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When does a club become a cartel? The US Department of Justice is
right to be asking that question of the private equity industry. Different funds compete on some deals and work together on others. For acquisitions, the crux of an antitrust investigation could be whether private equity groups collude to pay less for targets than would otherwise be the case.

One recent transaction illustrates the potential for ambiguity. Blackstone and its partners recently agreed to buy semiconductor group Freescale for $17.6bn. A rival consortium emerged at the 11th hour but then walked away without a fight. There are perfectly valid explanations – most obviously, a price tag they could not match. But private equity bidders do consciously avoid bidding wars. Kohlberg Kravis Roberts, for one, surely remembers the ultimately not very profitable battle for RJR Nabisco in the late 1980s.

The popularity of consortium deals also raises questions. For some big buy-outs private equity firms need to pool resources. Going for targets out of reach for all but a few bidders is a legitimate way to limit competition. But if rivals are allowed into deals simply to stop them bidding separately, that is more dubious. It is also not enough to say that a target company’s board checks that any buy-out price is fair. After all, a fair price is not the same thing as the best price.

Private equity groups are hugely important repeat customers for Wall Street. The opportunities for sharing information among different firms and through advisers are legion. People in the industry are, however, smart and well advised. If they have crossed the line – and they have not yet been accused of that – it could simply be that some standard market practices turn out to be misguided. If so, as Eliot Spitzer’s campaigns have demonstrated, the industry could be in for a surprise.

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