US private equity faces extra scrutiny under new merger review rules

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Advisers to the world’s largest private equity firms are warning new merger notification rules proposed by US antitrust agencies threaten to disproportionately affect the serial dealmakers and significantly delay getting transactions over the line.

Changes to the Hart-Scott-Rodino (HSR) form, which companies fill out to notify the Federal Trade Commission and the Department of Justice about deals exceeding a certain threshold, would force buyout groups to disclose significantly more information in the early stages of a transaction and potentially lead to more deals being blocked, antitrust experts said.

“This is breathtaking and astonishing in its reach and potential impact to deals,” said James Langston, a partner at Cleary Gottlieb in New York. “There’s nothing about the existing process that was broken.”

The overhaul of HSR, as it is often referred to, is the first in more than four decades and has been widely anticipated by dealmakers.

Under the proposal, companies will be required to file more detailed information to the FTC and the DoJ about the parties involved, their respective markets and how the businesses operate ahead of an initial 30-day assessment period.

Antitrust lawyers say this level of scrutiny had previously only been required in the so-called second stage of the approval process when the agencies ask for more information on the handful of deals that trigger further concern.

The agencies have predicted that this will add 100 hours to the amount of time companies will need to prepare the forms, though dealmakers believe this could end up being significantly longer.

Lina Khan, FTC chair, said in a statement that “much has changed” since the HSR was first enacted, including the increasing complexity and volume of deals. “The information currently collected by the HSR form is insufficient for our teams to determine, in the initial 30 days, whether a proposed deal may violate the antitrust laws,” she said.

The agencies did not highlight specific sectors or businesses, such as private equity, when announcing the proposal, which will move to a 60-day comment period before final implementation.

While the rules are applied regardless of the buyer’s funding model, there are certain provisions that experts think specifically target private equity firms, which have been some of the most active dealmakers over the past decade. In 2021 and 2022 alone, buyout firms accounted for about a fifth of global transactions, respectively, according to data from Refinitiv.

Among the list of new requirements are disclosures of previous transactions over a 10-year period and detailed workforce reports to identify whether there is significant overlap between the two parties, which lawyers say will ensnare large private equity buyers who own numerous businesses across industries.

“People have realised that private equity can sometimes be shrouded in secrecy in ways large public companies are not. It’s hard to figure out what private equity owns,” said one antitrust lawyer. “[Regulators] have homed in on the fact that they want to know what’s happening in private equity.”

Private equity firms have increasingly found themselves in the crosshairs of regulators as their footprint in the US has rapidly expanded to the point where they control large swaths of the economy. Both Khan and Jonathan Kanter, head of the DoJ’s antitrust division, have been vocal about their desire to increase scrutiny of dealmaking by buyout groups.

Last year, the FTC required private capital buyer JAB to divest 11 veterinarian clinics as it completed two large acquisitions owing to market concentration concerns, a sign of the agency’s tougher stance on private equity roll-ups — plans by private investors to consolidate niche sectors such as vet clinics and funeral homes.

The DoJ, meanwhile, is closely scrutinising Thoma Bravo’s proposed $2.3bn take-private of cyber security company ForgeRock, which lawyers said could lead to a rare antitrust challenge involving a large private equity deal.

Antitrust regulators have also focused on so-called “interlocking” board directors, where representatives from one private equity firm sit on numerous boards in a single sector. The FTC’s proposed changes seek to increase scrutiny on how boards wield their influence by forcing buyout firms to identify “board observers” — key dealmakers monitoring investments that do not hold formal board seats.

Lawyers, several of whom said they had received numerous calls from frustrated clients following the HSR announcement, may be lamenting the extra time it will take to pull material together but conceded that this is ultimately good for their bottom line.

One antitrust lawyer said the new rule would likely be “great for my pocket but terrible for my private life” as long as deal volume was not dramatically affected.

“The real beneficiaries will be the antitrust lawyers specialising in HSR,” said George Hay, an antitrust professor at Cornell University. “Their billings will increase very substantially especially in the first year as law firms learn the ropes.”

However, the prolonged slowdown in dealmaking amid a tougher financing and regulatory environment has left others feeling that there will be a bigger price to pay if acquirers are discouraged.

“This will hurt small companies especially hard by increasing deal costs substantially,” said Eric Laumann, a former litigator who heads North American risk arbitrage research at Oscar Gruss.

Regulators “want a lot more information about the structure and ownership of private equity funds and they style it as trying to get more transparency. I’m sceptical of that view,” said Daniel Culley, a partner at Cleary Gottlieb who focuses on antitrust issues. “I think they’re trying to disfavour private equity as acquirers.”