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Regulators vs Private Equity: Antitrust probe could further dampen dealmaking outlook

The private equity industry, already seeing a slowdown due to financial tightening, needs to gear up for an even bigger problem.

Since the dealmaking boom in the 1980s private equity firms have amassed great control over American industry, deploying trillions of dollars in capital across all sectors of the economy. Today PE portfolio companies employ millions of Americans and hold sizable market shares in several industries. Now, under the Biden administration, their practices are being scrutinised and could alter the way dealmakers think about future acquisitions.

Lina Khan, Chair of the Federal Trade Commision (FTC) and Jonathan Kanter, head of the Department of Justice's antitrust unit are the country's top regulators on competition practice. They have both voiced their concerns over the practices of private equity firms and have vowed to take legal action against current industry practices. The FTC and DoJ's main concerns revolve around private equity's 'roll-up' strategy and their 'buy, strip and flip' model. “Sometimes [the motive of a private equity firm is] designed to hollow out or roll up an industry and essentially cash out,” Kanter said in an interview with the FT. “That business model is often very much at odds with the law, and very much at odds with the competition we’re trying to protect.” Another practice they are sceptical of is the "interlocking directorates" where executives of PE firms sit on the boards of competing companies.

So far antitrust bodies have not been able to bring any major legal challenges as they lack precedent due to years of lenient policy on this matter. But this could change if they start challenging private equity firms on monopoly grounds. The accumulation of nursing homes by PE firms could be a great starting point. “In nursing homes, we saw an increase in the mortality rate after private equity buys them,” said Lina Khan in an interview with the FT. “There are just very real life and death consequences . . . that require us to take it very seriously.” Khan also mentioned that regulators have previously overlooked PE firms because they focused too much on the individual deals themselves which do not seem to be a problem but over multiple deals one firm can start gaining significant power.

Regulators still have a tall order as the lack of precedent for antitrust challenges to private equity firms will make it tough to win court battles, although Khan and Kanter have both mentioned that they are not afraid of losing in court and will fight to bring appropriate regulation. Dealmakers are likely to take this change in the regulatory landscape seriously and may look to cancel plans for any deals that could come in the regulators radar. Seven PE executives, including a partner at Thoma Bravo, have already stepped down from the boards of their portfolio companies due to Khan and Kanter's warnings.The regulatory uncertainty is a serious blow to private equity firms amidst tough economic conditions.

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