Private equity firms usually have money on the mind. They aim to make money for their investors by buying companies and selling them at a profit, while pocketing management and performance fees for themselves. In the competitive world of Wall Street, performance is critical – but for some of the biggest private equity funds in the world, competition may have actually meant cooperation.
At least that’s what a suit filed in U.S. District Court of Massachusetts in December 2007 alleged ((Greg Roumeliotis, Private Equity Firms Pay $325 Million in U.S. Collusion Settlement, Reuters (Aug. 7, 2014), http://www.reuters.com/article/2014/08/07/us-lbocollusion-settlement-idUSKBN0G71QT20140807.)). The suit, a class action filed on behalf of shareholders of twenty-seven portfolio companies acquired by several leading private equity firms, originally alleged that the private equity firms illegally colluded on potential transactions – often agreeing to buy companies together in so-called “club deals” and by trading quid-pro-quo favors ((Roumeliotis, supra.)). A federal judge dismissed those charges because they were “unnecessarily complex” and were not “supported by the evidence,” but allowed other charges to stand: that several firms tacitly agreed to not outbid each other in private equity auctions after deals were announced, which may have had detrimental effects on shareholders in the form of depressed sale prices. ((Dan Primack, Judge Rules in Private Equity Conspiracy Case, Fortune, http://fortune.com/2013/03/13/judge-rules-in-private-equity-conspiracy-case/.)). Ultimately, the suit covered nine buyouts and seven private equity firms, including industry heavyweights Blackstone, KKR, Bain Capital, TPG and the Carlyle Group. ((Roumeliotis, supra.)), ((Reuters, Carlyle to Pay $115 mln to End LBO Collusion Lawsuit, Sept. 8, 2014, http://www.reuters.com/article/2014/09/08/lbocollusion-settlement-idUSL1N0R41T820140908.)).
The suit, Dahl v. Bain Capital, relied heavily on e-mail messages exchanged between the firms, including those between high-level officials: Tony James, President of Blackstone, is quoted in an e-mail to KKR co-founder George Roberts saying “We would much rather work with you guys than against you. Together we can be unstoppable but in opposition we can cost each other a lot of money.” ((Mike Spector, Buyout Firms Settle Suit Alleging Collusion Over Deals, Wall St. J. Markets, Aug. 7, 2014, http://online.wsj.com/articles/blackstone-kkr-tpg-to-pay-combined-325-million-to-settle-club-deals-lawsuit-1407426128.)). Jonathan Coslet of TPG is quoted in an e-mail saying: “All we can do is do [u]nto others as we want them to do unto us. It will pay off in the long run even though it feels bad in the short run.” ((Yves Smith, Private Equity Kingpins KKR, Blackstone, TPG Settle Collusion Lawsuit, Naked Capitalism, Aug. 8, 2014, http://www.nakedcapitalism.com/2014/08/private-equity-kingpins-kkr-blackstone-tpg-settle-collusion-lawsuit-325-million-detroit-police-fireman-et-al.html.)).
Despite the e-mail evidence, the firms maintained no wrongdoing on their part and tried unsuccessfully to have the suit thrown out ten times. ((Spector, supra.)); ((Private Equity Firms Facing Huge Price to Settle Suit: Report, CNBC NetNet, Dec. 26, 2013, http://www.cnbc.com/id/101297043#.)). Yet, starting with Bain Capital, the firms began to make settlement agreements in 2014. Bain Capital and Goldman Sachs agreed to pay $54 million and $67 million respectively. ((Jeffrey Goldfarb, Discord Among Private Eqiuty Firms is Their Best Defense in Lawsuit, New York Times Dealbook, Aug. 7, 2014, http://dealbook.nytimes.com/2014/08/07/discord-among-private-equity-firms-is-their-best-defense-in-lawsuit/.)). Silver Lake Capital settled for $29.5 million. KKR, Blackstone, and TPG teamed up to contribute $325 million collectively. ((William Alden, Carlyle Deal Concludes a Lawsuit Against Private Equity, New York Times Dealbook, Sept. 8, 2014, http://dealbook.nytimes.com/2014/09/08/carlyle-deal-concludes-a-lawsuit-against-private-equity/?_php=true&_type=blogs&smid=tw-dealbook&seid=auto&_r=0.)). The lone holdout was the Carlyle Group, who also disputed the claims: “These claims are without merit and we will continue to vigorously contest the allegations,” said a spokesman for the firm. ((Alden, supra.)). But on September 5, Carlyle became the final defendant in the suit to settle for a sum of $115 million in advance of a November 14 trial date. ((Alden, supra.)); ((Private Equity Firms, supra.)).
The settlements raise larger questions about private equity activity going forward. The firms paid out large sums, to be sure, but they are miniscule in comparison to vast deal prices private equity firms are accustomed to paying, like the $32.1 billion dollar buyout of hospital chain HCA, which was one of the deals investigated in the suit. ((Alden, supra.)). Will the financial penalties incurred and the specter of future lawsuits curtail any similar alleged behavior in the future? Was the alleged activity an attempt to stay profitable during the financial crisis, now relegated as a relic or will it be the norm for the future? These private equity firms didn’t admit wrongdoing, and they only had to pay a small sum. But if following the money isn’t indicative, you can always follow the e-mails.