David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.
"The lady doth protest too much, methinks." So wrote William Shakespeare, cautioning us to question those who proclaim their views too stridently. These days, Shakespeare's warning applies to leading private equity firms including Bain Capital, KKR, and Blackstone.
The private equity industry has been widely criticized for destroying jobs and for tax schemes that camouflage ordinary income as long-term capital gains. The industry claims in its defense that it does the Lord's work of capitalism: rooting out inefficiency, firing incompetent management, shedding unproductive workers, and ensuring that assets are put to their best use. Private equity leaders bring the gale of Schumpeter's "creative destruction." They claim to help us all by spurring us to do our best in rigorous competition.
However, as much as private equity execs praise competition, they hate it when it affects their own businesses. In documents revealed this week (pursuant to a motion by the New York Times), 11 leading private equity firms were accused of bid-rigging and collusion to limit competing for new opportunities. The accused firms include Bain Capital, KKR, Blackstone, and Goldman Sachs, among others.
According to the newly unsealed court documents, leading firms conspired to prevent fair and open competition. From 2003 to 2007, the firms made secret arrangements with each other. Under these arrangements, all but one would "stand down" in bidding. The side deals allowed one bidder to win the business on much more favorable terms than they would get in a truly competitive market. The winning bidder would then bring in other firms, including those that originally refrained from bidding, and give them a share of the action (or a share in a future deal). This practice is worse than unsavory: Bid-rigging has been illegal since 1890 under the Sherman Antitrust Act.
The bid-rigging is apparently well-documented in E-mails exchanged between participants at the firms involved. Although details have been redacted, the overall pattern is clear. Observers say the charges have merit and have survived at least 10 attempts at dismissal to date. The defendants have offered at least $200 million to the plaintiffs to settle the charges without trial. This offer to settle was reportedly turned down, suggesting the plaintiffs have a lot of confidence their case.
Since Bain Capital is involved in these allegations, this case may influence the 2012 presidential election campaign. Romney's supporters will point out that these deals took place well after Romney left the firm. Romney's detractors will point out that Romney benefited financially from some of these allegedly crooked deals, even after he stepped down as Bain's CEO. His detractors will attempt to link Bain's business practices to Romney's trustworthiness and character.
It's easy to understand why the private equity industry has been tempted to collude. The early years of private equity were highly profitable, but high profits always attract new entrants, and new money flooded the industry. With more money in the industry than good deals to invest in, margins fell. Firms succumbed to the pressure to overbid. Many leveraged companies collapsed under too much debt, leading to the operating entities being shut down or further restructured.
Private equity firms should live by the logic of the no-holds-barred competition that they espouse. They deserve to win in competitive bidding if they can do their work better, faster, smarter, and/or cheaper. If they can't win without rigging bids to eliminate competition, they ought to find another line of work. Deals that can't pencil out without cheating should simply not get done. It's ironic that those who most praise the fierce and bracing logic of competition are sometimes least willing to face it themselves.