Although there is no official statistic, I would expect that roughly 25-40% percent of the merger filings to the European Commission are private equity-backed. Private equity transactions may raise several antitrust questions that do not arise in the same way with strategic acquirers (see also our previous post here). In this post, I will therefore discuss some general considerations and provide practical guidance regarding antitrust issues during transactions.
The jurisdictional question: It is the sponsor that usually matters, not the fund
Private equity transactions frequently fall within the scope of merger control regimes, not necessarily only because of the size of the target, but because of the way turnover is attributed within private equity structures. Under the EU Merger Regulation, as well as most national merger control systems in Europe, the relevant turnover is generally calculated at the level of the undertakings concerned. This means that turnover generated by all entities that are ultimately controlled by the same parent undertaking must be aggregated when assessing whether jurisdictional thresholds are met.
In a private equity context, the European Commission typically regards the fund sponsor or investment manager as exercising indirect control over the portfolio companies held through the fund structure. As a result, the turnover generated by all portfolio companies that are under the sponsor’s “control” will normally be taken into account for merger control purposes.
This approach can become controversial where a sponsor manages multiple funds. At first glance, one might argue that portfolio companies held by different funds should not automatically be considered part of the same economic entity. If each fund operates independently and pursues its own investment strategy, there may be grounds for treating them separately when assessing jurisdictional thresholds.
In practice, however, antitrust regulators are often reluctant to accept such a formalistic view. The increasingly sophisticated architecture of private equity structures, combined with overlapping management functions, common decision-makers, and the presence of advisory or management entities that influence investment decisions across multiple funds, frequently leads regulators to look beyond the legal structure. As a result, sponsors often face an uphill battle when seeking to persuade regulators that individual funds should be assessed independently, both for turnover attribution and for the substantive competitive assessment of the transaction
Control is what counts
The central question under EU merger control is whether an investor acquires the ability to exercise decisive influence over an undertaking. While decisive influence will often result from a majority shareholding, ownership of more than 50% of the shares is not necessarily required. The Commission has consistently taken the view that control may also arise through governance arrangements that enable an investor to influence the strategic commercial behaviour of a business. In practice, veto rights over matters such as the annual budget, business plan, significant investments, acquisitions, or the appointment and dismissal of the majority of senior management may be sufficient to confer control, including forms of so-called negative control, even where the investor holds only a minority stake.
The analysis becomes particularly relevant in private equity transactions involving co-investment structures. Two or more investors may acquire joint control where each is able to block or influence decisions concerning the target’s strategic direction. In such circumstances, the investors are regarded as jointly exercising decisive influence over the portfolio company. From a merger control perspective, the acquisition of joint control constitutes a concentration and may therefore trigger filing obligations at EU level and/or in multiple national jurisdictions, depending on the parties’ activities and turnover.
Importantly, the concept of control under the EU Merger Regulation does not define the outer limits of merger control jurisdiction across Europe. Several national regimes apply more expansive notification requirements. Inter alia, Austria and Germany require merger control filings in certain situations where an investor acquires a minority shareholding without obtaining control. As a result, transactions that do not confer decisive influence – and which therefore may fall outside the scope of EU merger control – can nevertheless require notification and clearance under applicable national merger control rules. For private equity firms, this means that minority investments deserve the same careful jurisdictional assessment as acquisitions of sole or joint control.
Substantive analysis
As discussed above, the Commission is generally reluctant to assess different funds managed by the same private equity firm as entirely separate economic entities. This can lead to outcomes that may appear counterintuitive from a commercial perspective. A transaction executed through Fund V may raise horizontal or vertical issues because of the activities of a portfolio company held by Fund III, even where the two funds have separate investment teams, different investor bases, and internal information barriers.
As a consequence, where a portfolio company held by one fund is active in the same market as a target being acquired through another fund managed by the same sponsor, the Commission will generally conduct its standard competitive assessment. The same applies to customer-/supplier-relationships. The Commission practice contains a number of examples in which upstream or downstream links between portfolio companies and target businesses have been examined notwithstanding the fact that the relevant activities were housed in different funds.
For private equity firms, this has important practical implications. One of the first antitrust law workstreams in a transaction should often not be a detailed review of the target itself, but rather a comprehensive review of the sponsor’s wider portfolio. Identifying existing portfolio companies that may have horizontal overlaps, customer-/supplier-relationships or other relevant competitive connections with the target is frequently essential to assessing potential substantive antitrust risks.
That said, the outcome of such an exercise will often be reassuring. In a significant proportion of private equity transactions, there are limited – or no – meaningful overlaps or vertical links between the target and the sponsor’s existing portfolio companies. Where this is the case, the substantive competition assessment is usually straightforward. At EU level, many such transactions qualify for simplified treatment and are cleared without extensive investigative efforts. The Commission’s decisional practice likewise suggests that only a relatively small number of private equity acquisitions proceed to an in-depth Phase II review.
The practical lesson is therefore twofold. Private equity firms should expect antitrust regulators to take a broad view of their portfolio when assessing competitive relationships. At the same time, the fact that all controlled portfolio companies are potentially relevant to the analysis does not mean that substantive concerns are likely to arise. In most cases, the exercise is one of identifying and confirming the absence of material competitive links rather than addressing significant competition problems
Practical advantages over strategic investors
The fact that many private equity transactions require merger control clearance without giving rise to significant substantive competition concerns can itself be a competitive advantage in an auction process. While private equity firms will often trigger filing obligations because the turnover of their broader portfolio must be taken into account, the absence of material horizontal overlaps or customer-/supplier-relationships frequently means that regulatory clearance is highly predictable and can be obtained through streamlined review procedures. From a seller’s perspective, this may translate into lower regulatory execution risk than in the case of certain strategic bidders whose acquisitions are more likely to attract substantive scrutiny. Accordingly, the parties’ assessment of merger control risks may influence both bidder selection during the auction process and the allocation of regulatory risk in the transaction documentation, including risk-sharing mechanisms and any commitments relating to the pursuit of merger clearance.
Private equity firms may also benefit from a more flexible approach to due diligence. In the case of strategic buyers, the employees best placed to evaluate commercially sensitive information are often those who operate in business areas that compete directly with the target.
Private equity firms often have an alternative solution. They can establish a clean team consisting primarily of investment professionals from the fund who are not involved in the day-to-day commercial activities of any portfolio company. They can often review competitively sensitive information while remaining compliant with antitrust rules. They are also generally better positioned to accommodate seller requests for safeguards, including confidentiality restrictions, clean team arrangements and cooling-off periods where appropriate.
The bottom line
The bottom line is that private equity transactions are not exempt from antitrust law complexities – if anything, they often raise a different set of questions. The focus is less on the target in isolation and more on control, turnover attribution and a portfolio-wide assessment of potential overlaps and vertical relationships.
While merger control filings may be required more frequently, substantive concerns will often be limited. Private equity firms that understand this distinction and conduct an early portfolio review are typically well positioned to navigate antitrust law issues in M&A deals.
Photo by Billy Huynh on Unsplash
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