If you’re Blackstone or KKR, are you on balance pleased or not pleased that Bain Capital’s favorite son is running for president? On the one hand, millions more people now think that they know what “private equity” is – and that they don’t like it – than did a year ago, and that loosely coagulated hostility has led to attempts to ban carried interest and dividend recaps and management fee conversions and the Cayman Islands. On the other hand, when a lawsuit accuses the entire private equity industry of antitrust violations and rampant corruption, now you get headlines like “Equity Firms Like Bain Are Depicted as Colluding,” and so I guess KKR employees can tell the folks back home “we are not an equity firm like Bain.” If Bain is a metonymy for Everything Bad in your industry, you can’t help but look good by comparison. Goldman Sachs once played this role for another industry, or still does, but at least Goldman is genuinely evil;1 boring Bostonian Bain is a weird choice to be the poster boy for badness. Did you know that Cerberus – an “equity firm like Bain” – is named after an actual hell hound?2
Anyway! Today’s unflattering depiction of Bain & ilk comes from a long-running class action lawsuit accusing those firms of price-fixing on a series of club LBOs in the go-go five-years-agos; the theory is that every private equity firm was in a conspiracy not to bid up each other’s deals, and to split the profits. The court recently released a heavily redacted complaint in that case that claims to draw on PE firms’ internal emails basically saying “let’s collude to drive down prices on all these deals.”
Presumably the redacted bits all say “let’s do lots of crimes!” but the unredacted bits tell a … pretty unsurprising story. Private equity firms wanted to buy companies cheap. They did so in part by not getting into tooth-and-nail bidding wars over any individual target, either by just not bidding for the target or by trying to club up with other bidders to split the deal. When this worked and PE Firm A got a deal cheap because PE Firm B passed on it, Firm A was like “yaaaay” and Firm B was like “you totally owe us, man,” which I feel like is in exact equipoise between “evidence of criminal antitrust collusion” and “just a bluffy/jokey thing you say when your competitor lands a deal.”
I am not an antitrust lawyer, but the complaint reads less like criminal price-fixing and more like regular old sharp negotiating. The basic dynamic in any auction is of course that the seller wants a bunch of bidders who are desperate to win, and that each bidder wants to minimize competition even at the cost of cutting in another firm on its sweet sweet deal – because getting 1/3rd of a sweet sweet deal, in an environment where there’ll always be another target, is much better than getting all of a disaster.
So you negotiate. The PE bidder negotiates for exclusivity with the target, or failing that for the right to club up with other potential buyers and/or lock up exclusive financing sources to deter other bidders. The seller, if it’s smart, shops broadly and demands confidentiality agreements that forbid clubbing and financing exclusivity. You fight over it and ultimately make a judgment about your negotiating position and what’s best for shareholders. But you don’t expect the PE firms to be nice about it. From the complaint, on PanAmSat:
KKR “won” the auction on April 20, 2004 as sole sponsor, and although the deal did not close for another four months, no other competing bids were ever made. … But less than a month later, on May 17, 2004, KKR cut the “losing” bidders, Carlyle and Providence, into the deal, allowing those firms to each invest $185 million in PanAmSat. … KKR’s co-founder George Roberts testified that KKR always intended to bring other private equity partners into the PanAmSat deal, but never told [PanAmSat's sell-side bankers] CSFB of his intention.
Why would he? That’s not criminal conspiracy; it’s just being a dick. His job is to be a dick, to extract maximum value for his investors. CSFB’s job is to stop him being a dick, to extract maximum value for PanAmSat’s shareholders. In the deals chosen by these plaintiffs to sue over, the KKRs of the world did a better job than the CSFBs.
Of course the plaintiffs have a perfectly plausible theory for that, which is: private equity firms are huge clients of the banks, being as they are repeat players in M&A and financing markets and let’s say not usually cost-conscious down to the penny, so the banks tend not to negotiate against them as sharply as they otherwise would. Maybe! But … where have we heard about sell-side investment banks with conflicts of interest? Here:
In February Goldman Sachs, El Paso and the El Paso CEO took a giant tongue-lashing from Delaware Chancellor Leo Strine about alleged conflicts of interest of Goldman and the El Paso CEO. Strine “reluctantly” declined to enjoin the deal [in which EP was bought out by partially-GS-owned Kinder Morgan] and basically told the parties to have at it in a damages action. This [$110mm] settlement resulted from that litigation.
See, when your company’s board agrees to be bought out by a private equity firm, and you think the price is too low, you get several chances to fix that. Chance one: vote no on the deal! Chance two: sue over conflicts of interest of your bankers and management, over a bad sales process, whatever, and try to get a cash settlement. Chance three is I guess file an antitrust suit years later about all of those buyouts.
Except maybe not. This was my favorite part of the complaint (paragraphs 579 etc.):
In a number of the club LBOs identified herein, settlements were reached in unrelated, earlier-filed state court breach of fiduciary duty actions, in which plaintiffs primarily alleged that the directors and officers of the target companies breached their fiduciary duties to the company and its shareholders by agreeing to have the company engage in a going-private transaction. …
The cases were resolved through settlement and each settlement contained releases. The releases were drafted in vague fashion, but antitrust claims and claims sounding in antitrust were absent from the release language. … The settlements purported to release the directors, officers and the private equity firms involved in the specific deals from all claims that were or could have been brought.
Ha! I am no class-action mechanic, but I’m pretty sure this says “all of our purported clients who are now suing these private equity firms over sharp dealing and conflicts of interest in these deals, previously sued these private equity firms over sharp dealing and conflicts of interest in these deals, and ultimately settled those cases by releasing these private equity firms from ‘all claims that were or could have been brought’ about those deals.”3 Obviously these lawyers want to get around that little problem, and maybe they can, but I’m not so sure they should. Sure, I could believe that private equity firms colluded to drive down prices, and that they were able to fool or co-opt bankers, boards, managements, and shareholders. But could they get their misbehavior past the watchful eyes of plaintiffs’ lawyers? That’s hard to imagine.
2. From an actual myth!
3. Pour about a million grains of salt on words like “clients” and “sued,” but that’s how class actions work. The members of this class were – mostly, at least – members of the deal-specific classes, did not opt out of the settlement, and so are bound by the releases. I think. Not a class-action, antitrust, or any other useful kind of lawyer.