Parasite, Panacea – or Both? How Private Equity Investment Can Shape Local Communities

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Accountability and boundary-setting are key, as far-flung ownership of local assets can come with social costs.

Jon Gray, president of Blackstone, confirmed in late January that the firm had raised $100 billion of its $150 billion goal for its flagship funds – an infusion that will expand the private equity giant’s nearly $1 trillion global footprint.

In High Point, North Carolina – where Blackstone owns half of downtown – this news makes for more than just a news snippet or coffeehouse banter. When High Point Mayor Jay Wagner walks out of his City Hall office, he is surrounded by some 7 million square feet of private equity investment – no small matter in a town of fewer than 120,000 people that’s known mostly for hosting the world’s largest home furnishings industry trade show.

Global ownership is nothing new for big cities like New York. But it’s an entirely different reality for smaller cities, where until recently local owners – who were known and accountable around town – animated the city’s clubs, churches, government buildings and charities.

So is Blackstone’s increasing global footprint bad news or good?

Let’s start with a basic premise. Buildings are saturated with an element of home, regardless of whether they are marketplaces, residences or for some other use. They are the settings where people’s lives unfold. Meanwhile, outside investment funds expect to come in, get a return on their investment and eventually get out.

In the face of these apparent contrasts, developing mutually beneficial relationships requires intentionality – not binary thinking that views investment as either a panacea or a parasite. I call it a both/and approach.

It was the late 1990s when major real estate investment trust Vornado acquired multiple downtown High Point buildings. Some High Pointers were proud of the attention from big-city investors, but others perceived the beginning of a new era.

Downtown spaces were no longer measured in terms of relationships, but formulas. While Vornado’s words and actions showed some care for the community, in its spreadsheets, High Point was – as a local developer put it – “no different than Phoenix or New York.” Indeed, in 2010, those spreadsheet formulas demanded Vornado exit High Point. As one High Point official characterized it, Vornado simply decided, “This is no longer important for us.”

Then, in the beginning of 2011, there were rumors that a huge swath of downtown was being evaluated by what a longtime Republican official and High Pointer described as “dispassionate lenders and private equity investors.” So great was his concern, he suggested the community “borrow a chapter out of the Green Bay playbook” and purchase the buildings, similar to how fans and members of the Wisconsin community acquired the NFL’s Green Bay Packers. It was a radical idea born out of a remarkable time.

The ground was shifting and High Point’s barbecue spots, taverns and barbershops were talking. Who had the financial might to catalyze such a deal?

By the time the weather had warmed in May, the answer was clear: private equity, headlined in part by Bain Capital. A $1 billion transaction that year merged not only High Point’s major, competing furniture exposition buildings within the same company, but also under the same banner as showroom space in its biggest U.S. rival, Las Vegas.

It seemed like decades worth of economic, social and cultural change had occurred in just a few months.

It turns out that in High Point’s case, there have been some synergies between what is good for private equity investors and what is good for the community. The private equity-funded firm – International Market Centersacquired by Blackstone in 2017 – has invested heavily in downtown buildings, eliminated inefficiencies and even given a major office building back to the community exclusively for local control and use.

Yet there are always social costs inherent in these transactions.

First, as local relationships are lost or transformed, holding building owners accountable for their actions can be complicated.

There is also a tension between real estate’s meaning and use for local residents and its new profit expectations by outside investment funds. In High Point, gone were some of the more organic ways that commercial building owners had meshed with the community. One local owner, for instance, had allowed for conventions, proms and the city’s annual Taste of the Town fundraiser to be held in their space.

Most importantly, private equity acquisitions almost by definition extract wealth from a region. They often combine several smaller, more local companies, causing a swift loss in local connections. Profit that used to flow into local households and economies now flows to far-flung investors.

The bottom line is that local governments can’t depend on community goals naturally aligning with the goals of outside investors. Even what seems like a win-win situation requires attention, because the conditions creating it will inevitably shift. (Of course, with a huge High Point footprint under one owner, a major shift could be disastrous).

The both/and approach calls for savvy local leaders. When a wave of investment comes, communities must already have levees strategically placed to protect what they cherish. It’s a process that begins long before the transaction, with community meetings that identify the community’s assets – perhaps an important meeting place not discernible to outside eyes, or a highly valued legacy business – and the creation of policy tools to save those assets. Examples may include inclusionary zoning, deed restrictions and community benefits agreements.

The both/and approach requires support from national, state and county governments. For investors, engaging the interests of a local community with a strong, independent vision of its own can feel inconvenient rather than opportunistic. And yet, cultivating a community’s long-term social, political and economic health remains one of the most important functions of local government.

This tension must be tackled head-on, because investment funds will come and go – but communities will remain.