Private Equity Attracts Public Scrutiny

The latest wrinkle inspiring calls for increased regulation are so-called club deals.
Joseph McCaffertyMarch 29, 2007

As private equity gets hotter, it continues to attract heat. The latest wrinkle inspiring calls for increased regulation are so-called club deals, in which PE firms team up to bid for large companies.

Last fall, the Department of Justice sent letters to at least five high-profile private-equity firms, including Kohlberg Kravis Roberts, Merrill Lynch, and Silver Lake Partners, seeking information about such practices. The DoJ declined to comment on the informal investigation, but the agency is likely looking into whether the group deals employ bid-rigging or other anticompetitive practices. Clear Channel, HCA, and Kinder Morgan are among the companies that have been purchased recently by consortiums of PE firms.

Saikat Chaudhuri, a management professor at the University of Pennsylvania’s Wharton School, says that the size and high profile of these deals is reaching a point where everyone starts to get a little nervous. While he doesn’t expect regulators to step in any time soon, he says it is possible that the Securities and Exchange Commission may require PE firms to register as investment advisers and provide additional disclosures. Similar rules were proposed for hedge funds before the idea was killed by a Washington, D.C., appellate court last summer.

“I don’t expect a big regulatory backlash,” says Bruce Evans, a managing partner of PE firm Summit Partners, at least in part because the Sarbox-inspired flight of capital to foreign markets may cause regulators to be wary of a replay. Ironically, Europe seems more likely to crack down: in November, the UK’s Financial Services Authority called for increased monitoring of private equity and threatened to limit the industry if it found the risk to financial markets excessive. Fears of a backlash against private equity increased in Germany last year when Franz Muntefering, then chairman of the Social Democratic Party, referred to PE firms as “locusts.”

Private-equity firms here aren’t taking any chances. Last month the Private Equity Council, a lobbying group that intends to improve the image of the industry and fend off any suggestion of regulation, officially opened for business.

Staking Out the Club
Large deals by private-equity groups are attracting attention.
Target Buyers Price* Date
HCA KKR, Bain, Merrill Lynch $33 7/06
Harrah’s Entertainment Apollo Management, Texas Pacific Group $28 12/06
Clear Channel Bain, Thomas Lee $27 11/06
Kinder Morgan Goldman Sachs, AIG, Carlyle $22 5/06
Freescale Semiconductor Blackstone, Texas Pacific, Carlyle, Permira $18 9/06
* Price (in $ billions) includes assumption of debt Source: Various reports