I. The PE Business Model
Ms. Jurata explained that PE funds invest capital using a strategy that typically involves acquiring a private company (also called a portfolio company once acquired), managing the private company for a period of three to seven years, and then selling the company. PE firms can provide funding to firms that are not able to access public debt or equity markets. PE firms are incentivized to maximize the value of their portfolio companies, because doing so will increase their return on investment when they eventually sell their portfolio companies.
Mr. Mosier discussed how agencies factor in the PE business model when assessing competition issues. He noted that it is incorrect to assume that acquisitions by financial buyers (such as PE buyers) do not need to be scrutinized to the same extent as acquisitions by strategic buyers (such as other companies in the same or related industry) and that the same rules apply to all buyers. He described some of the public discourse on the PE business model, including criticisms that it focuses too much on short-term profits and/or underinvesting, saddles companies with debt and weakens their balance sheets, and involves layoffs or sale leaseback transactions.
II. PE-Related Statutes
Mr. Mosier highlighted the following statutes relevant to antitrust enforcement and PE:
- Section 7 of the Clayton Act, which prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”
- Section 7A of the Clayton Act, which specifies which acquisitions must be reported to the DOJ and FTC in advance of their execution.
- Section 8 of the Clayton Act, which prohibits directors and officers from serving simultaneously on the boards of competitors.
- Section 1 of the Sherman Act, which prohibits contracts, combinations, or conspiracies in restraint of trade or commerce.
- Section 2 of the Sherman Act, which makes it unlawful for any person “to monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations[.]”
The review of mergers and acquisitions in the United States has undergone some recent revisions, including the updated Merger Guidelines and proposed changes to the pre-merger filing requirements. In addition, the current administration has been taking a “whole of government” approach to competition, including PE deals.
III. Changes to the Hart-Scott-Rodino Act and Pre-Merger Filing Requirements
Ms. Overton discussed the evolution of filing requirements under the Hart-Scott-Rodino Act (HSR Act). In 2011, changes to the HSR Act streamlined the pre-merger notification process for both the filing entities and competition authorities reviewing the pre-merger notifications. Other changes required increased transparency of the acquiring party’s “associates” and their overlap with the company being acquired. PE firms fall under the umbrella of “associates,” although the definition does not explicitly include the term “private equity.”
In 2023, the FTC and DOJ announced a proposal to further change the filing requirements under the HSR Act. The proposed revisions to the HSR filing requirements increase the amount of information that acquiring parties need to disclose as part of the pre-merger notification process. The panelists discussed a proposed change that requires acquiring parties to disclose the history of past acquisitions dating back to at least ten years prior to the filing date. Currently, pre-merger notifications only require a transaction history of five years prior to the filing date.
The FTC and DOJ estimate that the time required to prepare a filing will increase from 37 hours per filing to 144 hours, leading to a total of $350 million dollars in annual labor costs across all filings. Mr. Armstrong, Ms. Jurata, and Ms. Overton also noted that increasing the amount of information required to be disclosed may lead to the disclosure of information that is unnecessary for agencies to assess antitrust issues related to some PE firms’ deals, which could delay the review process. For instance, PE firms may invest in portfolio companies that operate in different industries, and information on historical acquisitions in unrelated industries are likely to be unimportant for agencies’ assessment of a deal.
IV. Recent Enforcement Efforts
The panelists discussed two recent enforcement efforts by US antitrust authorities: (1) the FTC’s actions against JAB Consumer Partners and (2) Federal Trade Commission v. U.S. Anesthesia Partners, Inc. and Welsh, Carson, Anderson & Stowe XI, L.P., et al.
Mr. Armstrong discussed the PE firm JAB Consumer Partners’ (JAB’s) proposed acquisition of SAGE Veterinary Partners (SAGE) in 2021. At the time, JAB was the parent company of Compassion-First Pet Hospitals and National Veterinary Associates. The FTC investigation concluded that the proposed acquisition of SAGE would allow JAB to “establish a dominant position in key markets for specialty and emergency veterinary services in California and Texas.” The FTC ordered JAB to divest clinics in California and Texas for it to proceed with the acquisition of SAGE. The FTC also ordered that JAB shall not acquire any veterinary practice, clinic, or facility doing business near National Veterinary Associates without providing written notification to the FTC.
The panelists also reviewed the FTC’s complaint against the PE firm Welsh, Carson, Anderson & Stowe (Welsh Carson) and U.S. Anesthesia Partners (USAP), a provider of anesthesia services in Texas that is part of Welsh Carson’s portfolio of companies. The FTC alleged that Welsh Carlson and USAP illegally established monopoly power in the market for anesthesiology practices in Texas. The at-issue actions of Welsh Carlson and USAP involved a series of non-reportable acquisitions of large anesthesiology practices in Texas, price-setting agreements with other anesthesiology practices to artificially increase prices, and a deal signed with a competitor preventing it from providing anesthesiology services in the areas served by USAP. The complaint illustrates the FTC’s view of serial acquisitions in the same industry as potentially problematic. Smaller, non-HSR reportable acquisitions are subject to investigation by the DOJ and FTC under various antitrust statutes.
V. The PE Business Model and Competition
The PE business model has drawn increased attention from government agencies and legislators. One area of skepticism around PE firms is the possibility that the PE business model may be inherently harmful. Critics claim that the PE business model leads to higher prices or lower product or service quality because of the way that PE deals are financed and because of PE firms’ incentives. PE firms use a leveraged buyout strategy in which a company is acquired by borrowing a large amount of debt, and the concern is that increased debt-service costs are passed on to final consumers in the form of higher product or service prices.
The panelists analyzed the results of an academic study that investigated the effect of PE ownership on the quality of the services provide by nursing homes. The study compared the medical outcomes of nursing homes owned by PE firms with other nursing homes. The study concluded that mortality rates were higher, the number of caregivers was smaller, and management fees were larger at the nursing homes owned by PE firms relative to other nursing homes.
Ms. Jurata cautioned against generalizing the results of this study to PE deals in general. She described another study that compared the medical outcomes of nursing homes owned by PE firms with other nursing homes during the COVID-19 pandemic. The study concluded that the nursing homes owned by PE firms experienced a smaller number of COVID-19 cases among patients and staff, as well as a smaller probability of a shortage of N95 masks, surgical masks, and other protective equipment.
VI. Conclusion
The PE business model has gained attention from the FTC, DOJ, media, academic researchers, and the general public, and the proposed changes to the HSR Act indicate that PE deals will undergo more thorough reviews than they have in the past. This increased scrutiny may be intended to detect consolidations that can lead to market power and consumer harm, but it may impose additional costs with unintended consequences. Moreover, the increased monitoring of serial acquisitions made by PE firms may discourage PE firms from specializing in investments within a given industry – a practice which carries both potential benefits and risks, and which will continue to be a subject for debate.
