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Dealmakers face up to more complex M&A environment

New regulatory priorities – from anti-trust concerns to national security screening – are driving a more complex M&A market, according to research conducted for Private Equity Wire’s latest Insight Report, Clear Intent: Private Equity’s New Regulatory Landscape Awaits.

• Greater regulatory scrutiny around national security and anti-trust could slow progress of some M&A deals in 2022

• US Department of Justice has signalled a crackdown on private equity buyouts which “hollow out” an industry

• Screening of foreign investors is limiting the universe of potential buyers for an asset, compared to five years ago


New regulatory priorities – from anti-trust concerns to national security screening – are driving a more complex M&A market, according to research conducted for Private Equity Wire’s latest Insight Report, Clear Intent: Private Equity’s New Regulatory Landscape Awaits.

M&A volumes reached a record high in Europe, the US and UK last year, driven by years of a cheap debt and a quick return to business after the pandemic. In Europe, private equity accounted for around 40% of all acquisitions. In the US, private equity M&A in 2021 was more than double the previous year’s total.

Yet, according to lawyers and dealmakers, regulatory scrutiny around national security and anti-trust could slow down the progress of some deals in 2022. In May, Jonathan Kanter, head of antitrust at the US Department of Justice, signalled a crackdown on private equity buyouts which “hollow out” an industry.

More information is being sought upfront from buyers before regulatory approval in other jurisdictions too. “Changes in regulation have made the M&A process more complex over the past year,” said John Reiss, Global Head of M&A at White & Case earlier this year. “Now more than ever, dealmakers need to understand early on where there may be regulatory hurdles to clear, and potentially pre-empt these with filings at the term-sheet stage.”

In the US, hurdles include an increasingly aggressive stance by the Committee on Foreign Investment (CFIUS), changes to antitrust policy and the Federal Trade Commission’s implementation of pre-consummation warning letters as potential causes for longer deal timelines or investigations post-transaction.

“There’s been some instances where CFIUS has certainly come into play, so the universe of potential buyers for an asset could be smaller than you would have expected five or six years ago,” said a source at a large private equity buyer in the US, “but generally we have been on the right side of most of these things.”

Regulatory scrutiny of M&A appears to be tightening in Europe and the UK too.

New guidance was published last year on Article 22 of the European Union’s Merger Regulation, which provides a mechanism for EU Member States to request the Commission to examine a concentration that does not meet the EU turnover threshold for merger control.

In the UK, a new screening regime under the National Security and Investment Act (NSIA) was introduced at the start of this year which allows the government there to review certain transactions linked to national security and potentially block or unwind them. Transactions falling within 17 “sensitive” sectors of the UK economy may now require government clearance prior to completion.

According to lawyers at Latham & Watkins earlier this year: “In our view, such enhanced regulatory focus is here to stay and dealmakers must now address how best to tackle the implications and minimise the impact of regulatory interventions in deals”.


Key implication | GPs: On large cross-border M&A facing regulatory scrutiny, a smaller universe of buyers or the risk of non-completion could impact valuations or exit for fund LPs


 

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