Disregard for antitrust compliance challenges PE

Private equity has been on the radar of regulators for a while now. The new rigour in financial regulation poses many issues for the alternative investments industry. Additionally, the US presidential election is playing its part in pushing the industry back into the political debate – as candidate and ex-Bain Capital Mitt Romney is being investigated by the press left, right and centre.

It is the very nature of the sector, the buying and selling of businesses, which pushes PE into the bullseye of antitrust regulators. Multiple acquisitions redistribute the liability for a portfolio company continuously, turning the legal structure into a muddled grey zone.

"If you look at other industries, you can see the development of awareness of regulation. This awareness dramatically increased over time," says Keith Jones, partner at Baker & McKenzie and specialist in EU, competition and trade law. Yet, the attention to antitrust compliance does not seem to be very high in PE. Jones argues there may be funds that are very cautious about antitrust claims, but also others that just outright ignore their existence and impact on a deal.

Meanwhile, firms in the know can even use antitrust compliance to gain competitive advantage: "There were some who bought companies, cleaned them up, blew the whistle on them and basically got them ready for sale again," says Jones.

Following an acquisition, legal responsibility is transferred to the new owner. At the same time, divesting from a portfolio company does not free the investor from his legal responsibility entirely. Any claims made against the business concerning the holding period can still be attributed to the GP.

And penalties are high. EU law prescribes a fee increase of up to 100% in cases of recidivism and according to Jones that is no rarity across Europe. At the same time, the EU also provides whistle-blowing leniency.

LPs on the other hand have a preferable position in this legal structure. In case of antitrust violations in portfolio firms, they have the option to press charges against the fund manager in some jurisdictions. However, despite the EU's effort towards harmonising antitrust regulation, the national frameworks remain different.

"It depends on what they would harmonise it to. There are pros and cons to every jurisdiction. Many come to the UK because of the flexible disclosure rules. Germany and the Netherlands are also pretty popular," declares Jones.

It remains unclear why antitrust is not a bigger issue in the industry, especially as it should be part of the pre-acquisition due diligence audit. Its financial and reputational impact should be a priority for investors, particularly at a time of increasing demand for transparency.

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• Topics
• Regulation
• EU Commission