Private Equity Firms Facing More Questions in FTC Merger Reviews

The Federal Trade Commission is ramping up its scrutiny of private equity mergers and acquisitions, in keeping with the Biden administration’s focus on stricter antitrust enforcement.

The FTC has started asking a broader set of questions about the private equity firms behind large deals that are subject to the agency’s prior approval under its merger review rules.

Historically, the FTC’s merger reviews—authorized by the Hart-Scott-Rodino Act—largely have focused on competition issues created by the deal in question, according to Debevoise & Plimpton LLP partner Erica Weisgerber and other attorneys familiar with HSR reviews.

The agency expanded its investigation beyond the initial review when it identified an overlap of business interests among the private equity firm’s fund that holds the acquiring company, or other competition issues, said Weisgerber and other attorneys familiar with the reviews.

But the FTC now is expanding its initial HSR inquiries and increasingly using second requests—the more comprehensive phase of HSR review—to probe the private equity fund behind the deals and other companies that the fund owns with questions not traditionally associated with competition, according to Alexis Gilman of Crowell & Moring LLP and other attorneys familiar with these questions.

The agency also is asking more questions about private equity sponsors—PE firms that create and manage, but don’t necessarily own, the acquirer fund—about their future plans for transactions in a particular industry, Weisgerber and other attorneys said.

Greater Scrutiny

The increased focus tracks FTC Chair Lina Khan’s prior statements that the agency plans to boost its scrutiny of whether private equity deals contribute to anticompetitive behavior driven by consolidation across various industries.

The agency also said in September that it would expand the scope of second requests for all types of mergers.

“The growing role of private equity and other investment vehicles invites us to examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations,” Khan said in a September memorandum to FTC staff.

Khan and other Democratic commissioners expressed concerns about private equity transactions amid a sharp rise in private equity-backed deals, which reached $2.1 trillion in 2021, nearly doubling the $1.1 trillion worth of deals in 2020, according to a Bloomberg Law analysis.

“The agency apparently is trying to determine whether ownership by a PE firm affects the competitive decision of its portfolio company and, thus, whether that could have implications for the competitive effects of a merger involving a PE-owned company,” said Gilman, who’s also a former assistant director of mergers at the FTC’s Bureau of Competition.

The FTC declined to comment.

Scope of Reviews

In the past, many private equity deals typically cleared the initial 30-day HSR review period without further probing from federal antitrust regulators, attorneys said.

A small set of deals received a second request for more information because of competition issues among the other companies that the acquirer fund owns.

But the scope and volume of questions are ratcheting up for proposed deals that previously would have sailed through review, attorneys say.

The FTC increasingly is asking merging parties and the private equity funds that own them about how the proposed deal could affect noncompete agreements and employee competition, as well as unionization and executive compensation—issues that weren’t traditionally the focus of merger reviews, according to Gilman and another attorney, who each faced some of these questions.

The agency also is asking how the deals would affect competitive incentives for employees, according to attorneys familiar with these questions.

“We’re seeing two new things in FTC merger reviews—first, the FTC is investigating a broader set of non-traditional issues and going more in-depth on those issues, for example, asking more questions about employment and compensation to see if a merger can harm competition in labor markets, which would affect employees,” Gilman said.

FTC questions also extend to private equity sponsors’ future deal-making plans, he said.

The agency also is seeking information on private equity sponsors’ managing partners, and whether there are overlapping interests among competing companies across the various funds they manage, according to attorneys familiar with the questions.

Private equity sponsors additionally are being asked about their acquisition pipelines—including plans for smaller transactions called tuck-ins and add-ons—and industry track records, Weisgerber said.

“The FTC is also asking in-depth questions about the role that private equity firms play in the operations of their portfolio companies involved in mergers,” Gilman said.

“While this level of scrutiny was previously found in regulated industries, like telecommunications and energy, it is now becoming much more commonplace across the board,” Weisgerber said.

Large deals were reviewed by both antitrust regulators and the agency that oversees a particular sector, but the FTC mainly focused on competition issues while the industry-specific agencies scrutinized the broader impact, attorneys said.

“Private equity-backed mergers are subject to the same rigorous antitrust review process that other businesses face. The FTC should not unfairly discriminate against a deal simply because a company is backed by private equity,” said Jason Mulvihill, chief operating officer and general counsel at the American Investment Council, a group that represents private equity companies such as Apollo Global Management Inc., Blackstone Inc., and Bain Capital LP.

Proposed Rule

The heightened inquiries follow the FTC’s September 2020 introduction of a proposed rule that would expand the information a private equity-backed deal must provide in its initial HSR filing, which the FTC uses to determine whether a review is warranted. The proposal hasn’t yet been finalized.

The proposed rule would broaden the information required about all funds related to the ultimate parent of the fund performing the acquisition. Under current HSR rules, only the acquiring fund is required to disclose information.

“We wanted to right-size the rule to ensure we were reaching enough information to reveal traditional competition issues—a lot has changed in private equity models in the past 40 years,” said Bilal Sayyed, former director of the FTC’s Office of Policy Planning. Sayyed left the FTC in January 2021 to join nonprofit think tank TechFreedom.

Private equity models often have multiple layers of ownership and multiple funds managed by a single entity—clouding the picture of who ultimately controls business operation decisions.

“The FTC and DOJ recognized there might be traditional portfolio company competition problems they’re missing because they weren’t getting enough visibility into who owned what,” Sayyed said.