Regulatory scrutiny of private equity (PE) firms and transactions, from an antitrust perspective, has become somewhat commonplace in the West over the past year, as officials flag competition concerns – including around roll-up strategies and interlocking directorates – and put related enforcement activities high on their agenda. Will their counterparts in the Asia Pacific region follow suit, or at the very least, take issue with some of PEs' competition-curtailing investment strategies?
Though examples of Asian antitrust regulators intentionally targeting PE-backed deals are few and far between at present, there’s enough going on to pique Asia Desk’s curiosity. Signals being telegraphed by a few of the region’s more mature authorities suggest that PE firms shouldn’t write off the possibility of heightened regulatory scrutiny. In fact, they would do well to adjust their strategies accordingly, rather than wait for the regulatory hammer to come down.
While strategic investors have long been on the regulatory radar, a recent ripple of interest in the conduct of financial investors arrived from Australia, when chairperson of Australian Competition and Consumer Commission (ACCC) Gina Gottlieb-Cass flagged PE’s minority stakes in competing companies as a “real concern” in February.
The ACCC raised competition concerns last year on a PE-led consortium’s proposed acquisition of a port in Victoria. The deal was eventually nixed after the ACCC pointed out that one of the acquirers, Palisade Investment Partners, on behalf of investors could come to control 100% of the Port of Portland and a 49% interest in the Port of Geelong – ports conducting very similar trade in that part of Australia – if the transaction was allowed.
More recently, the proposed acquisition of Origin Energy [ASX:ORG] by Brookfield Asset Management and EIG Partners – which attracted regulatory attention since November last year and was reportedly filed in April through ACCC’s public merger authorization route – prompted some speculation that Brookfield might be required to divest its transmission company AusNet Services to get the deal to the finish line.
In India, the local competition authority appears to have turned its attention to PE as well, albeit via a watch-and-monitor approach.
Following a significant uptick in PE investment, it’s been widely reported since 2020 that Competition Commission of India (CCI) is conducting a market study on the business practices of PE investors and their impact on competition in the Indian market. The CCI wants to determine whether PE investors holding stakes in multiple firms in the same market have an incentive to distort competition, and how they could potentially exert influence on portfolio companies.
Subsequently in 2022, a report suggested that the CCI is adopting the view that interlocking directorates among competitors is clearly alarming. The regulator has been asking PE firms that seek permission for board representation in a second company in the same market to choose one company and cede their directorship in the market rival.
Recent amendments to India’s Competition Act – the Competition (Amendment) Bill, 2022, approved by Parliament on 3 April – may well be the first move the regulator has made to win oversight of such matters, as one of the changes to the merger control framework adjusts the definition of control to include “material influence”. The term implies “the presence of factors that enable an entity to influence the affairs and management of another enterprise” such as board representation. A similar definition exists in China and South Korea though the Korean threshold to establish “control” in the case of interlocking directorates is somewhat higher.
Although the provision is obviously not as strict and straightforward as Section 8 of the Clayton Act in the US – a caveat that makes service of directors and officers on the boards of competitors a per se violation and has been recently more actively enforced by the Department of Justice’s (DoJ) Antitrust Division – this is indeed a step in the right direction providing more space for the regulators to assess potential competitive harm.
There is little public visibility on how concerned other APAC regulators are about PE houses’ investment tactics, but a PE lawyer noted that similar discussions are underway at firms in China and Japan, where internal legal collaborations between PE lawyers and their competition counterparts have become more frequent.
Private equity firms have enjoyed a long and lucrative run relatively free from regulatory scrutiny, but APAC’s regulators may not be far behind their Western counterparts in addressing financial sponsor led deals. PE houses would do well to engage with a local “legal relationship consultant” – and the sooner the better.