Over the past month or so, top antitrust officials have been making headlines for their comments on the private equity industry. The long and short of it: you’re in our line of fire.
The head of the US Department of Justice’s antitrust unit Jonathan Kanter told the FT last month he wants more checks on the asset class, with roll ups in particular in his line of sight. Chair of the Federal Trade Commission Lina Khan followed suit, saying regulators should be sceptical of such consolidation, going one step further to warn that there are “life and death consequences” when large sections of the economy are rolled up under Wall Street’s control.
The rhetoric is there, but the question is how various regulators’ focus on private equity will play out in practice.
One recent development serves as a potential warning for the asset class: the FTC said this month it would require consumer goods & services investor JAB Consumer Partners, which has a particular focus on pet care, to divest of clinics as part of an upcoming roll up involving National Veterinary Associates and SAGE Veterinary Partners. It is also “imposing robust prior approval and prior notice requirements on JAB’s future acquisitions of specialty and emergency veterinary clinics.” JAB declined to comment when contacted by PEI for this report.
“Private equity firms increasingly engage in roll up strategies that allow them to accrue market power off the Commission’s radar,” Holly Vedova, director of the US’s Bureau of Competition, said in a statement. “The prior notice and approval provisions will ensure the Commission has full visibility into future consolidation and the ability to address it.”
For private equity firms that have been buying up companies at eye watering valuations or rolling up sectors ripe for consolidation, antitrust concerns have been front of mind, says one senior London-based private equity lawyer who advises large sponsors. It’s not just the size of the business; particular “problematic” sectors appear to be receiving particular scrutiny too. Alongside veterinary clinics, technology and nursing homes were mentioned as examples by the FTC’s Khan.
Increased regulatory enforcement is around the corner, as the US Securities and Exchange Commission’s proposals at the beginning of this year demonstrate. Buyout managers must – if they don’t already – understand that if they want to close a mega front-page merger between two politically sensitive companies, they’re going to face heightened scrutiny, the lawyer tells us.
All this is factored into due diligence. Yes, private equity firms must be thoughtful about antitrust ramifications as they work through their value creation plans. Will your acquisition overlap with a business already existing within your portfolio? If you have targets in mind for a buy-and-build strategy, where will your market share end up?
A crucial element, too, is planning exit options. If your plan is to sell to a strategic buyer, could their future market share come onto the regulator’s radar? Forecasting for some other exit options, such as a sale to a private equity buyer or an IPO, may be prudent, advisory sources tell us.
Says one antitrust lawyer: this topic should be front of mind right from when firms are diligencing a potential investment, right through to the point of exit to ensure you minimise any risks that could spiral out of control.
Further antitrust scrutiny isn’t likely to kill the buy-and-build strategy, but as private equity and the businesses it owns grow, careful consideration as to assets bought, their exits plans and how these may be viewed by regulators, will likely pay dividends.