Photo credit: David Smith
The consensus is that the road to economic recovery from the COVID-19 pandemic is K-shaped: certain sectors and populations will thrive while others stagnate or decline. Outsized online retailers and digital infrastructure providers, like Amazon, have experienced boom times, while many Main Street small businesses have gone bust. Those with a stake in the stock market have surfed a great wave of rising equity valuations. In the United States, “Pandemic Billionaires” enjoyed a 60 percent increase in their combined wealth, while the sustainability of wage gains and employment opportunities for lower-wage workers is uncertain.
The K-shaped recovery describes the rising tide of wealth for highly capitalized firms and tech companies—often one-and-the same—and the institutional investors and financial intermediaries, like pension funds and asset managers, who hold significant stakes in these firms. The K also marks out the ebbing waters that leave small and medium-sized businesses exposed, as well as wage workers, low-income, and minority populations without access to equities or assets.
How did we get here?
This fork in the road reflects differential access to credit, assets, and wealth—that is, the socioeconomic and structural inequalities that constitute the American economy. And yet, this outcome is not inevitable. As we argued one year ago, the $2.3 trillion in public funds mobilized by the Coronavirus Aid, Relief and Economic Security (CARES) Act served to underwrite sites of private capital and asset accumulation at unprecedented levels. Supported by Federal Reserve lending programs and liquidity provisioning, it created conditions that guaranteed the value of “high risk” assets. These are largely owned by private equity firms, which now dominate the upward slope in the K economy.
Private equity firms are part of the non-bank financial sector, which means that, unlike commercial banks, they cannot access central bank liquidity through official channels. The CARES Act pandemic relief funds broke those regulatory floodgates, enabling private equity firms to benefit indirectly from the Federal Reserve’s asset purchases and effective asset value guarantees. The CARES Act thus put a floor under the value of assets managed by private equity firms. And they are riding this financial lifeboat onto new shores of investment and accumulation.
There is no lack of forceful criticism of the short-term “buyouts” business model pursued by private equity firms. This leveraged investment strategy involves taking ownership of an “undervalued” private company or buying-out and delisting a public company. Private equity firms do this by using these companies’ assets as collateral to finance the buyout with debt. They then cut costs, reduce overheads, retrench staff, and resell the company, or issue shares on the stock market to yield a profit.
There is far less scrutiny of private equity’s ongoing conversion from short-term to more enduring investment activities. Through “permanent capital” investments in life and retirement insurance companies, life sciences, digital infrastructure, logistics, and real estate, private equity firms lock-in revenue streams from these assets in perpetuity and decrease their dependence on investor capital. Specifically, permanent capital investments reduce private equity’s increasingly controversial reliance on management fees paid by institutional investors. Permanent capital investments also avoid the risk that institutional investors will redeem their interest in a fund set up by the private equity firm.
The revenue generated by permanent capital investments includes premiums from life or annuities insurance, or rents from housing estates and intellectual property rights—amplifying the “assetization” process documented by Kean Birch and Fabian Muniesa, where, in this case, investments are made in anything that can be, “owned or controlled, traded, and capitalized as a revenue stream.”
Through these investment practices and new revenue streams, private equity is also becoming a primary source of credit and interest for corporate America. Indeed, over the course of the pandemic, private equity has found the means to extend into conventional areas of finance (e.g., providing insurance services and managing real estate) and supplant traditional banks.
The Federal Reserve’s “injection” of liquidity into financial markets conjures an image of a wash of cash that keeps us all afloat. The debt-financed stimulus was both necessary and welcome but these interventions were not neutral. As one would expect, financial institutions and asset holders were the first to access these credit facilities. Less apparent are the ways in which they convert that liquidity into other assets and stock buybacks, leading to further increases in asset prices. The K-shape reflects this differential access to credit, assets, and wealth.
Federal Reserve liquidity provisioning results in a change in relative asset prices. Those with savings or investments in the stock market benefit from increased asset valuations and equity prices while others are confined to the downward path.
To be sure, the Paycheck Protection Program, a part of the CARES Act, was effective in its aim to maintain payrolls. And a much cited Credit Suisse 2021 Global Wealth Report claims that aggregate wealth accumulated by households has risen by $28.7 trillion, which includes $12.4 trillion for North America and $9.2 for Europe.
But as we noted, these gains are largely due to rising stock market prices, or equity valuations. An author of the 2021 Credit Suisse report concurs, noting that, “If asset price increases are set aside, then global household wealth may have fallen. In the lower wealth bands where financial assets are less prevalent, wealth has tended to stand still or, in many cases, regressed.”
Here, “asset price increases” refers to increases in stock market prices (equity). Unfortunately, most people don’t hold stocks and hence haven’t shared in the equities balloon. The problem for lower and even middle-income earners isn’t merely getting an increased injection of monetary support to cover lost wages or even to address current consumer price inflation. Rather, what is at stake is that they are not part of the “asset economy.”
The asset economy includes individuals with investments in stocks, bonds, and real estate, and institutional investors such as pension funds, endowments, family offices, foundations, and insurance companies that likewise hold these securities. It also consists of asset managers—mutual funds, hedge funds, and ETFs—and private equity firms, all of which pool and invest capital on behalf of those institutional investors. Private equity firms, however, invest in so-called “alternative” asset classes—that is, private companies, rather than stocks, cash, and bonds.
In the United States, we have witnessed a spiral of increased asset valuations. House prices have soared: in May, the median price for U.S. homes was $350,300. This is a record high, according to the National Association of Realtors. In August, the S&P CoreLogic Case-Shiller Index, which tracks the value of single-family housing (i.e., stand-alone, detached homes) in the US, released its latest figures for June, revealing a 18.6 per cent price gain year-on-year—the index’s highest reading of the last 30 years.
One might imagine that lower and middle-income families would benefit from this trend in housing prices, either by selling their homes or by availing themselves of increased valuations by using their property as collateral. The debt implications of leveraging property aside, this scenario assumes that these families own their homes. It also assumes that homeowners are in a position to take advantage of this trend in the housing market. We must first ask: Who is benefitting from rising house prices?
Most observers skirt that question and instead focus on the reasons for rising housing prices.
Some argue that high prices are a problem of supply: there aren’t enough houses to satisfy dramatic increases in demand, and there are bottlenecks in provisioning of materials as basic as lumber. Others argue that the Fed’s asset-buying program is responsible for this price spike, not only because it has led to overall higher asset prices, but also because the Fed has purchased $40 billion of mortgage-backed securities every month, encouraging what Robert Kaplan, President of the Dallas Federal Reserve, has said is a worrying sign that private institutional investors—real estate companies owned by private equity firms—are entering the single-family housing market.
Either way, asset price inflation has differential effects on those who hold financial assets versus those who do not. As Lisa Adkins, Melinda Cooper, and Martijn Konings note: “The key element shaping inequality is no longer the employment relationship, but rather whether one is able to buy assets that appreciate at a faster rate than both inflation and wages.” This is the K-shaped economy. And recent monetary policy has intensified the K’s inflection points, including structural inequalities.
Whether soaring housing prices are due to supply-side or demand-side factors, the asset holders that have benefitted from stimulus policies, such as private equity firms and their institutional investors, are the beneficiaries of rising house prices.
Private equity investments in real estate include widely reported property deals, such as the acquisition and subsequent death of Hahnemann Hospital in Philadelphia. But they also consist of less noted investments in single-family homes and affordable housing across the country.
In June, Blackstone, a private equity firm now known as the world’s largest landlord, holding $378 billion worth of property assets, acquired Home Partners of America for $6 billion. This purchase added 17,000 single-family homes to its portfolio across the United States. A month later, Blackstone purchased $5.1 billion of rent-controlled apartments designated for 678 affordable housing communities from insurer AIG. The investment is part of a $7.3 billion deal with AIG in which Blackstone will also assume responsibility for 9.9 percent of the insurer’s life and retirement assets as part of its “permanent capital” strategy.
Private equity’s investments are happening at a time when the supply of single-family homes and affordable housing has fallen short of demand, pushing would-be first-time homeowners into rental markets. The legal scholar Robert Hockett recently sounded the alarm: “The high rate-elasticity of home sales and prices has been widely remarked now for years. What still goes less widely remarked is that this correlation is a ‘smoking gun,’ revealing the oversized presence of speculators—PE [private equity] and hedge funds—in home markets. Get ’em out.”
Hockett’s warning is not wrong. But while most homes in the United States are still purchased by individual mortgage-backed investors, focusing on private equity’s influence in moving U.S. house prices is somewhat irrelevant. More significant is private equity’s underlying advantage.
These investments in housing markets are gradually remediating the ownership of assets—for instance, turning homeowners into rent-seekers—in cities where low-income wage earners increasingly seek work. Moreover, they result in the transfer of value from low and middle-income households to institutional investors. Private equity has become a key architect in this transfer of value. We should question its inevitability, which means examining how we got here in the first place.
In the years after the 2007–2009 Great Recession, private equity firms launched “buy-to-rent” schemes that involved purchasing foreclosed homes at scale. This strategy was enabled by U.S. Treasury and Federal Housing Finance Agency (FHFA) programs that aimed to assist homeowners with negative equity to refinance their loans and to incentivise lenders to reduce interest rates. These programs proved largely ineffective at preventing mass foreclosure. By the time they were operational in 2011, the first wave of homes (2008–2010) from predominately inner-city lower-income and minority families that held a greater percentage of subprime loans had already foreclosed.
Large portfolios of single-family homes were sold off at county auctions at distressed prices. In other instances, the FHFA directly sold government-owned foreclosed homes in bulk to private equity, framing the sales as a test case to “gauge investor appetite for a new asset class, that is scattered-site single-family rental housing.” The scale of these portfolios, paired with private equity’s access to financing (cash, lines of credit, debt markets) otherwise unavailable to smaller investors reliant on mortgages, provided the operational efficiencies for private equity to establish single-family rentals as a new asset class.
The Great Recession legitimated single-family rentals as an asset class from which a credible source of revenue could be generated. (While single-family housing assets on rental markets was nothing new, before 2011 it consisted almost entirely of “mom and pop” investors holding a handful of properties. What changed was the makeup of these landlords and their preferential access to credit.) It’s important to note that value creation from rents was only one source of asset-backed capital accumulation pioneered by these firms.
Value was also generated through securitization. In 2013, Blackstone’s real estate arm, Invitation Homes (sold off in 2019), was the first to securitize rental incomes from single-family homes by selling bonds on secondary markets. As economic geographer Desiree Fields has shown, this securitization process (i.e., transforming assets into financial securities) was enabled by innovations in tenant-facing digital platforms and underwriting analytics that allowed private equity to “aggregate the ownership of resources, extract income flows, and convey these flows to capital markets”—giving rise to the “automated landlord.”
Backed by the value of pools of rental income, these securities were sold to raise further rounds of capital. The aim, however, was not to create yet another stream of revenue for profit’s sake. Instead, the debt raised was used as a form of nonbank financing: it was lent to institutions in search of credit—thus extending the purview of “shadow banking”—capital market lending outside the commercial banking system and its associated regulations.
In 2017, Blackstone’s Invitation Homes received its final government-backed loan guarantee of $1 billion. What remains is a new institutional investor asset class: an additional means by which private equity has extended into conventional areas of finance. It is also reordering urban rental markets across the globe and is effectively a form of wealth extraction from the working class.
In the K-shaped economy, we see soaring wealth and accumulation for those who hold assets while those without access to credit facilities or the means to acquire assets face an uncertain future: the increasing incursion of private capital and the nonbank sector into real estate, insurance, and retirement accounts—that is, our homes and safety nets.
Janet Roitman is a university professor at The New School.
Andrew Moon is a PhD candidate in anthropology at The New School for Social Research.