Issues on collaboration between private equity funds

Implications: The DoJ probe highlights the facts that antitrust issues can arise when competing (or potentially competing) bidders coordinate their behaviour.

As the practice of joint bids is common, a large number of private equity funds - and ultimately investors - could be affected.

However, it appears that there are legitimate reasons for cooperation between competing (or potentially competing) bidders provided that the antitrust rules are respected.

Analysis: The allegations stem from a widespread prcatice of different private equity houses coming together to bid for potential targets, and the DoJ appears concerned about whether such action is designed to reduce competition for a target business and so ensure that the price paid for the target business is lower than would otherwise be the case.

If it can be proved that private equity houses have combined forces in order to dampen competition between them then the consequences may well be severe - with fines being imposed and shareholders of businesses acquired "on the cheap" able to sue the private equity houses for damages.  Individuals could also be subjected to criminal proceedings.

However, there are many sensible and legitimate reasons why private equity houses would collaborate when bidding for a target. For example, the target may be too expensive for one private equity house to fund itself, so forming a consortium enables them to participate and can actually increase competition for the assets up for grabs. Also, even if a private equity investor could afford the target itself it may not want to take such a big financial risk and so a consortium enables it to share the risks and so again actually enhances competition.

As in many antitrust investigations, the outcome will depend on the evidence the regulators uncover. Perhaps one or two injudicious comments about the benefits of a consortium bid exist but that does not necessarily mean the private equity houses have operated illegally. On the other hand paying another bidder to stay out of the process could be seen as problematic although a sensible business decision.  Whilst the outcome will depend heavily on the facts, it appears that sensible defence arguments may well exist.