By David Barrosse, Capstone CEO

Well before the end of the Trump Administration Capstone predicted that any new Democratic Administration would likely take a radical new approach to anti-trust policy. In the days after President Biden took office the odds that Capstone would be correct in that prediction soared. The Biden Administration appointed maverick policymakers at the Federal Trade Commission (FTC) and the Department of Justice (DoJ)—individuals willing to challenge past legal precedent by suing to stop almost every merger they could. The new strategy would be controversial and would involve a slew of losses. Still, liberal advocates of the new policy believed it was the only realistic way of challenging decades of legal precedent that had allowed increasing concentration of economic power. The willingness to take the losses—such as the government’s most recent loss in trying to block the Microsoft merger with Activision—would be a key part of the strategy. Lawyers hate to lose, especially government lawyers, so this new approach was a sign of the Administration’s resolve to change the fundamental direction of competition policy.

Although we predicted this evolution in anti-trust policy early on, we assumed this new strategy would focus mostly on technology and media platforms. In the past year, a new dynamic has emerged that we did not predict, but it is certainly consistent with an Administration that wants to continue to push the envelope. Last year the Chair of the FTC, Lina Khan, and the head of the DOJ antitrust division, Jonathan Kanter, made coordinated remarks making it clear that their latest target in remaking US competition policy was the private equity industry. The remarks focused on how private equity firms controlled the combined economic power of the companies sitting in their portfolios in numerous ways. However, the main thrust of the criticism focused on “roll-up” strategies. Khan and Kanter made it clear that many roll-up strategies are designed to create monopolies in small sub-sectors in the hopes of flying under the radar of antitrust regulators.

In a Financial Times interview in May of 2022, Kanter made his views clear: “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.” Khan echoed those concerns in another Financial Times interview “[e]very individual transaction [by a private equity firm] might not raise problems, but in the aggregate, you’ve got a huge private equity firm controlling, say, veterinary clinics. So that’s a concern.”

Late last year Khan directed the FTC to issue a policy statement asserting the power to block private equity roll-ups even if the agency couldn’t prove that the combination violated the Clayton Act definitions of economic harm. This move seems, to Capstone, to be a clear sign that the FTC will attempt to use frustration and intimidation to reduce the number of roll-ups. Kanter seemed to confirm that view in March when he said, “There is no success greater for us than deterrence.”

Only three weeks ago the regulators released their latest attempt to frustrate roll-ups. On June 27^th, the FTC, in coordination with the DoJ, proposed changes to the premerger notification rules implementing the Hart-Scott-Rodino (HSR) Act. Some of the important changes include the following:

• Provision of details about transaction rationale and details surrounding investment vehicles or corporate relationships.
• Provision of information related to products or services in both horizontal products and services, and non-horizontal business relationships such as supply agreements.
• Provision of projected revenue streams, transactional analyses and internal documents describing market conditions, and structure of entities involved such as private equity investments.
• Provision of details regarding previous acquisitions.
• Disclosure of information that screens for labor market issues by classifying employees based on current Standard Occupational Classification system categories.

These changes are clearly focused on private equity roll-up strategies and are, at least initially, simply designed to make these transactions more costly in terms of both money and time. The FTC and DoJ hope that by adding to the time and cost required and by raising the threat of being sued that it can achieve its policy of “deterrence” described by Kanter.

The antitrust regulator’s focus on private equity is consistent with the priorities of their political patron, Elizabeth Warren, and the entire progressive wing of the Democratic Party. The Progressives’ focus on private equity transactions can be traced back to the 2011-2012 Presidential candidacy of Mitt Romney, one of the founders of Bain Capital. Since that time the Progressive wing of the Democratic Party has scrutinized several aspects of the industry. Senator Warren has sponsored several legislative attempts to change the tax treatment for the industry, limit their involvement in the healthcare industry, and make firms responsible for companies well beyond the time they leave their portfolio. The actions of Khan and Kanter are, therefore, consistent with a broader attack on the industry from this faction of the Democratic Party.

Since the policies of Khan and Kanter have broad support, at least from a large portion of Democrats in Congress, the natural question is “What comes next?” Will companies owned by private equity garner greater scrutiny by financial and healthcare regulators? Will blue state regulators join federal agencies in trying to stymie roll-ups? Capstone will continue to monitor these issues and their implications, ensuring our clients have the benefit of the broader dynamics and its impact on specific sectors.

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