Private Equity Spotlight: Preparing for 2025’s antitrust landscape

Against the backdrop of a new administration, the introduction of new HSR rules in early 2025 will impose significant additional burdens and risks on deals subject to premerger notification in the United States. How will new DOJ and FTC leadership impact antitrust enforcement, can we expect the private equity industry to remain a key target under the new administration, and what can private equity firms do to prepare?

In this episode of our Private Equity Spotlight series, private equity M&A partner Nick Gibson is joined by antitrust partners Michelle Mantine, Ed Schwartz and Chris Brennan.

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Transcript: 

Intro: Hello, and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content, please contact our speakers.

Nick: Welcome back to Dealmaker Insights, the Reed Smith podcast series spotlighting the private equity industry. I'm Nick Gibson, a private equity M&A partner in the Chicago office of Reed Smith, and I'm excited to have antitrust partners Michelle Mantine, Ed Schwartz, and Chris Brennan here today to discuss the antitrust outlook for 2025 and what changes the industry can expect and start preparing for. We have a lot to cover today, so let's jump right in. So the U.S. presidential election was a few weeks ago, and a second Trump administration is quickly approaching in January. Let's level set for the audience. What is the current antitrust environment for private equity, and were there any major developments over the last four years that specifically affected M&A activity by private equity firms?

Ed: Yeah, Nick, good question. This is Ed Schwartz, and I'll jump in, and I know Michelle and Chris are going to have thoughts as well. So, I mean, the short answer is there's been a sea change. Historically, the antitrust agencies, both the DOJ and the FTC. Really only focused on private equity and the nature of ownership to the extent that it related to adequacy of the divestiture buyer in a deal where divestitures were required. And that's an issue and a concern that goes back with the agencies for some time. Will a private equity firm be an adequate divestiture buyer and compete effectively and aggressively? The world has changed in that regard. Pretty early on, certainly by 2022, both the DOJ and the FTC were making very aggressive statements about their intent on focusing on private equity and whether private equity were going to be adequate or an acquisition by private equity would be adequate in order to preserve competition in a particular industry. And both Lina Kahn and Jonathan Kanter were making statements along the lines that we're going to take a muscular approach and expressing concerns about whether PE firms were in fact well-suited to compete as effectively and aggressively as other potential buyers. And it didn't take long for the agencies to begin taking action. And so we saw the first sent decree between the FTC and a private equity firm, and this was involved JAB and its subsidiaries, which owned a bunch of veterinary care clinics in Texas. And the Kitsets Decree. Was negotiated and effectuated and required significant divestitures. And we saw also a case a lot of folks are going to be familiar with, and that's the FTC's Law of Citizens, Welsh Carson, a private equity firm, and its portfolio company, which owned a bunch of anesthesia companies. And the complaint that was filed focused on roll-ups in that industry for the last, you know, the prior roughly 10 years. And this is the first case that we've seen that was like this in a number of ways. One, it focused on roll-ups by a PE portfolio company. Two, it sued to block the deal under Sherman Act Section 1, so it hasn't seen in a long time. Ultimately, the case was dismissed by the district court judge, importantly, because Welsh only owned a minority share. But, I mean, this was really a watershed moment that one of the agencies sued on this basis. So the short answer is there has been a sea change. I mean, it's effectively a complete turnaround in thinking about how the antitrust agencies think about ownership, the nature of ownership, and how effectively they may compete. And I think it's worth adding that since their loss in the Welsh Carson case, the agencies haven't let up. They've continued to issue a number of statements, sometimes along with other agencies, you know, really pounding on the fact that they're going to be looking very, very closely at private equity firms and just how effectively and aggressively they will compete following their acquisition. So the heat is very much still on with PE firms, at least in this administration.

Michelle: And I couldn't agree more. I mean, really, since Biden's executive order back in 2020, the heat's been on and sort of been being turned up, right? With respect to almost every angle of antitrust enforcement, and PE has had sort of the share of the limelight, you know, often with industries like healthcare and tech, who sort of usually have that role from an antitrust perspective. Private equity has joined them. When you look at the revised merger guidelines at the end of last year and their focus on private equity, the final HSR rules, which will go into effect February 10th that were largely done under Lina Kahn and their focus on private equity and the ownership structures. The agency's public forum last March, really delving into private equity ownership issues and providing a forum for folks to sort of share their stories about private equity. In my view, it's been much of a one-sided story to date, unfortunately. The only real sharing of the other side, so to speak, the benefits of private equity has been shared with a public filing by an amicus brief in the USAP case where an interested party and association sort of laid out how private equity has also benefited from competition and market. So it's an interesting dynamic at the moment. The heat is very much on and definitely a challenging environment for private equity.

Chris: I think some of this too, the numbers bear out that this isn't necessarily just the Biden administration. It's also the market over time. In 2022, two out of five deals involve some private equity participant. That is up way, way beyond where it was in 2000. So over the last two decades, you've seen a massive increase in private equity participation. Nick, I'm sure you have seen that in your practice. And so I think a lot of what we've seen from the Biden administration is really a feeling that enforcers were asleep at the wheel. Right. And when we can think about that in terms of other ways in which this has been a very active administration, we know that private equity is here to stay and that those rates may actually increase. The question is really going to be what happens if a new Trump administration takes a different approach.

Ed: That's a really good point and an interesting perspective, Chris. And I think one that does bear emphasis is you could look at what's happened as the antitrust agencies finally capping up with the massive change in the nature of ownership in the United States that shifts from public equity ownership to private ownership. And, you know, and I agree with you. I think that perspective does bear upon, you know, or does help us think about what's going to happen in the future, you know, both in the Trump administration and administrations beyond. I mean, I think it may be too easy to chalk up what we've seen. Under the Biden administration, with private equity antitrust enforcement as well, it's more the same. We've seen very aggressive, some might say hyper-aggressive enforcement efforts to greatly, if not grossly, expand the scope of antitrust enforcement and chalk it up maybe too easily to that. And we do have to keep in mind that to some extent it arguably is attributable to the massive change in ownership and investment in the United States. It's probably worth just mentioning one more thing, and that is, you know, a lot of folks who listen to this know this, but the revised horizontal antitrust guidelines did include language, new language that expressly addressed private equity investment. And the language is where one or both of the merging parties has engaged in a pattern or strategy of pursuing consolidation through acquisition, the agencies will examine the impact of the cumulative strategy to determine if that strategy may substantially lessen competition or tend to create a monopoly. So this focus on roll-ups isn't, of course, limited just to a focus on private equity, but it does seem that that language was included in particular for the purpose of signaling that they're going to be looking hard at private equity. So one of the questions, and I don't want to jump ahead too far. So one of the questions that we're all thinking about is what changes are we going to see and what pullbacks are we going to see in enforcement policy under a Trump administration? Some of them are probably easy to predict. The FTC's policy statement about Section 5 enforcement issued in November 22, that's gone. I think we can all be pretty sure of that. Are the agencies going to revise yet again or even just withdraw? The revised horizontal merger guidelines and this new language with it. We'll see. If we take a step back and we look at what's happened in antitrust enforcement and merger enforcement in general with respect