This episode focuses on big finance and the city, specifically how a new type of financial actor, so-called asset managers, are taking ownership and control over urban infrastructures and the implications this has for urban life. The guest in this episode is Brett Christophers, professor of human geography at Uppsala University. Christophers is the author of several books that have recently been celebrated by everyone from revolutionary Marxists to business outlets such as the Financial Times and Bloomberg, sparking debate about the state of capitalism. This episode will focus on one of Christopher’s most recent books, Our Lives in Their Portfolios: Why Asset Managers Own the World, published by Verso Books. In this book, Christophers examines the rise of what he calls the “asset manager society” and shows how major asset managers such as Blackstone, BlackRock, and Brookfield own many of the roads we drive on, the pipes that supply our drinking water, energy systems for electricity and heat, hospitals, schools, and even the homes in which many of us live. Christophers argues that these asset managers are our new financial masters and that they shape our lives in profound and disturbing ways.
What is asset management?
An asset management institution is a financial investment institution whose particular characteristic, which separates them from other types of financial investment institution, is simply the fact that most of the money they invest is not their money. They are principally investing money that they raise from other investors and it's that money that they invest and earn fees of various kinds for carrying out their investments.
– Asset managers are providing a service to other investors and those other investors can be anything from individuals, the likes of you and I, all the way up to big pension funds, sovereign wealth funds, insurance companies and all the rest of it, says Christophers.
Historically, through the first few decades of the business of asset management in the mid-20th century, the things they invested in were financial assets, such as stocks and shares.
– The big kind of development from the 1980s onwards was that they began to diversify into what in the industry is called real assets, which are assets with kind of physical substance, Christophers continues.
Instead of just buying financial securities or digital assets, they started buying roads, houses, water treatment works and all those sorts of things. Christophers argues that once they began doing that, they became much more significant to our everyday lives than before.
The total amount of money they manage on behalf of others is something like $100 trillion, with around 10% invested in real assets such as housing, energy systems, transportation assets, and more – roughly $10 trillion.
– I think a more tangible way of thinking about it is to focus on one of the key actors, an Australian asset manager called Macquarie, which is the world's biggest asset manager in terms of ownership and investment in infrastructure, says Christophers.
On its website, Macquarie estimates that about 100 million people worldwide rely daily on infrastructures it owns, whether by flying from its airports, drinking water supplied through its pipes, or using electricity transmitted through its systems. Most of these 100 million people are unaware that these infrastructures are owned by an asset manager or even what an asset manager is. Christophers argues that it does matter that these infrastructures are owned by an asset manager rather than, for example, a government or local authority, as was historically the case. It’s crucial to understand who these actors are, how they operate, and how they manage these essential assets.
The rise of “asset manager society”
Christophers explains how we can point at two moments in time and two sets of developments as being very important to the growth of asset management and its dramatic expansion from the 1970s until today.
The first was in the 1970s and 1980s, marked by the booming pensions industry. Both private and public sector retirement savings pools expanded dramatically during this period, with the US at the centre of the development.
– And what happened was that once those pension funds began to get bigger and bigger and bigger, the trustees of those pension funds increasingly turned to experts to undertake that investment for them, Christophers explains.
– So instead of carrying out that investment themselves, choosing whether to buy shares in General Electric or whoever else it might be, they turned to experts, which were these external asset managers, and paid them fees for carrying out the service, Christophers continues.
The second major period was around and after the global financial crisis of 2007–2009. In its wake, stricter banking regulations were introduced. While banks continued to thrive in some respects, regulations hobbled their traditional functions, pushing financial activity into less-regulated sectors like asset management. This shift allowed asset management to grow, as its activities are often private, less transparent, and less regulated.
– When we talk about finance kind of shaping and controlling government, it tends to be the Blackstones and the BlackRocks that we talk about these days and not the big investment banks. I think that's very telling, Christophers notes.
All the big banks have their own asset management divisions, but asset managers have their own imperatives and rationales. And to the extent that they try to influence and shape government policy, they try to do that in a direction that is favourable to them. And Christophers argues that the most important of those, at least in relation to the types of assets mentioned in his book, is that they want government policy that will help make certain classes of assets available to them for investment.
One example is housing, where it's not necessarily the case that a government would allow big investment institutions to buy up multifamily housing, single family housing, student housing and so on. However, asset managers would like it to be politically and regulatory permissible.
– So A, they want to enable there to be as many asset classes available to them to invest in as possible. And B, they want the investment possibilities to be available on as favourable terms as possible, Christophers explains.
The impact of asset management on urban life
Asset managers’ investments in urban infrastructure affect people in varied ways. Some impacts are widespread, while others are concentrated on specific groups of people.
– So, for example, if you're talking about investment in rental housing, which has become a much more frequent and common object of investment for asset managers, particularly over the last 15 years or so.
– If you're a homeowner, then the fact that Blackstone or whoever else it might be owns a big amount of rental housing, it's not going to make much difference to you at a personal level, so it's a differential experience, Christophers elaborates.
Christophers argues that there are three main ways in which urban life has been substantially impacted by the fact that asset managers have come to own lots of essential assets that represent critical infrastructure for people's lives, whether that's housing or whether it's roads or parking meter systems, telecommunications networks, social infrastructure like hospitals and schools.
The first of those, and in many ways the most obvious is that it's typically meant that those things have become more expensive for users, or in the case of housing, tenants. One of the arguments that the asset managers have made in essentially legitimating or self-justifying their business model has always been, that they are more efficient custodians and owners of these types of assets than the state ever was or can ever be.
But if you look at the data, that simply doesn't stand up to scrutiny. All the data suggests that you get above average increases in user rates or rents when those types of assets come under the ownership of asset managers than other types of owners, Christophers elaborates.
– There's now, I think, a host of different academic research that looks at different metropolitan regions in the US and shows, pretty persuasively, that the eviction rates are substantively higher across rental housing portfolios that are owned by asset managers than by other types of private sector owners, let alone public sector owners.
That's all about trying to evict tenants who are not enabling those asset managers to maximize the rents that those properties that they own will be able to generate. One of the arguments Christophers makes in the book is that we shouldn't be surprised by that.
– And what I mean by that is if you look at how these asset managers work, if you look at the types of fees that they charge, if you look at the types of returns that they promise their investors, if you look at the types of salaries they pay their professional managers, then of course they're going to charge as high rents as they possibly can because without charging those rents, they won't be able to pay those fees and salaries and justify the charges, Christophers continues.
The second one is a dearth of investment in maintenance and upkeep of these types of assets. The problem with that is that when asset managers buy up these types of assets, they typically do so through investment vehicles that have a fixed life, which might be around 10 years. What that means is that if they're buying the asset, they know that within a few years' time, they need to sell those assets because they are under an obligation to return the capital that was committed to those funds in the first place to their investor clients.
– When they buy, they are typically buying in the knowledge that within a relatively short space of time, they must sell those assets, says Christophers.
Unless they are required to do so, they will be disinclined to undertake capital expenditure, investment in maintenance and upkeep and those kinds of things, the benefits of which may only be felt 15, 20 years down the line. They have no interest in doing that because they know they're not going to be the owners at that point, Christophers continues.
– So, all other things being equal, they will tend to prefer kind of band-aid type sticking plaster solutions to proper maintenance and upkeep.
The third way is when governments want asset managers and other investment institutions to invest in these types of assets, to buy these assets, and sometimes even to build these assets under kind of construction contracts, for example a new road or a new bridge. They often find that the asset manager will be reluctant to undertake that investment unless the state provides, whether centrally or through local government, a range of different guarantees or subsidies that essentially guarantee that it will be a profitable investment.
– And what we found doing research in this area, is that very often governments will actually make promises to asset managers that have significant implications in terms of their future flexibility and ability to plan for liveable cities, Christophers concludes.
Listen to Professor Brett Christophers in conversation with Doctoral Research Fellow Yngve Solli Heiret on big finance and urban life.