renewable energy system that is predominantly private: those specific private interests will have an increasingly important say over the commercialisation of electricity. For me, the bigger issue right now is this: we are in a world where in most countries, governments have essentially outsourced the energy transition to the private sector. They basically say, look, we are not going to build wind and solar farms ourselves, as governments, for public ownership and operation. We expect you, the private sector, to develop renewables’ capacity, to operate the wind and solar farms and sell the electricity that they produce. Under that scheme of things that is dominant worldwide, government’s role becomes a role of nudging, providing incentives in the form of support mechanisms, subsidies, and so on, to help encourage that investment and channel it into different forms of offshore versus onshore capacity, and so on. Now that would be fine if it were the case that developing renewable energy and running wind and solar farms was an attractive proposition for capital. The problem is, and has long been, that renewable energy development and operating wind and solar farms is generally speaking – and of course, this varies historically and graphically – not a particularly attractive business, even though the cost of the underlying technologies, the wind turbines, solar cells and modules and so on, have come down a lot over time. And yet governments have found themselves completely unable to remove those subsidy and support mechanisms. The best example of that would be the Inflation Reduction Act in the US from 2022, where not only have the long-term subsidies to wind and solar power been renewed for another ten years, they’ve actually been increased precisely because renewable energy development was not going as well as had been hoped by the Democratic Party. The same thing has happened throughout the world, wherever governments have tried to eliminate or even to reduce those subsidies: where they’ve done that, they’ve found the investment absolutely collapses. Renewable energy development simply cannot occur on any significant scale even today without robust support from governments.
So my main concern is that, in principle, it’s fine to put responsibility on the private sector, but that becomes a questionable strategy when the private sector can’t see sufficient profit incentives to do that at the scale that the world requires and at the speed that the world requires. If the private sector is still not doing this fast enough, even though the prices of the technologies have come down so much – thanks in significant part to development in China, let it be added – and despite the fact that everywhere in the world, the significant support mechanisms from the state still exist, maybe that’s telling us that we shouldn’t have actually relied on the private sector to do this in the first place. So if the state is going to lay out these significant subsidies and support mechanisms, essentially just to support private sector profits, then arguably we should be thinking about the public sector taking the risk and getting some of the reward as well.
“As owners of housing and other forms of essential infrastructure, asset managers are almost the least best option among private sector owners”
Another key aspect of the post-financial period – and one which stimulates the rapid growth of asset managers – is the decision of many governments to use public money to de-risk private sector infrastructure investments. You argue this is partly because of the relative strengths and weaknesses of the public and private sectors in this present moment, and partly the fact that in Western economies, post-war infrastructure is at the end of its natural life; in so-called developing economies there is a need for new infrastructure; and across all economies there is a need for new climate infrastructure.
Can you outline the rise of the concept of the ‘infrastructure gap’, and why it’s considered inevitable that governments will continue to have a limited role?
It’s a really good question, and I think this applies to housing as well. The idea of the infrastructure gap is that, on the one hand, you have the amount of necessary outstanding infrastructure investment for things like climate mitigation and adaptation, and you could also include new housing under that capacious label. It’s no secret that in large parts of the world there are simply shortages of housing stock: particularly in major urban regions, levels of construction have fallen significantly. On the other hand, you have the amount of infrastructure investment that is currently occurring or planned to occur. There’s a gap between those two things which has been getting bigger and bigger over the last 20 or 30 years. I think one thing that’s very interesting here, and obviously very problematic, is that this gap has emerged and grown at a particular point in history partly because governments around the world have increasingly exempted themselves from carrying out infrastructure investment. This is all to do with the idea that government shouldn’t be fiscally expansive or too extravagant with public expenditure; they have to keep a budget balanced, and don’t want to go into significant deficit for fear of getting punished by the bond markets or whatever else it might be. That’s very much tied up with austerity politics and has become a dominant orthodoxy in the past couple of decades. It was relaxed a bit during the pandemic, but it didn’t take long for it to become hegemonic once again. So governments have basically said that we can’t do this, we can’t afford this, and/or it’s not our role. That’s very much true on climate infrastructure where they have basically given responsibility to the private sector, but it’s also true of all other types of infrastructure, including housing: governments aren’t building housing on any significant scale in most parts of the world, they’re relying on the private sector to do that. Now, asset managers come in almost by necessity. The reason for that is very straightforward – if governments are expecting the private sector to plug that growing infrastructure gap, then almost immediately they are required to turn to asset managers simply because they control the vast bulk of surplus private capital in the world. So they can’t help but turn to the likes of Macquarie, Blackstone, and Blackrock because they have the financial firepower at their disposal.
One of the problems I point out in the book is that it’s one thing for governments to rely on the private sector in general and asset management in particular, to plug that infrastructure gap, but that doesn’t necessarily mean it’s in the asset managers interest to do that, still less to do that in ways that will be publicly beneficial. Why would one simply assume that they will build housing or build new infrastructures in a way and on terms that will be of benefit to the public? They have an inherent interest in doing things only on terms that are beneficial to them and to their clients. I would actually argue that in the case of housing, the problem goes even further than that, which is that actually to a significant extent, asset managers and financial investors have no interest in constructing new housing at all, still less affordable housing. If you listen to what those asset managers say in their private, honest moments, they will say, not only do we really not want to build new housing, in fact, the thing we look for when we invest in existing housing is supply shortages, because these keep upward pressure on rents. Their interests are actually diametrically opposed to the construction of new housing because that runs antithetical to their existing interests.
That’s a great explanation. It just popped into my mind that Norwich Council won the RIBA Stirling Prize in 2019 – they built 105 council houses. I think it's the first time any social housing has won the architectural prize.
Yeah, but if you listen to both Labour and the Tories in England, councils are not seen as the solution to the housing shortage. The private sector, and asset managers and other institutional investors in particular, are seen as the answer. They are not the answer.
In terms of the ownership of essential infrastructure, in the UK at least, the question mainly focuses on state ownership. While it’s clear that the government should have a much more expansive role, do you think it is the only answer to the current ownership crisis? Or do you think there is also a significant role for mutual ownership – including more localised and federated models – that we see in Europe and North America?
The US, for example, has electricity co-ops with 40 million customers, which is one-sixth of the country and is not an insignificant amount of people. And again, in places like Germany, they have much a much higher level of localised citizen democratic ownership. How do you see the different potential routes of changing as much as we can, even if that's an idealistic representation of how we can change the crisis?
The main thing I would say is that almost anything would be better than an ownership ecology such as we increasingly have now, that is, increasingly dominated by asset managers. As owners of housing and other forms of essential infrastructure, asset managers are almost the least best option among private sector owners, precisely because of the types of incentives that have been built into the business model, and because of the inherent ‘short-termism’ that is a part of the fund vehicles through which they typically invest. They are about as inappropriate owners of essential infrastructures as you can imagine. I'm not necessarily instinctively against essential infrastructure being owned directly by, say, a pension fund that is a genuine long-term investor and is interested in generating steady, predictable, reliable yields of, say, 6% a year. But the problem is that pension funds have increasingly not carried out their investment themselves, but channelled it through asset managers who have interests which are often diametrically opposed to what pension funds nominally are about in terms of their incentive structure. But there are pension funds in the world, not least in Canada, which do carry out a lot of infrastructure investment and don't do most of it through asset managers, they do it directly. That's potentially a better model. More research is required into whether you get substantially different outcomes for households under direct pension fund ownership or ownership that is rooted in short-term asset management investment.
"In the UK, the privatisation of things like electricity and water have been unmitigated disasters.”
The second thing I would say is that in general I am a supporter of public ownership of these types of infrastructures. In the UK, the privatisation of things like electricity and water have been unmitigated disasters. Even the Financial Times and its writers in recent years have essentially come to the same view, that the way it's been done in the UK has been a disaster. Those types of infrastructures never should have been privatised and certainly not in the way they were. However, having said that, we see public ownership as this panacea where everything is rosy and ideal. I'm old enough to remember that British Rail was hardly ideal and there's no reason to believe that it always would be again. So I'm not going to uncritically romanticise public ownership, just as I wouldn't uncritically denigrate private ownership. There are good and bad examples of both. I would instead draw on a set of arguments that the departed geographer Doreen Massey made about land ownership, where she argued that at least with public land ownership, you have the possibility of socially beneficial outcomes, which in the case of private land ownership, you're foreclosing at the very outset. Public infrastructure ownership generally is no guarantee of more socially beneficial outcomes, but at least you have the possibility. You need to enable the owners, in the case of public ownership, whether it's local authorities or public corporations or whatever else, to act in a socially beneficial way. There's no point in having public ownership if you simply expect those public owners, public sector owners, to behave like private corporations. I think that's part of the problem in the UK, and this goes back to your mention of places like Germany and the US, which is that in a country like the UK, where political authority is so centralised, there's a real question mark over the ability of other public entities to behave in socially beneficial ways, because their powers are so constrained – and local authorities would be very good example of this – by centralised political authority. I'm principally in favour of greater levels of public ownership, but how, and the conditions under which it's done, are important. I don't necessarily think that all infrastructures need to be publicly owned, and still less nationalised. As you say, there are good arguments in certain cases for municipal ownership or community ownership, land being a very good example of that. In an ideal world, you would have this mixed or plural ecology of ownership where you have significant levels of central public ownership, significant levels of municipal ownership, but also a healthy ecology of private ownership as well. The problem with the UK is that we have this ideology where private ownership has become the default ownership model of pretty much everything, and it hasn't worked. The trick is to get away from that default ideology of private ownership where it has to become acceptable again, and desirable again, to have other forms of ownership. Arguably that kind of default ideology in the UK has gone further there than almost anywhere else in the world. There are still much greater levels of public ownership of certain infrastructure in the US than in the UK. We tend to vilify the US as the home of free-market capitalism and neoliberalism, and of course it is in many ways, but also there are continuing levels of public ownership of certain infrastructures, much more than is true in the UK. ∞
Brett Christophers is a professor in the Institute of Housing and Urban Research at Sweden’s Uppsala University and is author of Rentier Capitalism, The New Enclosure, and Our Lives in Their Portfolios: Why Asset Managers Own the World.
