Federal Antitrust Regulators Scrutinize Private Equity Roll Up Strategies

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In a bid to gain significant market share in various industries, private equity investors have increasingly turned to roll-up strategies, acquiring multiple smaller companies within the same sector. However, the Federal Trade Commission (FTC) and the Justice Department’s antitrust division are now closely examining the legality of such practices. The regulators are concerned that roll-up strategies may lead to unfair competition and reduce market diversity.

FTC Chair Lina Khan highlighted the issue in a recent interview with CNBC, expressing the need for a deeper examination of instances where individual acquisitions might not raise legal concerns, but their cumulative impact can result in significant market consolidation.

To address potential anticompetitive practices, the FTC has proposed an update to its merger guidelines. The draft update aims to expand the list of required information and documents that firms must submit when notifying the government of large attempted mergers. This move is intended to enable more thorough reviews and assessments of mergers and acquisitions concerning their compliance with antitrust laws.

While the FTC’s proposed changes are aimed at enhancing scrutiny across various sectors, private equity funds may face increased challenges. According to an analysis by law firm WilmerHale, the new proposal could require firms to spend four times more time preparing paperwork for each acquisition, resulting in up to 144 hours of paperwork per transaction. Additionally, the updated guidelines would empower the FTC to conduct more frequent and robust investigations into transactions involving private equity funds and their platform companies.

The roll-up strategy is commonly employed by private equity firms to consolidate companies in fragmented markets, creating full-scale businesses. However, the FTC has intervened in some cases to prevent private equity firms from gaining excessive control over industries. For instance, in 2022, the FTC blocked JAB Consumer Partners from further acquiring veterinary clinics, aiming to preserve competition and prevent excessive consolidation.

The scrutiny on private equity roll-up strategies comes shortly after the Supreme Court rejected the FTC’s attempt to block tech giant Microsoft’s $69 billion acquisition of videogame-maker Activision Blizzard. The court’s decision was a setback for the Biden administration’s efforts to enforce antitrust laws and curb anticompetitive business practices.

As the regulatory landscape evolves, private equity investors will face increased scrutiny, and the implementation of roll-up strategies may come under stricter assessment to ensure a fair and competitive market environment.