Capital Markets

Investors Sue 13 Private Equity Firms

Bid-rigging is alleged amid a record-pace for LBO deals.
Stephen TaubNovember 15, 2006

Investors have filed a class-action lawsuit alleging that 13 of the largest private equity firms colluded to fix prices of deals, according to several reports. The suit, filed in U.S. District Court in Manhattan, alleges that the investment firms formed “clubs” to bid collectively in buyout deals, according to Reuters. The complaint also claims that the firms exchanged information and submitted bids at agreed upon prices, according to the wire service.

“Investors in the target company are deprived of the full economic value of their holdings and ‘squeezed out’ at artificially low valuations,” the suit says, according to Bloomberg. Meanwhile, the Justice Department has launched an informal investigation into charges that the buyout firms colluded on leveraged buyouts, according to Bloomberg.

The buyout firms include Kohlberg Kravis Roberts; Clayton, Dubilier & Rice; Carlyle Group; Silver Lake Partners; Blackstone Group; Bain Capital LLC; Thomas H. Lee Partners; Texas Pacific Group; Madison Dearborn Partners; Apollo Management LP; Providence Equity Partners; Merrill Lynch & Co. Inc.; and Warburg Pincus LLC., according to reports.

The named plaintiffs include L.A. Murphy, Marvin Sternhell, and Henoch Kaiman, who were investors in dozens of companies, including Univision Communications Inc., HCA Inc., and Harrah’s Entertainment Inc., added Bloomberg. The suit comes amid the biggest boom in leveraged buyouts (LBOs), eclipsing prior active periods such as the late 1990 and late 1980s. So far this year, U.S. private-equity firms have raised $177.89 billion, already topping the record $177.75 billion set in 2000, according to BusinessWeek, citing Dow Jones Private Equity Analyst.

The publications speculate that these assets could top $225 billion by the end of the year. Last year, private equity firms “only” raised $159 billion, according to the magazine. Meanwhile, the size of deals continues to get larger and larger and it’s not uncommon for several of the biggest LBO funds to team up to make an acquisition. Indeed, earlier this year HCA went private in what proved to be the largest buyout ever, breaking the record set by KKR when it purchased RJR Nabisco in 1988.