Private equity firms could be at risk of breaking competition laws when engaging with other actual or potential bidders in the process of acquiring a secondary stake, according to a report from UK law firm Travers Smith.
One of the competition law allegations brought to courts is the act of clubbing together in a direct secondaries transaction. In these so-called ‘club deals’, the aim is to reduce the number of competitors in the bidding process and to therefore also increase the likely purchase price.
“There’s a much more active market for secondaries than there ever has been before and one of the things we’re seeing from regulators is that are very concerned about transparency and conflicts of interest,” said Todd Cipperman, founding principal of Cipperman Compliance Services, a provider of compliance services to registered funds and money managers.
In some cases, an agreement might be made between potential bidders that eliminates one party from bidding, or if a bid is made, it could be a non-competitive one, according to the report. In return, the firm may make an agreement with the other that they will not bid on other acquisition targets, or they could offer compensation for the losing bidder.
Cipperman said that regulators are looking to see if anyone is getting a sweetheart deal in the bidding process, whether special investors have better access to information and whether there are people that have affiliations with the private equity firms involved in the bidding process.
“So we are seeing the regulators stepping up, and they’re looking at secondaries in that way,” he added.
Secondaries firms can reduce their exposure to competition law by seeking legal advice, according to Travers. This should be done before making any approach to another bidder and the potential exchange of “competitively sensitive information” in a situation where firms band together to form a joint bid. Firms should also provide documentary evidence to explain why they decided to use a particular transaction structure.
Market participants have to understand the tough regulatory environment they live in, according to Cipperman. This means getting policies and procedures right when you’re involved in the secondaries market to make sure that there are no undisclosed conflicts of interests and there is no disclosure of confidential information.
European and UK competition law prohibits anti-competitive agreements including price-fixing, bid-rigging and market-sharing arrangements. If these laws are broken, private equity firms could face fines of up to 10 percent of worldwide turnover, third-party damage claims and director disqualification.