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October 10, 2006

Adam Smith & Collusion in Private Equity

The only thing surprising about the news that Department of Justice officials are investigating possible anticompetitive behavior (read: collusion) among private equity firms is that it took so long. Note, however, that I'm not saying collusion happens or that it doesn't -- I'm far enough away from mega private equity that I'm in no real position to opine -- but any industry where competitors periodically work together always brings Adam Smith's quote to regulators' minds:

"People of the same trade seldom meet together . . . but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Of course, most regulators cheerfully ignore the second part of Smith's quote:

"It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice."

Because while plenty of mischief can potentially come from competing private equity firms forming a syndicate around a deal, if regulators make it less likely such syndicates form then they will increase the risk of any single transaction, thus ensuring that fewer deals get done.

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