US watchdogs take on private equity

This is an audio transcript of the FT News Briefing podcast episode: US watchdogs take on private equity

Marc Filippino
Good morning from the Financial Times. Today is Monday, August 29th, and this is your FT News Briefing.

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Financial markets are absorbing the hawkish word out of the Wyoming meeting of central bankers this past weekend. And the EU is set to shut the gates on Russian tourists. Plus, we’ll look at why the Biden administration is scrutinising the $10tn private equity industry. I’m Marc Filippino, and here’s the news you need to start your day.

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Investors are bracing for a longer stretch of higher interest rates as central bankers focus on inflation. That was the message from the world’s leading central bankers during the Jackson Hole symposium in Wyoming this past weekend. And markets responded with sharp sell-offs on Friday after Federal Reserve chair Jay Powell gave his keynote speech. Here’s the FT’s Colby Smith.

Colby Smith
I mean, it was unequivocally the strongest message we’ve heard from Powell to date about the central bank’s commitment to root out high inflation. There were some lingering hopes. I think the Fed was starting to think more about two-sided risks, meaning that it isn’t just high inflation that they’re worried about. They’re also concerned about the impact on economic growth that their campaign to tighten interest rates would create. And the message that Powell sent at Jackson Hole was that the Fed is narrowly focused on bringing down inflation, and they’re willing to sacrifice gains in the economy since the pandemic in order to do so. And specifically, he warned about the likelihood of a sustained period of lower growth and also a weaker labour market.

Marc Filippino
So, Colby, were there any central bankers pushing for a more dovish policy or at least less hawkish than what you’re describing?

Colby Smith
No, actually, I really think that central bankers here know that the task in front of them is to convince people that they have this inflation situation under control. So we heard this from Powell. We heard this from the top officials at the ECB and other central bankers that the most important thing at this moment is to really establish their credibility and their inflation-fighting credentials. And they can ease up even if we start to see some economic pain because the risk of letting inflation run out of control, which will then require the Fed to take even more aggressive action, is going to be much more economically costly.

Marc Filippino
Now, what does this mean for markets going into this week or beyond and not just in the US but other regions, too? How might investors react to all this, Colby?

Colby Smith
We’re in a bit of a standstill, I think, in terms of markets until we get fresh economic data. So upcoming this week, we have the jobs report on Friday, and we’ll also get another reading of the CPI report before the September policy meeting. And what’s going to be critical for investors next month is not only the decision itself about whether the Fed is going to raise rates by half a percentage point or three quarters of a percentage point. But also we’ll get new economic forecasts from officials, as well as individual projections for the level of future interest rates. And what’s critical there is we’ll not only see how much tightening Fed officials think we’ll need to see in 2023 and 2024. But for the first time, we’ll also see their projections for 2025.

Marc Filippino
Colby Smith is the FT’s US economics editor.

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EU foreign ministers are meeting tomorrow in Prague, and the FT reports they plan to suspend the bloc’s visa agreement with Moscow. It’s been in place since 2007, and the move would make it harder for Russians to get Schengen area travel documents. This would be a punishment for Vladimir Putin’s invasion of Ukraine. Some EU member states, like Poland and the Czech Republic, stopped issuing new visas to Russian tourists and closed their borders to them. Others did not close their borders, which means Russians can still travel freely around the EU. Poland and the Czech Republic are both pushing for an EU wide ban.

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In the US, there’s a new generation of antitrust officials, and they’re zeroing in on what they see as anti-competitive behaviour. One area that they’re looking at is the $10tn private equity industry. These are private firms that buy companies off public markets and restructure them to try and make a profit. I’m joined now by the FT’s Stefania Palma. She’s been looking into this. Hey, Stefania.

Stefania Palma
Hi, Marc.

Marc Filippino
So in terms of timing, why are regulators looking at private equity now?

Stefania Palma
So one of the key reasons why regulators now in Washington are taking a closer look at private equity is just because the industry itself has just come to basically own and take control of vast, vast chunks of the US economy like never before. So what they are mainly taking a look at are undervalued companies that are bought, restructured and then sold off very quickly. Or, for instance, private equity companies that might go into an industry, say, like nursing homes. And the Federal Trade Commission putting out a report saying that actually mortality rates have gone up after buyout groups have entered the sector. So what they’re looking at are issues of competition, which they think is under threat when private equity enters a sector, but also looking at the impact on ordinary American citizens.

Marc Filippino
How could regulators change private equity, Stefania?

Stefania Palma
So one of the things that the DOJ and the FTC are working on is revising merger guidelines in order to challenge deals they deem unlawful. And one of the things that they are focusing on in overhauling these rules is precisely looking, taking a closer look at private equity and their involvement in deals. Similarly, when it comes to pre-merger notification forms, regulators also want to tweak them in order to get more visibility on the role of private equity in transactions. In addition to that, for instance, the DOJ with the head of the antitrust unit, Jonathan Kanter, he told me in one of my interviews he is actually quite concerned about private equities role in buying assets that companies are ordered to sell in order to complete a separate tie up. So these are all dynamics that have been central to the private equity industry. And now you have this new group of officials that are actually saying, hang on, let’s take a look at what the implications of these strategies have been on competition in the US.

Marc Filippino
I see. So has there been any pushback from people in private equity to this?

Stefania Palma
So after, just a few days after we published our exclusive interview with Jonathan Kanter, we had Lawrence Summers who’s a former US Treasury secretary, express concern over what he defined as a new era of populist antitrust policy. The big sort of criticism that this new cohorts of antitrust officials are receiving is that, you know, they’re being accused of politicising competition policy. And generally speaking, you obviously have lobby groups of the key sectors that could potentially be a hit in this case, private equity. They are obviously pushing back. So it’s absolutely fair to say that they’ve definitely been ruffling some feathers.

Marc Filippino
Stefania Palma is the FT’s US legal and enforcement correspondent. Thanks, Stefania.

Stefania Palma
Thank you.

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Marc Filippino
Shares in Chinese ecommerce giant Alibaba have been tumbling, but they enjoyed a reprieve recently. Investors sparked a rally last week on hope that the US and China might reach a deal over Washington’s threat to delist Chinese companies from US exchanges. That may not help Alibaba’s business in the US though. It’s been floundering. Here’s the FT’s Cristina Criddle.

Cristina Criddle
I think there was this huge ambition, especially sort of going back to Alibaba’s IPO, where Jack Ma really wanted to create over a million jobs for US merchants and on this Alibaba.com platform, wanting to onboard more than a million businesses. But obviously the relationship between the US and China, especially in relation to tech companies, has really changed over the past few years. And so that’s meant that it’s had to change its strategy and pull back from the American market a little bit.

Marc Filippino
Alibaba’s business to business platform operates in almost 200 countries, but its wholesale ecommerce operation in the US, which launched three years ago, has also been plagued by staff departures and a failure to attract customers.

Cristina Criddle
And what happened was when they onboarded these small US businesses, they were unable to compete with other global businesses that were on there. They weren’t able to meet sort of the costs of items being sold on there. So it just hasn’t made sense for the sellers there. So they’ve not been signed up as quickly. Now we’re looking at sort of 2,000 new businesses in the US a month on the platform, which isn’t anything near the 1mn that they were first looking out for.

Marc Filippino
Cristina Criddle is the FT’s technology reporter.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news.

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