Private equity’s antitrust future

U.S. antitrust regulators may be coming for private equity.

Driving the news: Several large buyout firms have received Justice Department inquiry letters about partners sitting on multiple portfolio company board seats within the same industry, according to Bloomberg.

• DOJ’s concern reportedly is that this overlap “could influence those companies to act in ways that maximize gains for all — instead of competing vigorously to provide the best services or lowest prices to consumers.”
• Letters have gone out to private equity firms of all sizes, including industry giants like Apollo, Blackstone and KKR.

The big picture: Private equity typically views each of its portfolio companies as discrete entities, even if majority owned and held within a single fund. That’s one of the reasons it’s successfully fought charges of systemic risk.

• This also is true of venture capital and growth equity, albeit usually with minority stakes.

Why it matters: Were overlapping board seats to violate U.S. antitrust law, then the same argument could apply to overlapping investments.

• That would blow a huge hole in the core investment strategies of many industry-focused PE firms. Plus of more diversified firms with robust industry practices.
• It also could drive up the price of private equity deals, because of added regulatory uncertainty.

The bottom line: Private equity has a long history of fending off Washington, D.C., as best evidenced by its continued ability to treat carried interest as capital gains.

That dynamic probably will play out again this time, although firms are surely doublechecking board meeting notes to make sure they didn’t give DOJ an opening.