Hedge funds and Private Equity - PES

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The first era of capitalism took the form of family-owned capitalism where large family not only
owned companies but also had the funds to make the necessary investments into their business.
This traditional form was characterised by very close relationships between the management
and the employees despite a cruel lack of social rights. Although in retrospect it appeared to
some analysts as the “good times”, this period also revealed a lack of dynamism, where the
economy was closed and very local, with few perspectives for expansion. Since the financial
markets were not well developed, the access to finance was limited. Growth was too weak and
the decision-making in companies was too top/down.
This situation, described here in very broad terms, was the reality in Europe more or less until
the 1950s.Then, an important decision taken after World War II, i.e. the convertibility of currencies
into gold and the opening of trade at an international level, completely changed the face of
capitalism.
We saw the rise of international markets, leading to the development of shareholder ownership.
Managers controlled large public corporations, but they did not own them. Shareholders owned
corporations but were unable to control them or coordinate their own actions due to their large
numbers. They provided long-term capital on the condition that managers paid them a decent
dividend. The separation of ownership and control kept the shareholders at arm’s length from
managerial decision-making. The public corporation was not insulated from stock markets, but
entrepreneurial decision-making was not directly influenced by the volatility of financial markets.
The immediate benefits from this change of international dimension were a boost for growth, an
increase of productivity and the development of new technologies. A new type of company
appeared: the so-called multinationals. While industry at the same time suffered from a poor
capacity for renewal, there was a growing distance between owners of companies and their
employees, and a slow-down in upgrading infrastructure. We witnessed the internationalisation
of stock exchanges but not yet true international financial markets.
The 1970s were characterised by an acceleration of internationalisation. There was strong potential
for economic growth until 1979, with increasing productivity. A phenomenon, called
globalisation, became the new paradigm, going beyond the level of nation states and deep into
the real economy. There was also a re-concentration of ownership in the large public corporation.
The last development of this evolution of capitalism had its roots in the USA. The shareholder
value-concept has been increasingly influencing our societies, not only financial markets, but
also managerial decision-making in companies in the real economy. Capital markets have
changed fundamentally during the last decade. Today, financing capital is organised in relatively
larger funds, compared to the traditional channel of bank financing. Today, pension funds and
insurance companies re investing in up to 50% of all shares and 40% of other stocks and bonds.
Another new phenomenon is hedge funds and private equity funds – both focusing on shortterm
profit and huge management fees.
This new type of ownership means in reality the predominance of institutional investors: banks,
insurance companies, financial conglomerates, pension funds and other funds like private equity
funds and, sometimes, hedge funds. Financial market capitalism may therefore be defined as a
specific capitalist regime within which the real economy is more and more dominated by the
operational principles of the financial markets. This is a quite recent phenomenon where, in addition
to imposing their operational principles, funds are also the owners of the real economy, in
one way or another. They may act in concert or not, they may exercise their voting rights or not,
but in all cases, they are characterised by a damaging lack of transparency which affects both the