Good morning, Hubsters. MK Flynn here with today’s Wire.
This morning, we’re looking at the impact of the federal government on private equity-backed deals – now that the dust has mostly settled on the midterm elections.
First up, I’ve got an interview with Pam Hendrickson, the vice chairman of Riverside, the prolific lower middle-market PE firm headquartered in New York and Cleveland. Hendrickson, who is based in New York, is also the chairman of the American Investment Council, an advocacy group for the PE industry.
And then, Bill Myers, the editor of Regulatory Compliance Watch who tracks the Federal Trade Commission and the Department of Justice closely, warns PE folks: “Be afraid. Be very afraid.”
Now that it’s clear Republicans will control the House of Representatives, while Democrats will have a majority in the Senate, I asked Riverside’s Hendrickson for insights on what the next two years may hold for the PE industry on the legislative and regulatory fronts.
Over the last decade, Hendrickson has spent a lot of time trying to educate government leaders at all levels about the benefits of the private equity industry to the US economy. As chairman of the AIC, she leads the industry’s most influential advocacy group.
As the AIC’s website puts it, “Private equity builds better businesses across America, directly employs millions of workers, and delivers the strongest returns to support the retirements of millions of workers.”
Here’s Hendrickson’s take on where things stand today.
How will a divided federal government affect the private equity industry in general, and what will be the impact on PE deals in particular?
During divided government, Congress typically doesn’t move big pieces of legislation. Instead, attention turns to oversight of federal agencies. We are hopeful that Congress will act soon on the tax extenders bill that allows deduction of interest against EBITDA (as was the case through the end of 2021) versus the more restrictive EBIT. As interest rates continue to rise, this restriction is particularly harmful to manufacturing companies. We are also keeping an eye on proposed regulations that threaten investment, jobs creation, and capital flows.
As regulators have begun to scrutinize private equity and PE deals more, what’s the biggest challenge facing PE firms?
As an industry, we are working to make sure that regulators know the critical role our industry plays in strengthening every part of the American economy. On specific challenges, we face situations where countries and states have different ESG policies that can make it very complicated for global investors to know when and where to invest. Additionally, ownership of healthcare assets has gotten very complicated and continues to attract more scrutiny at both the state and federal level.
Are PE firms like Riverside concerned about suggestions that antitrust regulation is being broadened, potentially to include scrutiny of PE firms making multiple investments in a sector?
Private equity deals are subject to robust antitrust reviews. Recently, we’ve heard a lot of political rhetoric from the FTC and DOJ and are concerned that they are applying a new political lens to the treatment of private capital in the marketplace. In an uncertain economy, the DOJ and FTC should not be throwing more economic headwinds and regulatory burdens on companies that are trying to grow in order to survive.
The Federal Trade Commission will fight mergers “that violate the spirit” of federal antitrust laws under new policy guidelines adopted by the Commission this month.
The move is another sign that the notion of antitrust protection under the current administration is broadening beyond protecting consumers. This was also apparent in the DOJ’s blocking Penguin Random House’s proposed purchase of Simon & Schuster. In that case, the DOJ focused on author earnings, which showed that the agency is protecting not just consumers, but also workers, suppliers and competitors.
PE rollups may be vulnerable under the new regime.
“The new policy statement doesn’t mention the $21 trillion private fund industry—or any other business—by name,” writes RCW’s Myers.
Private fund advisers—especially private equity and venture capital firms—still ought to read it as a warning, Hogan, Lovells partner Logan Breed told RCW.
“This policy statement has no real guardrails or restraints,” he says. “The upper bounds of risk here are unknowable. This is an open-ended grab bag of enforcement opportunity for a Commission that doesn’t like private equity.”
Breed continued: “Private equity has a lot of power in our economy,” he says. “And people don’t understand it and it sounds scary. And so people are, I think, predisposed to be favorably inclined to arguments that sound plausible on their face to stop these big ‘evil’ corporations.”
For now, Breed recommends two things. The first is to “be careful about who you’re putting on boards. That’s one thing you can do easily.”
The second is to be honest about how much regulatory risk your firm is willing to take on before you consider your next buyout. “The less risk-tolerant move is to diversify rather than hitting multiple targets in a fairly concentrated area of the same sector,” Breed said. “I’m not saying the more risk-tolerant approach is illegal now, but it could certainly lead to an investigation.”
Across the pond
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I’ll be back with more tomorrow.
Until then, happy dealmaking,