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Friday 8 August 2014

Before The Proverbial Hits The Fan: Of Private Equity Exits

FPM cite here two examples of using exit doors and what they actually augur. First is news of three giant private equity firms settling with US prosecutors before potential massive fallout from the PE collusion lawsuit.  

The agreements [settlements] still need court approval, but KKR, Blackstone and TPG were keen to reach settlements before September 4, when a district court judge will make a preliminary ruling on whether the case merits class-action status.” FT, August 7, 2014 4:47 pm

And the second example is a traditional exit strategy used by private equity firms for constituent companies in their portfolios, i.e. carrying out an initial public offering or IPO.

Hedge funds are building up multimillion pound bets against companies recently listed by private equity after a number of high-profile flotations this year have fallen sharply in value, leaving institutional investors nursing large losses.” FT, August 5, 2014 1:06 pm

Discussing the first example. The timely settlement of the collusion lawsuit by three renowned buyout specialists is intended to precede possibly larger settlements amounts as the prosecution case escalates. The next event date in this issue is 4th September in one month.  should indicate whether the cases against PE firms conspiring to not compete on buyout deals which results in company shareholders not realising maximum value from being taken private i.e. delisted, is against the public interest. Therefore the class action suit with lead plaintiff/s and any number of class action members could lead to bigger litigation payouts. Remember the “Big Tobacco Guilty as Charged” cases with numerous claimants and payouts.

And then there was one! All 7 of the defendants have settled their cases to date, except The Carlyle Group. We wonder which of the politically connected PE executives knows more about how the PE conspiracy lawsuit will run? With the above mentioned three PE firms reportedly settling for collective total of US$325 mn. And with recent settlement by the other three defendants Bain Capital, Silver Lake and Goldman Sachs, for a combined US$150.5 mn, we are still nowhere near the multi-billion dollar compensation sought by pension funds and individual investors as plaintiffs.

The crux of this matter is which litigation side’s lawyers, defence or prosecution, has outwitted the other and whether the US Justice Department’s step forward serves the public interest or recoups from big corporate finance. While the people’s campaign for “cleaning up finance” gains momentum, all too often the wider public interest is understated by its representatives in state legislation and administration i.e. justice and politicians respectively. See FPM-followed SAC-saga in prosecuting Steven A. Cohen and his eponymous firm so far reaching a global multi-billion dollar settlement.  Watch this space September 4, 2014.

In the second example of ‘exit doors’ FPM sees a sinister trend towards hedge fund executives exploiting their bretheran PE firm’s mismanagement or asset stripping of their buyout companies. The added-value represented by the PE management’s involvement in the firms it takes private are suspiciously questioned at IPO. If this was the intended result then FPM recommends that PE and hedge fund activities need to be curtailed. As was when Chinese Walls were implemented at investment banks to prevent conflicts of interests between its trading operations and its advisory businesses. One cannot help but draw comparisons on how the mega-banks are proceeding to settle lawsuits for acting as double-agents in the subprime CDO collapse that bought the entire capital markets to its knees in 2007/08. High water marked by Lehman Brothers’ demise.