FTC may require PE funds to disclose LPs

Private equity firms could soon be required to disclose the names of their LPs in regulatory filings—an added hurdle for the asset class amid financing and fundraising challenges.

The Federal Trade Commission proposed a number of amendments Tuesday to its HSR form and associated instructions, requiring parties to disclose more details to the FTC and the Department of Justice ahead of larger mergers and acquisitions.

While the proposal covers M&A transactions across public and private asset classes, its implementation could have acute impacts on the PE industry, including an exposed LP base, higher legal costs and extended deal timelines.

Currently, the HSR form only requires the disclosure of the GPs and the identities of minority stakeholders in voting securities. The proposed changes would require the identities of certain LPs in participating funds, treating limited partnerships like corporations by requiring the identification of any minority investor with a stake of 5% or more.

When the disclosure of stakeholders' identities was implemented in 2011, the FTC understood limited partnerships as structures that didn't exert control over the operations of the fund or the fund's portfolio companies. Therefore, it didn't view the disclosure of LP identities as essential to the pre-merger review process, regulators wrote in the amendment proposal.

Now, after a decade, the FTC has shifted gears, stating in the proposal that it would be "inappropriate" to make generalizations about the role of investors in limited partnerships and that LPs' identities are in fact critical to uncovering any antitrust violations.

The FTC said the identification of LPs can provide valuable information about co-investors and any potential "overlapping investments" in a transaction that could violate antitrust legislation.

"Traditionally, private equity protects the disclosure of a limited partner at all costs," said Deidre Johnson, head of Ropes & Gray's pre-merger notification practice. "It's a huge change."

The question of LP disclosure began in 2020, when the Committee on Foreign Investment in the United States implemented new rules, said Paul Aversano, global practice leader of the global transaction advisory group at Alvarez & Marsal, a consulting firm. The new rules, which redefined how the committee reviews foreign investments in US companies for national security risks, said that a US-based fund's LP roster could be subject to the committee's review if foreign LPs were involved through any indirect investments.

"That was the genesis of it," said Aversano. "So exposing the LPs isn't necessarily a new thing, but CFIUS was purely [foreign] money. Now it's on every deal. Now you're going to have everybody disclosing."

While the information submitted in an HSR form is confidential, the disclosure of a fund's LPs could blunt PE deal volume and fundraising. Johnson said the new rules—if passed—could push transaction timelines out at least a month or two, which could raise costs for PE firms.

The rising cost of debt financing has already brought larger LBOs to a relative standstill, and total US PE deal count is down nearly 25% in Q1 2023 from its Q4 2021 peak, according to PitchBook's Q1 2023 US PE Breakdown.
   
The sheer volume of information this proposal would require of firms engaging in M&A activity came as a surprise to antitrust lawyers, who say it will result in an increased workload and billable hours for them—an added cost for clients.

Other key proposals would require filers to include information about the potential impact of a merger or acquisition on employees of the target company; internal documents and drafted documents showing a transaction analysis or describing market conditions; and details of previous acquisitions.

"Those kinds of expansions are going to create a lot more upfront work in terms of putting filings together," said John Ingrassia, a partner at Proskauer who specializes in antitrust litigation.

The proposals could also have a negative impact on PE fundraising, which has taken a hit over the past year. PE fundraising by the six largest public alternatives managers—Blackstone, KKR, Apollo Global Management, The Carlyle Group, Ares Management and TPG—has declined 41.9% from Q1 2022, according to PitchBook's Q1 2023 US Public PE and GP Deal Roundup.

"I suspect that it will be more difficult to raise capital in those circumstances where there's some sort of disclosure requirement," said Johnson.

The proposal is in tune with enhanced regulatory scrutiny around PE transactions in recent years. Last year, for example, the DOJ initiated a probe into PE firms' practice of appointing members to the boards of different portfolio companies in the same sectors.

"When we see enhanced scrutiny, that can have an effect on the types of transactions parties are undertaking," said Matt Wiener, co-practice leader of the transaction liability team at Aon. His firm called off a potential merger with Willis Towers Watson in 2021 after the DOJ sued to block the transaction.

The proposal is open for public comments for 60 days; the rules could go into effect in several months, when the FTC and DOJ publish a finalized version.

Featured image by EQRoy/Shutterstock

This article originally appeared on PitchBook News