SEC Investigating Group Purchasing Kickbacks by Private Equity Firms
You have to hand it to the private equity firm kingpins: they are skilled at financial sleight-of-hand which makes their already-lucrative investments even more attractive to them. But as the SEC has been exposing, too many of these tricks come at the expense of their investors.
The Wall Street Journal exposes the latest ruse tonight. While the dollar amounts aren’t earthshaking, the behavior is particularly shameless, and involves some of the biggest names in the industry: KKR, Blackstone, and TPG. It shows that these players are unafraid of engaging in out-and-out skimming as long as they dress it up in a way that is hard to ferret out.
The Wall Street Journal account, by Mark Maremont and Mike Spector, involves the use of kickbacks related to purchasing volume discounts. For instance, across its 74 portfolio companies, Blackstone bought more than 50,000 Hewlett Packard computers in 2011, and used bulk buying to obtain discounts. Blackstone, along with many other private equity firms, uses a company called CoreTrust Purchasing to negotiate these price breaks. Blackstone effectively skims a percentage of these haircut for itself:
SEC Investigating group purchasing kickbacks private equity firmsBlackstone between 2011 and 2013 received roughly $7 million in fees from a company that negotiates discounts for its portfolio companies, according to people familiar with the matter….KKR and TPG similarly disclosed that they receive group-purchasing fees that aren’t shared with investors. KKR separately said such fees totaled $6 million over the past three years… TPG declined to provide dollar amounts.A key provider of group-purchasing services to private-equity firms is CoreTrust Purchasing Group, an intermediary that negotiates special pricing for portfolio companies on items such as office supplies and package deliveries.CoreTrust funds its business by getting “administrative fees,” or commissions, from vendors, which it says vary from 1% to 3% of the purchasing volume. In some instances, it says, it “may share a portion” of these commissions with private-equity firms “whose portfolio companies are purchasing members.” Both Blackstone and KKR confirm they receive those commissions from CoreTrust…KKR participates in CoreTrust through its Capstone consulting group. A KKR spokeswoman said the arrangement “is a commercial one that reflects value added by both CoreTrust and Capstone, and has been disclosed both to portfolio companies and fund investors.”
We’ve been chipping away at the bigger implications of information exposed via the release of a dozen private equity limited partnership agreements. The SEC warned in May that investors, as in limited partners, had done a lousy job of negotiating these documents and weren’t so hot at monitoring the general partners either. We wrote earlier about a major tax problem for the limited partners, and we’ve since come across information from an expert that works for private equity funds that confirms our original reading, which we will discuss in due course Wolf Righter private equity firms manipulate buy rent housing racket