The dirty little secret of private equity profits


Executives in private equity firms — such as Mitt Romney of Bain Capital and Henry Kravis of Kohlberg Kravis Roberts — tend to be peacocks who think quite highly of themselves.

Fanning their splendid tail feathers, they unabashedly claim to be the ultimate free-enterprise risk takers — worth every dime of the multimillion-dollar paychecks they award themselves each year. Excuse me, but the risks taken by these self-anointed “heroes of the market” are done with other people’s money, not their own. But here’s a revelation that really ruffles their feathers: They appear to have been gathering their riches not with bold competition, but with old-fashioned collusion.

An antitrust civil lawsuit filed in federal court against 11 of the biggest equity firms includes emails in which they agree not to compete. In 2006, for example. The head of Blackstone sent an email to the co-founder of KKR: “We would much rather work with you guys than against you. Together we can be unstoppable, but in opposition we can cost each other a lot of money.” The KKR honcho happily emailed back a one-word response: “Agreed.”

Collusion, of course, perverts the marketplace they pretend to worship, artificially lowering the market price they’d otherwise pay. In the 2008 takeover of the giant HCA hospital chain, for example, KKR expressly asked its market rivals “to step down on HCA” and not bid. Agreeing to this blatantly illegal collusion, one rival wrote in an email: “All we can do is do unto others as we want them to do unto us.”

Of course, by cozying up with each other, they’re really doing it unto you and me. The equity outfits even have an insider term for their mutual back scratching: “Club deals,” they call them. Forget about the vaunted free market — when the big boys want to profiteer, they keep it inside the billionaires club.