Antitrust Authorities vs Private Equity
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The U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) have vowed to place an increased scrutiny on the private equity industry. Lina Khan, the chair of the Federal Trade Commission, told the Financial Times that she is seeking to take a more muscular approach to regulating private equity dealmaking. Jonathan Kanter, head of the DOJ’s antitrust unit also stated in a recent interview with the Financial Times that buyout groups were “an extremely important part of our enforcement programme” and that a fuller assessment of their deals was “top of mind for me, and . . . for the team.” At the American Bar Association’s Antitrust in Healthcare Conference, Deputy Assistant Attorney General Andrew Forman confirmed that the DOJ is “thinking a lot about enhancing antitrust enforcement around a variety of issues surrounding private equity.” The FTC demonstrated their commitment to regulate the private equity industry by announcing a consent order regarding JAB Consumer Partners' acquisition of specialty and emergency veterinary clinic operators.
Why have antitrust authorities focused on the Private Equity industry?
The antitrust authorities main concerns regarding the private equity industry are roll-up strategies, interlocking directorates and divestiture transactions. Roll-up transactions are when private equity firms purchase companies in the same market and merge them together. AAG Kanter stated that this strategy "is often very much at odds with the law and very much at odds with the competition we're trying to protect." Interlocking directorates are where executives from a buyout group sit on the boards of competing companies they own or control. This governance is prohibited under Section 8 of the Clayton Act, which Kanter is seeking to enforce. Divestiture transactions occur when private equity firms acquire assets from companies that have been forced to divest their assets by antitrust authorities due to a merger that will limit competition. Kanter notes that “in many instances, divestitures that were supposed to address a competitive problem have ended up fuelling additional competitive problems.” Khan also stated that the FTC was focusing on the private equity industry because the agency was alarmed by empirical research which showed an increase in mortality rates in nursing homes after private equity firms buy them.
Are antitrust authorities right to scrutinise the private equity industry?
Some antitrust experts have criticised the agencies stance on the Private Equity industry. Makan Delrahim, the former chair of the Federal Trade Commission stated that “taking legal aim at an industry, or any particular actor, rather than taking aim at the effects of the specific conduct or transaction is counter to the way law enforcement should be conducted.” Charles Rule, the former head of the DOJ’s antitrust division under President Ronald Reagan takes issue with some of the reasons for the agencies scrutiny on the Private Equity industry. In response to Khan’s argument about Private Equity firms increasing mortality rates in nursing homes, Rule counters that ‘private equity’s impact on social groups was “not what the antitrust laws were written to address”.’
Despite the criticism, there are some that support the antitrust authorities stance on the private equity industry. Natalia Renta, senior policy counsel at Americans for Financial Reform, told the Financial Times that “The private equity lobby is bound to throw up smokescreens about what antitrust law can and cannot do, but that misses the point entirely. Higher prices and lower-quality care leading to increased mortality — both characteristics of sectors where private equity has amassed a presence — are indicators of market power, and that is precisely what antitrust law addresses.”
What can private equity firms do?
Regarding Roll-up transactions, private equity buyers should instruct antitrust lawyers when assessing potential acquisition targets, so that they can be informed on whether their acquisition is compliant with existing antitrust laws. Concerning divestiture businesses, the Wilson Sonsini law firm advises private equity firms to “work with antitrust lawyers in order to develop business plans that will ensure that the divestiture business will remain competitive.” Private equity firms can also avoid interlocking directorates by creating a rule in the firm that executives should not sit on the boards of competing companies owned by the private equity firm.
If private equity firms refuse to take these threats seriously, the FTC and DOJ may force them to sell some of the companies they have acquired at a lower price in the future. Just ask JD how that turned out for them when they were compelled to sell Footasylum for £37.5 million (less than the £90 million price it paid in 2019) as a result of the Competition and Markets regulator blocking their takeover.
by Ifeoluwa Bayo-Oluyamo