Private equity faces heightened antitrust scrutiny

As the Biden administration takes a more muscular approach in fighting what it sees as growing anti-competitive behavior in the U.S. economy, private equity investors have come under intensified scrutiny in the context of merger reviews.

Private equity consists primarily of funds created by investment managers who pool capital from institutional investors like pension funds and high-net-worth individuals. Traditionally, these funds acquire companies and take them private with the goal of enhancing returns and later reselling them at a profit. In 2022, global private equity assets under management reached $7.6 trillion, as reported by McKinsey & Co.

Historically, U.S. antitrust authorities regarded these funds as acceptable, and even desirable, alternative buyers when companies were forced to divest assets to address antitrust concerns. But that changed in 2021 when the Biden administration directed the Federal Trade Commission (FTC) and the Department of Justice (DOJ) to take on what it sees as a concentration of corporate power. Private equity has since become a significant focus of that effort.

Jonathan Kanter, who heads the DOJ's antitrust division, and Lina Khan, chair of the FTC, have aggressively challenged a series of mergers, most recently suing in court to stop JetBlue Airways from acquiring its low-cost rival, Spirit Airlines. The government succeeded earlier in blocking the merger of publishers Penguin Random House and Simon & Schuster, but has failed in several of its other efforts, including halting Microsoft's US$69-billion takeover of Activision Blizzard.     

Private equity has found itself in the crosshairs of the Kanter-Khan duo, according to Fiona Schaeffer, a partner at Milbank LLP in New York and chair of the American Bar Association's (ABA) Antitrust Law section. She was in Ottawa recently to participate in a panel on private equity and antitrust at the CBA Fall Competition Conference.

She called this new approach to private equity "hostile" and anticipates it will continue. She noted that both Kanter and Khan were inspired by Timothy Wu, a Columbia University law professor who served as Biden's special assistant for competition and technology policy. Wu authored the 2021 executive order that called for stronger measures to fight corporate concentration.

Schaeffer said that Wu and his acolytes believe that private equity is "hoovering up independent businesses all over the country and consolidating ownership… That's why they will continue to attack private equity. It's really coming from that philosophical, political perspective."

The agencies have honed in "roll-up strategies" favoured by private equity in industries like healthcare and technology. These strategies involve an initial acquisition, followed by a series of smaller acquisitions within the same field. Often, these acquisitions do not individually trigger antitrust reporting requirements. Yet, the cumulative effect of the roll-up is to create a significant player in that sphere.

Khan has made it clear that she sees roll-up strategies as a threat to competition. In these cases, she has said that "a firm will undertake a series of acquisitions, no single one of which may raise legal concerns but in aggregate, there can be significant consolidation of the market."

In one of the best-known cases, the FTC took action against JAB Consumer Partners, a massive private equity fund with investments in companies like Keurig Coffee and Dr. Pepper, which was expanding its chain of specialty and emergency veterinary clinics. FTC took action, insisting that its goal was to block JAB "from gobbling up competitors" through what it called "stealth roll-ups."

The FTC has alleged that the private-equity business model has built-in incentives to strip firms of their productive capacity, undermine the quality of goods and hinder competition while saddling target firms with debt. In October of 2022, the FTC finalized a consent decree against JAB that forced its veterinary subsidiaries to divest clinics in a series of markets and imposed tough prior-notice requirements on future purchases of such clinics.

In another recent case, the FTC sued U.S. Anesthesia Partners Inc., and its private-equity parent, Welsh, Carson, Anderson & Stowe, alleging that the companies had a multi-year plan to consolidate anesthesiology clinics in Texas, thereby driving up prices, limiting competition and boosting their profits.

Welsh Carson's roll-up plan aimed at buying up "nearly every large anesthesiology clinic in Texas," according to Khan, the kind of schemes "that unlawfully undermine fair competition and harm the American public."

Isabel Tecu, an economist at Charles River Associates in Washington, D.C., told the panel that antitrust officials hold particular concerns regarding the impact of private-equity acquisitions in healthcare and for-profit education on consumers. These concerns centre around the lack of transparency in their operations, especially the intricate structure of these partnerships.

Ellen Frye, a director at Kohlberg Kravis Roberts (KKR) in New York, questioned the regulators' assumption that private-equity investors are only short-term players who buy a company, boost profits and then exit through a sale. "There are a number of KKR funds with a longer-term horizon, and a number of the funds are becoming open-ended funds."

With no sign that the targeting of private equity will end soon, Schaeffer said that these firms should be much more careful in how they handle acquisitions and be aware of all the information they disclose publicly. In the U.S. Anesthesia case, the private-equity acquirer had promoted the advantages of its roll-up strategy to lenders, boasting that it would establish "a player of national scale" by consolidating medical practices. The move would enhance the firm's negotiating power with insurance providers, enabling it to increase prices. The FTC used this document as evidence in its case.

She also said that private-equity needs to "do a better job at PR," and highlight all the competitive benefits and investments that result from their acquisitions.

Tecu also suggested that firms look for the benefits that come from private-equity acquisitions, including efficiencies that may help consumers. She cited the case of a study in Florida that found that restaurant chains purchased by private-equity firms tended to be a positive force for public health. These acquirers were "really good at coming and making sure than everyone washes their hands," she said.

Moderator Kyle Donnelly, a partner at Bennett Jones in Toronto, noted that the focus on private equity hadn't yet become a major concern for Canadian authorities. Just minutes later, Matthew Boswell, Canada's Competition Commission, told conference attendees in a keynote speech that private equity was very much on his mind. "On the emerging issues front, we see clearly what's happening in terms of evolving business practices," Boswell told the conference. "We are wise to the risks of creeping acquisitions—including private equity roll-up strategies—and the harm they may pose to competition."