The Department of Justice could be on its way to ending private equity's strategy of rolling up entire industries before hollowing them out and cashing out.
For PE firms, the new scrutiny by regulators could arguably be coming at the worst time, as asset prices have started to plunge due to the Fed's new hawkish monetary policy stance.
Jonathan Kanter, head of the DoJ’s antitrust unit, told the Financial Times this week: “Sometimes [the motive of a private equity firm is] designed to hollow out or roll up an industry and essentially cash out. 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.”
He said that buyouts were “an extremely important part of our enforcement programme,” FT reported. Kanter is "one of several progressive officials appointed by Joe Biden", the report notes.
Meanwhile, firms like Blackstone have come under fire in recent years for owning larger and larger portions of the U.S. economy. The industry has been red hot, with a record 14,730 deals taking place globally last year.
This was nearly double the previous high and amounts to $1.2 trillion in transactions. The report notes that PE firms are starting to turn into the very same corporate giants they once assisted in breaking up.
FT predicts that Kanter is leading enforcement for PE down the same path that technology companies have gone down with regard to anti-trust scrutiny.
“Many of the mergers we’re confronting are as a result of [private equity] roll ups,” he said, noting that the DOJ will be looking at “interlocking directorates”, which is where PE executives sit on the boards of numerous companies in competition and/or in the same industry.
Kanter noted that this could be a violation of the 1914 Clayton Antitrust Act.
He continued: “Very often settlement divestitures [involve] private equity firms [often] motivated by either reducing costs at a company, which will make it less competitive, or squeezing out value by concentrating [the] industry in a roll-up.”
“So in many instances, divestitures that were supposed to address a competitive problem have ended up fuelling additional competitive problems.”
“If we’re going to be effective, we cannot just look at each individual deal in a vacuum detached from the private equity firm,” he concluded. “It’s important that we articulate a tractable, legally sound framework in the merger guidelines, but one that’s broad enough and flexible enough to address issues [including] private equity [or] technology.”