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Side Letter: PE’s antitrust anxiety; Why experience matters; Xen’s HK hire

US regulators are putting their money where their mouth is when it comes to targeting private equity. Plus: Why experienced managers are more important than ever; and fundraising platform Xen has hired a former HQ Capital exec. Here's today's brief, for our valued subscribers only.

Just happened

PE: Under regulatory scrutiny (Source: Getty)

Antitrust action
US regulators appear to be making good on their promise to keep a closer eye on PE roll-ups. The Federal Trade Commission last week ordered JAB Consumer Partners to divest veterinary clinics in California and Texas as a condition of its proposed $1.1 billion acquisition of competing clinic operator SAGE Veterinary Partners, according to a statement.

The FTC will also require prior approval and notice regarding JAB’s future acquisitions of speciality and emergency veterinary clinics. “[PE] firms increasingly engage in roll-up strategies that allow them to accrue market power off the Commission’s radar,” said Holly Vedova, director of the Bureau of Competition. “The prior notice and approval provisions will ensure the Commission has full visibility into future consolidation and the ability to address it.”

The action is one of the first such moves since the US Department of Justice’s antitrust unit’s Jonathan Kanter told the Financial Times that PE buyouts were “top of mind” amid concerns that roll-ups are detrimental to market competition. It’s worth noting, however, that this isn’t the first time PE has faced antitrust scrutiny. Regulators investigated Bain and KKR’s Toys “R” Us as far back as 2009, and politicians voiced concerns over KKR-backed US Foods in 2014, our colleagues at Buyouts reported at the time (registration required). In 2015, CVC and Bencis Capital Partners were fined by the Dutch competition authority after it charged a former portfolio company of the two firms with breaking competition rules through price fixing.

The FTC has, however, identified PE as a top priority moving forward. “The growing role of private equity and other investment vehicles invites us to examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations,” FTC chair Lina Khan said in a September staff memo. “Evidence suggests that many of these abuses target marginalized communities, and combatting practices that prey on these communities will be a key priority.”

If these latest instances are anything to go by, regulatory intervention may well become a more common sight in the months and year ahead.

SEC enforcement
Speaking of regulation, the US Securities and Exchange Commission last week settled with Energy Capital Partners Management over claims it allocated undisclosed, disproportionate expenses to a private equity fund it advises. According to the SEC, ECP allocated a disproportionate share of expenses to a private equity fund without disclosing the charges to fund investors, when it had initially agreed that third-party co-investors would not have to pay expenses related to a credit facility used to finance the deal. ECP, which did not admit or deny the SEC’s findings, agreed to pay a $1 million penalty and has voluntarily paid back more than $3.3 million to the fund. Details by our colleagues at Private Funds CFO here (registration required).

The value of grey hair
After years of senior managers warning at SuperReturn that the good times were going to end, their predictions may finally have come to pass. There was a marked mood change in Berlin last week as news broke that the US Federal Reserve and the Bank of England had raised interest rates in a bid to curb inflation. Veteran sponsors told Side Letter on the event’s sidelines of their concerns about the relative inexperience in the market when it comes to downturns and recession. Those individuals will pass on their teachings, but experience answers for a lot, the sponsors said. GP execs – even those in more senior positions – can expect a bumpy ride ahead.

Essentials

What goes up
Recent performance results from the New York City Employees’ Retirement System may be some of the best we see for a while. The $84 billion pension posted a 37 percent annual return for the asset class last week, one of the highest such figures delivered in recent months. “We just saw extraordinary returns,” interim CIO Michael Haddad said, in comments reported by Buyouts (registration required). Some of the best results, Haddad added, came from funds managed by KKREQT and Platinum Equity.

Valuations may well drop in the coming months as soaring inflation and climbing interest rates begin to impact private markets. Oregon Public Employee Retirement Fund recently said it would not lower its 27 percent allocation to PE in an attempt to counteract the denominator effect as, like NYC Employees, it expects valuations to mimic their public market peers.

Xen’s HK hire
Here’s a Monday morning people move for you: Jessie Gao, a former senior investment executive at HQ Capital, has joined Asian fundraising platform Xen Capital in Hong Kong, per regulatory filings. Gao joins from Chinese wealth manager Noah Holdings, where she has spent five years as a director responsible for PE products and investments, according to her LinkedIn.

In a statement, Xen told Side Letter that Gao will serve as an investment director focusing on alternative investments in Greater China. Xen is one of a growing number of fundraising platforms hoping to capture the soaring Asian private wealth opportunity. Its investors so far are mostly from Southeast Asia, China and Korea, although in January it partnered with a Japan-focused peer to distribute there also.

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

20 June

22 June

23 June

24 June


Today’s letter was prepared by Alex Lynn with Adam LeHelen de Beer, Madeleine Farman and Jennifer Banzaca