A witch hunt?

Has the witch hunt begun or is there really something sinister waiting to be uncovered? This is the question on everyone’s lips as the Department of Justice in the US begins its probe regarding potentially anti-competitive behaviour by some of the top global funds.

KKR and Silver Lake are reported to be among those already to have been sent letters inquiring about certain work practices. It appears that the DoJ suspects certain buyout groups may have colluded in auctions to keep prices down. If this is the case, surely it will not be long before there are similar suggestions in Europe.

Back in the summer, there was talk about setting up an international association representing the private equity industry. KKR was mooted as already having signed up for preliminary discussions. In light of recent allegations an international association could seem somewhat sinister. But more likely it has just come too late.

There have been calls for more transparency in the private equity industry for a while now. Bigger funds acquiring larger assets and employing an increasingly expanding percentage of the global workforce are beginning to put governments worldwide on edge. This latest move by the DoJ could merely be a warning shot. Nothing has actually come of this trade association – as yet it has remained merely talk – maybe it is time to get a move on.

For example, at a recent meeting of revenue officials in Seoul, tax authorities from around the world expressed their concern about the growth of private equity, claiming that the mass shift in private ownership would undermine efforts to persuade large businesses to be open about their tax affairs. The officials were concerned that private equity firms were less likely to be transparent about their tax affairs than listed companies

“I think it is part of a broader set of circumstances confronting private equity; it is such an important part of M&A nowadays in Western economies and the authorities are beginning to look far more closely at how it works,” says Chris Hale, a partner at law firm Travers Smith.

“But many people do not understand how it works, which creates a force of suspicion out there that the industry has to confront,” he adds. “But private equity does not yet know how to promote itself, the way it operates is complicated. How funds are structured is complicated – how do you explain it? It needs to get better at this.”

“There is nothing wrong with club deals as I see them,” says Hale. “I have worked on plenty of European club deals and there has never been any suggestion of anti-competitive behaviour with the club group coming in late on and taking out the competition by reducing the bidding price.

“The club starts at the beginning or changes for good reason later on when one member is unwilling to go with a higher price and they have to look for someone to replace them,” he argues.

“In the case of the recent allegations by the US DoJ, there may be suspicions about one particular transaction, but I think it is part of something broader. They want to get under the skin of private equity and force them into being something more transparent.”