Why Private Equity 'Collusion' Is Not Always a Danger

Morten Sorensen, a finance professor at Columbia Business School, analyzes the implications of a class-action lawsuit, alleging that Blackstone, Kohlberg Kravis Roberts (KKR), and Bain Capital Partners allegedly colluded to lower the prices of takeover targets--and what it all means for the private equity industry.

(November 29, 2012) — Last month, accusations began to swirl when an unsealed lawsuit pointed to private equity ‘collusion’ at Blackstone, Kohlberg Kravis Roberts (KKR), and Bain Capital Partners.

A group of shareholders, including Detroit’s police and fire pension fund, alleged that a group of private equity giant executives colluded as multibillion dollar deals were at stake, court documents showed. The documents were part of an antitrust civil lawsuit brought against 11 of the world’s largest private equity firms.

But some, including finance professor Morten Sorensen at the Columbia Business School, assert that collusion is not always a bad thing. There are “perfectly reasonable reasons” why large private equity firms will band together for certain transactions, he told aiCIO in a recent interview. “One reason is that private equity investors need enough capital to actually purchase companies, so it’s conceivable that they band together in a group to be able to buy companies of the magnitude we’re talking about–mega buyouts,” he said.

There are also potentially illegal reasons for such deals, Sorensen explained. “The illegitimate reasons of banding together may be the ability to restrict competition. If large investors are the buyers of certain companies and they band together and agree not to compete against each other, they may be able to acquire companies for a lower price than the companies would otherwise sell,” Sorensen said. “Obviously that would hurt the selling shareholders, benefiting the large private equity investors.”

In one email revealed in a court filing, Blackstone Group President Tony James said to colleagues: “[KKR’s] Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours.”

In an email to KKR co-founder George Roberts, in reference to a Freescale Semiconductor Ltd. (FSL) buyout, James wrote: “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.” According to the complaint, Roberts replied, “Agreed.”

The email by James was allegedly sent after KKR decided to step down in the $17.6 billion bidding for Freescale, a semiconductor company. Blackstone eventually won the bid.

The big questions that arise from the KKR/Blackstone/Bain lawsuit: What is the potential of creating a monopoly where certain large private equity firms are the only players, thus restricting competition? During the alleged collusion among the private equity players in question, were other players–with sufficient capital–restricted from the market? “But keep in mind, there are a lot of private equity firms out there with sufficient capital,” Sorensen noted.

According to this Columbia Business School professor, those are the questions that must be answered before guilt can be placed. “But I think it’s too soon to cast judgment. There are too many unknowns at this point to make conclusions,” Sorensen warned. In other words, he said, more time is needed to get all the facts to judge whether the accusations against the group of private equity firms reflected a healthy dose of market competition or something more dangerous than that.

Related article: Unsealed Lawsuit Claims Private Equity ‘Collusion’ at Blackstone, KKR, Bain Capital

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Paula Vasan
Managing Editor, aiCIO
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