Private Equity: Too Much Of A Private Club?
When private equity firms team up – giant, multi-billion dollar deals can’t be far behind. Of course, mega-deals invite super-sized attention. That includes scrutiny from the U.S. Department of Justice, which is investigating whether private equity is becoming too much of a private club--in other words, the DOJ wants to make sure there are no anti-competitive practices going on. Today on CNBC’s Squawk Box, the team and former SEC Chairman Harvey Pitt took a closer look at the "private equity club" and the latest deal coming under the microscope.
As you might remember, we reported earlier this week that General Electric (the parent company of CNBC) is putting up its plastics division for sale. GE is also restricting private equity from teaming up in the bidding process.
According to CNBC’s David Faber, GE is selling now because there is so much liquidity in the market, and the restrictions are intended to make bidding a more competitive process, “They think it’s going to help an auction....but they’re trying to control it (teaming up) at the outset--to try to get true price competition."
Despite the corporate goliath’s willingness to limit private equity, GE Chairman Jeff Immelt has expressed concern, saying that a DOJ investigation could bog down the whole process.
Former Chairman Harvey Pitt told us, “(I think it's) always a good thing to have people examining these things. I do think it will be very hard to make out any anti-trust concerns.”
GE’s plastic’s division is valued at nearly $10 billion. “At the end of the day requiring 1 private equity firm to bid, would mean a commitment on their part of as much as $3 billion," added Faber. "Let’s figure. (if they leverage 70%) – that’s an awful lot to come up with even for the largest funds.”
This is not the first time a large company has imposed these kinds of restrictions. “We saw this to a certain extent with Univision. (Univision said at least you’ve got to have our permission to get together.) And Albertson’s tried to tell the private equity groups who they could match up with. That didn’t work,” said Faber.
There's also a belief that the Department of Justice is putting their focus in the wrong place, entirely. “I think the larger problem from an investor standpoint is, when you see a private equity group link up with a management,” David Faber explained. “That is much more of a bar to competition because another private equity firm has no interest in coming in, if they don’t think they can actually have that same management.”
According to The Wall Street Journal, Goldman Sachs has conveyed the bidding restrictions to 4 private equity firms and has also contacted two potential bidders in the plastics industry.