Mitt Romney’s presidential run has had the ancillary effect of increasing scrutiny of the private equity industry. After all, Romney founded the private equity outfit Bain Capital, and has built his case for the presidency in part on his record at Bain, which he claims reflects an ability to rehabilitate floundering enterprises and create jobs.
Unfortunately for the private equity industry — which traditionally prizes secrecy — Romney’s candidacy has gotten the U.S. press core digging for any juicy bits of news on private equity it can scrounge up. And it may have unearthed a live one: According to heavily-redacted court documents unearthed by The New York Times yesterday, former shareholders of the giant hospital-management firm HCA have formally accused Bain Capital and several other private equity firms of price fixing.
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According to the Times report, the documents allege that Bain’s success over the past decade was due in part to agreements with other private equity companies to artificially keep the prices of firms they were bidding on low.
Private equity firms generally use a combination of their own capital and borrowed money to take public companies private. After a period of time, the PE firms aim to sell those companies publically to investors at a higher price. So buying in at artificially low prices directly beefs up profits. Writes The New York Times:
“The case centers on the “club deals” that became popular during the leveraged buyout boom of 2003 to 2007, a period that the complaint calls the “Conspiratorial Era.” It claims there was a complex web of collusive arrangements involving 11 of the world’s largest buyout firms on 19 deals.
In the buyout of HCA, for instance, Bain, K.K.R. and Merrill Lynch bought the company in 2006 for $32.1 billion, then a record. Documents produced by the defendants and filed this week showed e-mails and meetings indicating that other equity firms had agreed to “stand down” and avoid bidding with the understanding that they would be brought into future deals.”
The Times report goes on to describe one private equity firm, TPG Capital, which — according to emails cited in the complaint — decided against bidding on HCA because “our relationship with them, KKR, and Bain was more important.”
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It’s impossible to tell from the New York Times report, or from the nine pages of the complaint which the Times linked to, how substantiated these claims are. Some of it — namely the TPG capital quote above — seems pretty damning. But most of the email communication in the report is redacted. According to the Times, lawyers for the firms and an anonymous executive from one of the defendant companies say that the plaintiffs are selectively using the emails to make normal business practices appear to be collusive.
Dan Primack, a senior editor at Fortune who covers the private equity industry, is skeptical of the allegations. He argued in his newsletter yesterday that, “It’s hard to believe that PE firms –- a competitive bunch -– would conspire to not compete on certain ‘Golden Age’ deals, while fighting like cats and dogs on others.”
But if the firms were colluding, why is it so improbable that they selectively chose which deals they were going to collude on? And, according to Josh Kosman, another veteran private equity reporter in the New York Post, this case has been going on for five years, and has survived “at least ten” attempts by the accused firms to dismiss the case. If the suit was really without merit would it have survived this long?
Unfortunately, according to Kosman’s sources, we’ll have to wait until next year for the case to make it to trial, so new details are unlikely to emerge anytime soon. This is certainly good news for the Romney campaign, which would be harmed by any lengthy public airing of allegations against his former firm. It should be stressed that all of the offenses alleged in this suit occured between 2003-2007, at least two years after Romney cut ties with Bain. That being said, if these allegations are true, it would certainly say a lot about the culture of his firm, and the industry itself, just a few years after he departed as one of its most prominent figures.
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