Private equity discord is best collusion defense

August 7, 2014

By Jeffrey Goldfarb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Even when it might help them, private equity firms can’t seem to cooperate. Blackstone Group, KKR and TPG are now willing to pay a combined $325 million to resolve allegations that they colluded to limit prices on deals. Three other firms previously settled for less. Carlyle Group is still holding out. Legally speaking, there’s safety in numbers. Yet the buyout shops can’t even agree on how to resolve the case.

Despite some unhelpful emails and other evidence uncovered by the suing shareholders of private equity takeover targets, the defendants seemed like pretty bad candidates for conspirators. The lawsuit gave attention to some mega-debacles, including the $43 billion acquisition of TXU, which is now the bankrupt Energy Future Holdings. It is hard to see how shareholders that sold to KKR, TPG and Goldman Sachs seven years ago might have been short-changed.

While excessive fraternizing during company auctions would be foolish – and potentially illegal – groupthink in court makes more sense. There’s safety, and greater clout, in numbers when negotiating with aggrieved investors. That hasn’t happened, though. In June, Bain Capital agreed to pay $54 million and Goldman $67 million. In July, Silver Lake proffered about $30 million. After claiming to produce 5.5 million pages of documents and having 14 executives deposed, Blackstone, KKR and TPG are tendering considerably more. None admit wrongdoing.

As the sole defendant remaining, Carlyle is tempting fate. If it leaves matters up to a Boston jury, assuming a judge allows the plaintiffs to proceed collectively, the firm led by David Rubenstein could face hefty penalties because damages in such cases can be tripled. Even merely by delaying, Carlyle could find that its settlement tab rises.

That the seven firms couldn’t get themselves on the same page to make the case go away hints at how hard it is for different groups with their own opinions and separate legal advisers to reach accord. The friction itself casts doubt on whether buyout barons could have concurred on deal valuations. Accusing them of being in cahoots just gives a bad name to cabals everywhere.

The amounts paid by Goldman Sachs and Bain Capital have been corrected in paragraph three.

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