Private Equity Collusion on Deals

By Nanea, a private equity insider

Last week, the New York Times reported on its successful effort to unseal evidence in a lawsuit alleging that the biggest private equity firms (so called “mega-buyout” shops) colluded to limit competition with one another during the Buyout Boom that preceded the financial crisis.

The story made me think about some of my own, non-business-related experiences with cooperative behavior among private equity rivals. For example, I’ve been offered (and accepted) coast-to-coast rides on the private jets of rivals who were attending the same industry event with me and were headed to the same place next. This practice, by the way, of offering a competitor an empty seat on one’s jet is extremely common in the industry, to the point where it is almost impolite not to extend the offer to peers. Similarly, I remember once being in the office of one of the industry titans (to preserve my own anonymity, I’m going to say that it was one of these guys: Kravis (KKR), Schwarzman (Blackstone), Rubenstein (Carlyle), or Coulter (TPG)). He stepped away from our meeting for a moment to take a call from a competitor. The purpose of the call? Not to collude on a bid, at least as far as I could tell. Rather, it was to discuss the fact that both of them were, by coincidence, pursuing rental of the same vacation house for the same time. The guy I was meeting with had contacted the other guy to say that he would withdraw if the other guy wanted the house.

I offer these stories not to suggest that private equity titans are boy scouts. Rather, I am trying to illustrate that skilled deal makers generally cultivate, in addition to the expected competitive instincts, a degree of cooperative behavior among themselves . The reasons for competition are obvious. The reasons for cooperation, perhaps less so. Most fundamentally, deal-making requires cooperation because people don’t like to make deals with people whom they despise. This reality reinforces a reasonably high level of social graces among private equity people. By contrast, hedge fund titans tend to be much less socially adept, because they buy and sell securities on computer screens, and therefore don’t need to cultivate the ability to be liked. Cooperative behavior is also important in private equity because private equity dealmakers rely on many, many others to succeed. Hedge fund guys are capitalism’s rugged individualists who can, in theory, sit alone in a dark room and make billions using only a Bloomberg terminal and a few other computers. By contrast, private equity people are the “it takes a village…” crowd who need sellers to buy businesses from, bankers to finance them, and portfolio company managements to work for them. They also frequently need capital partners to write checks for parts of the deal when potential buyouts are too big for them to take on by themselves.

It’s this “cooperation with capital partners” part that has gotten the private equity firms into trouble. The New York Times story quotes emails among various private equity firm executives where they appear to be agreeing to not compete with one another in various situations where one or another of the firms was bidding on a potential buyout. If that’s actually what happened, the sellers (public shareholders in many cases) may have lost out on a meaningfully higher purchase price for deals because the prospective buyers were colluding with one another.

A wrinkle that the NYT piece doesn’t highlight, but which was a key part of the behavior in question, is that the very large private equity firms commonly formed consortia (informally referred to as “clubs”) to do many of the biggest deals during the 2003-2007 buyout boom. Were the PE firms buying companies together in order to hold down prices, or was there another reason? The answer is probably, “it depends.” Many of the very large deals that were done in this time frame were too big for any one firm to take on alone. So that was sometimes a clear reason for cooperation unrelated to restraint of trade.

I remember seeing Jim Coulter, CEO of TPG, make a presentation in 2006 on this topic to a large audience. His essential message was that the largest private equity firms, of which TPG is one, have fewer competitors when they bid on deals than the non-mega buyout firms do, and therefore obtain more favorable pricing than smaller deals offered to other firms. He had extensive transaction data from investment banks purporting to support his claim, which he displayed in PowerPoint slides. Coulter offered a straightforward reason why big deals have relatively few bidders: only a handful of firms have the capital to bid on them (basically TPG, Bain Capital, Blackstone, Apollo, Carlyle, and KKR). And the very largest deals of all, he pointed out, require consortia that even further reduces competition.

The evidence unearthed in legal proceedings suggests that the largest private equity firms sought, in some cases, to even further dampen the competition for large deals below the level Coulter claimed. They pushed their cooperative impulses too far, probably all the while congratulating themselves about how civilized it felt—kind of like withdrawing when the other guy wants the vacation house.

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  1. Not the In-Crowd

    Perhaps ‘withdraw bid for the vacation house’ is code for something else? Seems a simple word change would give it an entirely different meaning.

    1. Lambert Strether

      Could be both, of course, depending on the context. Probably is, in fact. Better cover!

      * * *

      On communism of the rich: “What’s ours is ours and what’s theirs is negotiable.”

  2. dLambert Strether

    “offered (and accepted) coast-to-coast rides on the private jets”

    Out of curiosity, what’s the protocol for border crossing in a private jet? Something like: “Yessir, Mr. Warbacks. Go right on through!”?

    1. Nanea

      Indeed, my experience is that international border crossing in a private jet is an amazingly genteel affair. The plane lands, a U.S. Customs agent trots out to meet it at a designated spot, and the pilot collects the passengers’ passports and gives them to the Customs agent. The agent smiles at everyone, asks a cursory question about the purpose of the trip, and you are on your way. In my (fairly limited) experience, there is no opening of the plane’s cargo hold, no inspection of luggage. You could be bringing in suitcases of cash, drugs, or weapons and feel pretty secure that you’re not going to get caught.

      The whole experience is, in a sense, an extension of the phenomenon one experiences flying first class commercially. In coach, the flight attendants bark and scowl at the passengers. In first class (particularly on super-profitable long-haul flights) it’s all sweetness and light from the attendants–smiles and respect. Of course, that’s private enterprise, not the government, but the psychology driving the deference is the same.

  3. EarlofManheim

    Mimicking the collaborative behavior of animals as per the
    Price Equation. The difference here is that the relative
    relatedness is a function of the shared corporate interests
    (i.e. cross investment by individuals and institutions and
    historic shared experience working together at different firms). The large PE firms treat each other not as direct competitors but as animals in the same species, so to speak.
    All of which is driven by sub-conscious / unconscious psychology.

    How depressingly predictable…

  4. SomethingSomethingComplete

    Exceptionally difficult to buy something from an anonymous source called “Nanea, private equity insider”, who has lots of anecdotal evidence to share but sells it as .

    Why would anyone use this as reliable information in good faith, unless the goal of course was to find reinforcement for something you already happen to believe?

    Just recently NC posted the PE fund collusion story and it was great. There were real documents, there was actual evidence.

    But not a week can pass without the blog reverting to the anecdotes or opinions of people who we can’t even vet for reliability.

    And just to make it clear- as a lowly entry-level worker at a financial institution, I too went to a few big meetings and met some high-ranking people. But out of that limited, biased sample of experiences I can spin anecdotes that will make you think I was a high-ranking “insider”. How can that possibly be considered a reliable source of information on such a complicated subject?

    NC started off as a source of information.

    It has turned into a business that sells whatever its regular visitors are buying.

    Too bad.

    1. skippy

      “But not a week can pass without the blog reverting to the anecdotes or opinions of people who we can’t even vet for reliability.” – SomethingSomethingComplete

      Skip here… Such as yourself? I have yet see you offer any evidence, in any form, out side your attempts to direct traffic. That is a tell in its self IMO.

      Skippy… low entry level employee… eh. Give a few decades, then you’ll have the life experience too pic through the BS and evaluate. Hint… its call intuition, not common sense. Alternatively, just start your own blog.

  5. Nanea

    I would like to respond to SomethingSomethingComplete.

    The purpose of this post was to try to offer some insight into the sociology of private equity deal making. I don’t think I made any factual claims of significance. Yes, I did say that I was once in the office of a PE Titan when he was negotiating a vacation house rental. You seem to think that I offered a negative slant. Do you think this anecdote reflects negatively on the individual described? I don’t think it does.

    There are clearly limits to the anonymous commentary format, which I freely acknowledge. You can’t judge my writing based on information about who I am–you can only judge it based on what I say. I don’t think I have, nor do I intend to make factual or accusatory statements that readers can’t verify for themselves. Also, I think that one should recognize that anonymous blogging by individuals who have been vetted by Yves can make a significant contribution to knowledge by bringing people into the dialogue who have special knowledge and expertise as insiders, but whose insider position prevents them from being able to speak openly.

    Finally, you suggest that maybe I am a low level PE industry participant. First, you might wonder why Yves would give the microphone to someone without much stature or experience. Second, I think that you will see from my writings that I seem to have expertise that only senior people in the business generally have (e.g., knowledge of both deal-making and fund terms negotiations with LPs). Findally, I let my writing speak for itself. Even if I lived in my parents’ basement, what would it matter if I had detailed insight into the PE business?

    1. SomethingSomethingComplete

      Let’s go in reverse.

      First, I didn’t suggest that you are a low-level PE participant. My paragraph on that meant to illustrate a point- that without actual data, hard evidence, and/or total openness about who the speaker is, there is no way to know whether the experiences he/she describes are representative of the industry’s totality.

      If after attending two high-end meetings I came here and said “it is a generally accepted practice for investment bankers to share private information about clients with other investment bankers; trust me- I have seen that happen in all the meetings I’ve been to” it sounds nice and authoritative but you have no way of knowing what sampling biases lurk beneath or how limited my sample is.

      The point is not that you only attended 2 meetings but that I have no way of knowing how many you attended. Or whether the people you interacted with are representative of the industry as a whole. Or whether your particular skills put you in a job which in turn gave you a full picture of what the industry is like.

      And how can I tell what you chose to say and what you chose to leave out?

      Are the examples you cite here really an unbiased cross-section of your experiences?

      What you chose to share was not influenced by Yves or by the fact that you were writing a blog of NC?

      Maybe. But maybe not. There is just no telling.

      It’s like writing a science paper and in the “Data” section saying- “I have all this data. But I dropped some data points. I won’t tell you which ones. Also, I won’t tell you where it came from or what the sample size is… But here is the mean and standard deviation”.

      Second, this means that we can’t actually judge some of the things you say. That’s my point. You say that we can’t make judgments based on who you are, only on what you say.

      I claim that we can’t judge what you say without knowing who you are for all of the above reasons.

      And I personally love insiders. But I like them all the more when they leak actual documents, photos, videos, hard evidence (although even then I worry about selection biases- that insiders choose to leak juicy stuff out of context).

      I don’t honestly see the value of an insider talking about his experiences behind a veil of anonymity for the purposes of forming actual opinions of a complicated subject.

      And that’s the third point.

      Nanea, this isn’t a subject on which people should be forming their opinions on the basis of an anonymous insider’s anecdotes (no offense, but isn’t that what they are? are your experiences as you chose to share them here really a representative sample of what goes on in the PE industry?).

      This post comes in the midst of serious social dislocations. People are re-anchoring their beliefs as we speak. And where they re-anchor will matter for a long time to come.

      Is it fair to induce them to form their opinions based partly on the experiences you choose to share from the experiences you happened to have?

      That’s not an indictment of you by the way. I want to note that in closing.

      It’s an indictment of NC.

      In the past, NC leaned heavily on supplying us with data, documents, hard evidence on serious subjects. It was part Wikileaks, part OpenSecrets.

      These days it leans more on supplying us with anecdotes, information that is at best hard to verify and really harsh opinions.

      Just watch the Galbraith video on the wealthy posted a few pages back as an additional example.

      How can that possibly be a responsible way to approach such a serious topic?

      Anyway, I hope you understand that I have nothing personal against you or insiders.

      I just hope it’s not unreasonable to be demanding about what is written here. Because I know people have chosen to trust Yves, NC, and by extension- you. At least to an extent.

      That’s real responsibility for the writers. Even if it’s just a blog.

      1. SomethingSomethingComplete

        PS: Last thing, I promise.

        I think I may be being unreasonable here. After all, technically speaking it is a blog. It is (or used to be) a place for the owner to share interesting things as they see fit, not to do econometric research or post only dry data and documents.

        I guess the reason I am so distrait is that I myself no longer see NC that way. I think this is a big source of information that many people do rely on to form their opinions and so I get caught up on the things I talked about in my main reply.

        Maybe that’s not reasonable. I donno.

        1. Nanea

          I think we are talking past one another. My posting was intended as social commentary–insight into cultural norms of the business as I perceive them. This type of commentary is inherently subjective and based on personal experience. I thought that I was pretty clear about the personal nature of the experience I was writing about. Your criticism could be offered of any social commentary. Alexis de Tocqueville–do we know whom he talked to? How about Bob Woodward, for that matter?

          Also, to give you some context regarding the depth of my experience in the PE industry, I said that the guy I met with was Rubenstein (Carlyle), Schwarzman (Blackstone), Kravis (KKR), or Coulter (TPG). Though I have never had a one-on-one meeting with Kravis in his office, I have had one-on-one meetings with the rest in their offices. Also, I have met one-on-one with George Roberts (Kravis’ partner–the “R” in KKR) in his office. I can’t offer you any proof, except that Yves invited me to contribute to blog precisely because of my experience.

          1. Nanea

            You seem to be a reasonable guy, which is why I am continuing to engage this. There seems to be an implication in what you write that I was harshly criticizing the PE industry, playing to the NC crowd so to speak. I actually thought that the post was quite mild. It’s intended message was basically, “If the collusion allegations are true, the wrong-doing may be partially result of an excess of cooperative impulses among PE deal people.” I didn’t say that the alleged collusion came from criminal or psychopathic impulses, I said that it may have come from cooperative impulses. I’m frankly a bit surprised that this post didn’t provoke someone to comment that I was acting as an apologist for the PE industry.

            I just don’t see this post at being the equivalent of throwing red meat to the NC lions.

          2. SomethingSomethingComplete

            You’re right.

            It is your commentary, you obviously have the right to offer it here, and you didn’t claim that it was conclusive evidence or that we can generalize from it. And it was interesting, undoubtedly.

            The Tocqueville example was also quite good.

            Anyway, I guess what I would say after this exchange is that I hope the visitors read your post with the healthy amount of skepticism that we should approach any one person’s account of any complicated subject with.

            Again, this is not because I distrust you or Yves or anyone that posts here inherently, but only because I feel that skepticism is the correct approach to anything related to complex and important subjects (and I worry that people may have a tendency to lower their skeptical shields when they hear something that generally agrees with their existing opinions).

            I do hope that whoever reads this can learn something from what you said AND remember that the story of this industry is quite complex, meaning that it still merits a lot of further discussion and analysis.

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