Rattner’s trip to China, Nepal’s Gen-Z Uprising, Capitalism 4.0

25:35For Subadi and others, it's an idea whose time has come. A look over the palace wall made them angry, but then also hopeful for a better future, hopeful enough to take action, And now, hopeful that their action will be worth the sacrifice.

25:57Up next, capitalism at a crossroads. That's what several experts have addressed in various ways, as we seek a new model to replace the one that got us into the great financial crisis.

26:16This is Special Agent Regal. Special Agent Bradley Hall. The time is approximately 11.15 a.m. About to start consensual telephone call with Dr. Daiwa Zhang. China's Ministry of State Security is one of the most mysterious and powerful spy agencies in the world. But in 2017, the FBI got inside.

26:57I've never seen that much evidence in my entire career, and I don't think we'll ever see that much evidence again. I now have several terabytes of an MSS officer, no doubt, no question, of his life. And that's a unicorn. This is a story of the inner workings of the MSS and how one man's ambition and mistakes opened its vault of secrets. Listen to The Sixth Bureau from Bloomberg Podcasts starting on February 13th on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

27:37Here at Wall Street Week, we bring you stories of capitalism every week. But this story is not just of capitalism, but about capitalism, where it came from, where it's headed, and why so many people are questioning its future and its foundations. One of them is about to take over as mayor of Wall Street's home city at the end of the year. I am a democratic socialist. And if you listen to President Trump, it's not enough that Mr. Mamdani embraces democratic socialism. He insists on calling him an outright communist. And now let's see how a communist does in New York. We're going to see how that works out.

28:16Our Bloomberg colleague, John Authors, has taken a look through several recent books about capitalism's challenges written not by its opponents, but by its supporters. And he has some thoughts about why there's so much capitalist soul-searching these days. Thoughts that he shared with us. What is capitalism? How do you define it? Well, part of its strength, it's something that grew up naturally and has had the ability to morph and adapt in a way that none of its alternatives, socialism, communism, etc., have been able to do. I've been churning my way through this selection of enormous tomes, all of which have in common this belief that capitalism is in crisis.

28:58The point is that it adapts each time it has a crisis. There are more truly non-capitalist alternatives being considered at present than there have been. And arguably, the latest model of capitalism really fell in 2008. We work for Bloomberg. We're part of the citadels of capitalism. Everybody, I think, has to agree that the model that was in force until 2008 really perished with the crisis. You would normally expect them to be more clarity about what was coming next this long after the crisis. And I think the reason people are writing so much about capitalism now getting so worried is that we're not seeing that new model, that new narrative, taking shape with any clarity.

29:45Before we look at the new model, let's talk about the old models. What are the models that capitalism has evolved through? I'll give you the schema that Anatole Koletsky, who's sort of known these days for having set up the Gavkal, his book Capitalism 4.0 is about what is Capitalism 4.0 going to be. 1.0 was laissez-faire, it gave us the growth of the British Empire, the Industrial Revolution, the Gilded Age here in the States, and it finally perishes after the Great Crash and the Great Depression. Capitalism 2.0 is basically Keynesianism, the New Deal, the Marshall Plan, the GI Bill. It gives you the great successes of the post-war economic miracles in Germany, in Japan, and founders, obviously, in Stagflation in the 1970s.

30:39Capitalism 3.0, we generally think of with regard to Ronald Reagan and Margaret Thatcher, the great pioneers of it, Paul Volcker, with the way he took over the Fed and changed monetary policy, the rule of the dollar. Nobody thinks that capitalism of the Thatcher-Rager kind is going to come back anytime soon. We are going to have some transition on the scale of those ones I've just mentioned, the ones that came after 29 and after the 70s. The question is exactly what the capitalism 4.0 will be. Although capitalism in markets and democracy in politics tend to occur together and have some things in common, they are not the same.

31:21In each case, it was the markets that signaled to the politicians that this model had ceased to work with the great crash, with the great inflation of the 70s, and with the crisis of 08. Democracy and capitalism have a symbiotic relationship. There's a wonderful line from Winston Churchill that democracy is the worst way of running society that anybody has come up with apart from all the others that have ever been tried. Both have it in common that they're not perfect but that they are more or less impossible to improve upon. They have internal checks. You don't want to get thrown out by the voters if you're a politician.

32:01You don't, you, you, greed and fear counter each other and the two systems check each other. It's largely now up to governments to work out what to do next. Does capitalism work without growth? Yes, that is a critical problem. This is Sven Beckert, professor of history at Harvard. He spent 10 years writing this magnum opus on the history of capitalism. And one of the points he makes, it's like a shark, it has to keep moving. You could argue that it's capitalism 1.0, gilded age. Donald Trump is terribly excited by President McKinley, who went for very high tariffs in the late 19th century when America was expanding the way it was by building railroads, connecting up the west and the east coast and all the rest of it, was a way of protecting this infant economy as it got ready to take over its hegemonic position in the world.

32:54However, most of the people I've been talking to would suggest that there's something a little more alarming going on, which you might call capitalism 0.0, or pre-capitalism, which is mercantilism, the idea that came before. Capitalism grows out of Britain's victory in the Napoleonic Wars, the growth of the British Empire and the Industrial Revolution. Different countries had their own spheres of influence and then tried to build empires to give them a place to sell their stuff to. One of the problems facing capitalism is the growing role of governments in intervening to minimize pain for markets and investors.

33:36Well, my point, David, in the book is not that capitalism has failed, but that it's been ruined. And it's been ruined by government over time. Author Rasheer Sharma is head of Rockefeller Capital Management's international business. His book is What Went Wrong with Capitalism. So then you began to expand the role of the state. The problem is that it has now expanded to such an extent. And it's not just about government spending, as I said. It's the culture of the bailouts. Who does it help? It's the regulations. Who does regulation really help? And what I say in the book is that all these things have systematically increased to undermine what capitalism is supposed to be.

34:17And the outcomes we're getting today is not what the founders had in mind. When the founders spoke about the architects of capitalism, they wanted more competition, churn to happen, that the incumbents are never entrenched, that they're always challenged by insurgents. Capitalism was supposed to create that freedom. Let the insurgents come and challenge the incumbents. Instead, what we are seeing today is that the incumbents are getting more and more entrenched. The concentration of power, as you can see, the number of companies that dominate the S &P 500, how concentrated that is. and also the fact that you get this mismatch in risk, which is that you can capitalize the gains, but we are here to socialize the losses.

34:59I think it's this perversion of capitalism that we have seen today. And this is having real consequences. That concentration has only increased in recent years. Much of the growth in America's equity markets today is driven by the magnificent seven. Productivity growth around the world, and particularly like in America, has been falling off, right? At the end of the day, the key to long-term economic growth is productivity growth. So productivity growth is falling off. Why is it falling off? I argue it's because the dynamism that capitalism brought about getting new people to come, about taking out the deadwood, that dynamism is getting lost in this constant state support that we have for capitalism.

35:45And the other negative consequence is this concentration of power. And, you know, when you have so much regulation out there that helps the incumbents, they are big. They can afford to deal with those regulations and they can even lobby in Washington to get the kind of regulations that they want. But small to mid-sized businesses, they find it increasingly difficult to survive, forget even thrive in this kind of environment. There's a deep unhappiness with the establishment as most people are very unhappy with their own fortunes, right? Which is that in America today, for example, I think about 70 % of Americans today say that they are unlikely to be better off than their parents.

36:27This is a violation of the American capitalist dream. The American capitalist dream from 40, 50 years ago was that most Americans thought they're going to be better off than their parents. You're supposed to be better off over time. Young people in America today, when you poll them, they tell you that they'd rather have socialism than they would have capitalism. You know, for me, that is possibly the one most important statistic that inspired me to write this book, that why are so many young people in this country disillusioned with capitalism? And the answer for me is the fact that they're disillusioned with the current form of system, which they think is capitalism.

37:05With all the challenges that capitalism faces today, perhaps the most ironic is that its biggest advantage, deep capital markets, may in the end itself turn out to be anti-capitalist. One of the things that surprised me, I've spent the last 20 years of my life covering this, it's fascinating how many actual capitalists, people involved in finance, now regard the degree of liquidity in the markets, the degree of financialization as having been a problem. One way to express this is a guy called Omar Bide, who's currently at Columbia, be a very interesting thinker, argues that to make a market as deep as they currently are, to be able to trade things, you actually need to homogenize them.

37:56You need to plan them. You rely on MSCI and S &P to create indexes, and then you trade indexes. You get the rating agencies to tell you, yes, this is AAA. You can split it around however you like. that you end up in order to make markets that liquid so that you can trade them, they can become as big and liquid as they are. You have to make such sweeping decisions about how you define companies, how you allocate them, that you're basically taking the role of a communist planner. So there is an argument in which the liquefaction, the financialization of the economy basically did away with judgment, did away with the notion of trust in people's dealings with each other and therefore led to a version of capitalism that frankly isn't any better than socialism or communism.

38:46Coming up, what happens when the next generation isn't all that interested in inheriting that family-owned business we've spent our lives building up? The story of small business succession in the United States.

39:05I'm Carol Masser. And I'm Tim Stenevec, inviting you to join us for the Bloomberg Business Week Daily Podcast. Now, every day we are bringing you reporting from the magazine that helps global leaders stay ahead. We've got insight on the people, the companies and trends that are shaping today's complex economy. That's right, Tim. We're all over global business, finance, tech news, all as it is happening in real time. And we've got complete coverage of the U.S. market close. Got to say, basically, if it impacts financial markets, if it impacts companies, If it's impacting trends and narratives that are out there, we are on it.

39:35We also have a lot of fun doing it. Bloomberg Business Week also brings you the analysis behind the headlines through conversations with our expert guests. And we are doing this all live each weekday. And then we bring you the best analysis in our daily podcast. Search for Bloomberg Business Week on YouTube, Apple, Spotify, or anywhere else you listen. Check it out on your way home from work to catch up on the conversations that you miss during the business day. And on the weekend, check it out for a complete wrap-up of your business week. That's the Bloomberg Businessweek Daily Podcast. I'm Carol Masser.

40:03And I'm Tim Stanovic. Subscribe today wherever you get your podcasts.

40:16This is a story about hand-me-downs. Not that sweater your cousin has grown out of, but a treasured local business that your parents spent a lifetime building up so you can take it A business like the family dry cleaners, Gary Bochner, has run six days a week for 35 years.

40:43It all began in 1961, when Gary's father, Seymour, opened the family's first dry cleaning shop on New York City's Upper East Side. My father bought Joseph Cleaners 1961 on York Avenue and 80th Street. He was obsessed with two things, Joseph Cleaners and the dry cleaning business and the New York football giants. He lived the business, but as one of my friends said, it wasn't work for him. He loved the people, he loved the action, he loved trying to get the product to the people in a quality way, and he just had a great work ethic. Never miss a day of work from 61 to 96. Side by side, the father and son duo opened East Hills Cleaners in 2003, expanding the family's legacy.

41:28We had to sign a new lease in 2001, and rent was going up, cost of doing business was going up, business was still good, and we decided to, okay, we'll sell, and then we decided to look for a store on Long Island, and we worked really hard to build this up. Okay, thank you. After decades in the business, Gary is starting to look at what comes next, which for many mom and pops often means continuing the family business without the family. Succession plan is something that I'm concerned with. I can't keep working, you know, these hours. I try to take some weekends off and some time off. It's a small business as the boss being here.

42:07My family says the brand in a small business is you. Gary Bochner is far from an outlier. According to the U.S. Census Bureau, just over half of U.S. businesses are owned by people 55 and older. That's millions of small businesses nationwide that will soon be looking for someone new to take the reins. The small family-owned businesses are a huge part of our economy. They're actually the backbone of our economy. There are about 5.5 million of them, and they employ a tremendous amount of the workforce in the U.S. Christina Wing is founder of Wingspan Legacy and senior lecturer at the Harvard Business School, specializing in what comes next for America's family businesses.

42:51Is the nature of small family-owned businesses changing in the United States? In years past, it was left to the children and the children wanted to run it. Now the rising gen would rather the family business owners sell their business and they'd rather inherit the cash. And that's going to cause a real issue in the economy because it's going to lead to jobs going away, and it's going to lead to people in communities owning the business that aren't part of the community. Despite the importance of family-owned businesses to the U.S. economy, and despite the imminent retirement of many who built and run them, there's still a striking lack of planning for what comes next.

43:35A recent U.S. bank survey shows that only half of the 1 ,000 small businesses interviewed has a succession plan in place. We talk a lot about succession when it's a big public traded company. Do small family-owned businesses think and talk about succession as well? So the funny thing is, we actually talk about succession about other people, but inside the families, they don't talk about succession. We really need to start talking about succession a lot earlier, and it has nothing to do with the size of the business. If I am an owner of a small business, and I'm getting on in years, and I want to figure out a way out, where do I turn?

44:18Who do I ask for advice? There are advisors, unfortunately, who most owners of a small business ask. They ask a friend, and most friend has done it poorly. We have this problem everywhere in the world where succession and age get mingled. and so you start to feel, I'm old, I need a succession plan, oh, I better sell. But if they would talk to more professionals in the space, I think that they would see they have other options and that's that spectrum of owner-operator to owner-investor. I think there's a lot of people that would love to hold the business because sometimes their children might not want to work in it, but their grandchildren might want to.

45:00And so if you can kind of play it out for a while, it gives you more flexibility. Over the next 25 years, baby boomer and older households are expected to pass down about$100 trillion in wealth. And though we don't know exactly how much will come from family-owned businesses, those holdings make up roughly 18 % of their net worth, pointing to an estimated$18 trillion in business value that could change hands by 2048. But unlike other assets, family businesses can be messy, which makes the next generation less interested in receiving what's being passed down. The era of sort of 2015 to 2018, I felt a little more pressure from founders wanting to work with their children.

45:46I'm seeing less and less, I should say, challenges from the next generation wanting to remain with the business. And really, the business owner, the founder, looking for a solution provider. Jarrett Turner comes from a family business, a roofing company founded and still operated by his 73-year-old father. Like others, Turner didn't want to go into the business himself, but instead started a middle-market private equity firm 11 years ago to help people like his dad when the time came for them to step down. A lot of these businesses, the value in part is the connection to the community. They know the owner.

46:22They've been going to the same shop for a long time. Does the value of the business go down when it does come time for the founder to leave? If the founder were to leave and control a lot of local relationships, I think inherently the business value would go down. Turner's Soundcore gives owners the option to sell while staying involved in running their business for an extended period, preserving, at least for a time, the best of a local enterprise. It provides capital to those who built the businesses and continuity for the communities they serve. We're focused on developing theses in sectors which we deem to be highly fragmented.

47:00At Big Market TAMs, where we can aggregate and buy a number of family, founder, owner-operated businesses in the same sector. We can professionalize, we can implement technology, best practices, procurement programs, and take them to sort of the next level of professionalization, take market share, grow revenue, improve margins, and then typically sell within four to five years to a larger scale buyer. Typically, when you buy a business, is it 100 % of the business? So I think when you're a private equity firm, or maybe you're a family buying someone else's business, one of the challenges is customer relationships with the business owner.

47:41And also, you know, the DNA of that business, the culture is often driven by one or two people. So for us as a philosophy, we look at sellers and we put together a seller retention matrix where we look at a lot of qualitative aspects of their personality and how long have they been with the business, the number of customers that they have, the number of suppliers that they have. But one of the best ways as a buyer to assure that you're going to have interest in that business owner to continue to sort of drive the business forward and not improve their golf score the next day is to have skin in the game.

48:15Do you have much competition in private equity for small family-owned businesses? I would say you would have to look at our average multiple that we pay. If you type in private equity and average purchase price multiple into Google and other search engine, you will typically see 12 to 20-plus times EBITDA. We've averaged it in context at a 5.9 times multiple, and that's across 109 acquisitions. So in terms of our volume and the number of acquisitions that we've done and apply that to the multiple, We're probably one of the lowest of any private equity firm in the United States. I would use that as evidence that we don't have a lot of competition.

48:53The way that we're able to do that is we're buying very small businesses. In a changing economy, dependable cash-generating businesses are gold mines, especially for private equity firms able to buy small and scale fast. We at Soundcore, we focus on recession-resistant businesses. What's your average length of time you hold them? So we've owned businesses for a spread of three to seven years. Our average is five years. So that strikes me as remarkably short in private equity generally right now. We hear a lot, read a lot about private equity generally, the big private equity, having trouble getting out of investments.

49:32Is yours a different approach to private equity? I think it is. I mean, I think there are a few things that you can do wrong in private equity. You can overpay for businesses. You can over-leverage them and put them into a bad capital structure. Or you can pick your favorite child and put too much of your fund and a commingled fund into one deal that doesn't go right. It drags down the rest of the fund. I think by our strategy of not overpaying for businesses but giving business owners a fair price, not chasing to win auction processes, there's a lot more opportunity even in this market to exit our businesses.

50:06For many owners, firms like Turner's present a way out. even if taken in stages. But Wing warns that the rise of large consolidators brings its own consequences. We're seeing immense consolidation in the space, which means a private equity firm might have a mandate to go buy 100 dry cleaners within the southwest or the southeast or wherever. And then the brand and the experience becomes that of the hundred, not of the local. And so it's a change in the community. Well, that may not be an entity the local community likes as much, but it may be a more efficient business, may it not? I think that the roll up of a lot of different personality-based businesses, there are great reasons to do that in certain places.

50:56But I don't think overall that I would make a statement that a financial buyer is a better owner than others unequivocally. But there are cases where they are. And that brings wing to a challenge she sees again and again. Many longtime owners assume selling is their only way to retire. Because they've been owner operators. If we can get some of them to understand, they could become owner investors themselves, meaning they could keep the business, have somebody else run it, pay that person, but still own it. Legacy is everything, you know. This is how I grew up. Quality, responsibility, and personality.

51:40We have great relationships with our customers. We've known them now for generations. Oh, really? We give them a good product, and we like serving the community. For Bauchner, like so many others, it's never just a business. It's the early mornings, the familiar faces, the generations of trust that turn a storefront into a cornerstone of a community. And as the next generation steps in, or steps away, the values at the core of these small businesses remain the foundation for whatever comes next.

52:19That does it for us here at Wall Street Week. I'm David Weston. See you next week for more stories of capitalism.

52:40I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you fascinating conversations with the people who shape markets, investing, and business. CEOs, fund managers, billionaires, Nobel laureates, traders, analysts, economists, everybody that affects what's going on in the market, whether you own stocks, bonds, real estate, commodities, crypto, you really need to hear these conversations. Sometimes it's behaviorists like Dick Thaler or Bob Schiller. Sometimes it's fund managers like Peter Lynch, Bill Miller, Ray Dalio. Sometimes it's authors, Michael Lewis, author of The Big Short, and Moneyball.

53:25Regardless of the conversation, these are the folks that move markets each week. That's the Masters in Business podcast with me, Barry Ritholtz. Listen on Apple, Spotify, or wherever you get your podcasts.