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How Biden’s trustbusters plan to target private equity

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The trustbusting trio taking on private equity

For decades, private equity has successfully donated to US politicians to prevent Congress from changing the tax rate they pay on carried interest.

But the industry’s formidable lobbying machine has a new foe: three antitrust reformers appointed by US president Joe Biden to overhaul the way competition rules are applied.

Lina Khan, Jonathan Kanter and Tim Wu have made it no secret in recent months that private equity is on their radar as the industry’s top players morph into powerful diversified conglomerates that control vast swaths of the economy.

Tim Wu, Lina Khan and Jonathan Kanter
Tim Wu, Lina Khan and Jonathan Kanter © FT montage: Bloomberg/Stephen Voss/FT/New America

Among their main concern is private equity’s roll-up strategy — when a firm scoops up multiple companies in the same industry and merges them together — as well as its “buy, strip and flip” model, whereby undervalued companies are acquired, restructured and sold off shortly thereafter.

“We have very real questions around those acquisitions,” said Khan, who chairs the Federal Trade Commission.

How exactly the trio plan to tackle the issue is the focus of this Big Read by the FT’s Stefania Palma and DD’s James Fontanella-Khan.

Here’s a snapshot:

  1. Scrutinise “interlocking directorates”, where private equity executives sit on boards of competing companies 

  2. Broaden disclosures in pre-merger notification forms 

  3. Home in on smaller deals

  4. Overhaul merger guidelines with a stronger focus on buyout groups

We got a taste of what’s to come last June, when the FTC forced JAB Holdings, which manages the fortune of Europe’s secretive Reimann family, to divest veterinary clinics so that it could close two of its previously proposed mergers. The move was unprecedented.

The focus on private equity comes as the industry has grown into a behemoth that directly and indirectly employs an estimated 31.1mn people, according to EY. That’s nearly one in every five jobs in the US (the overall US labour force is about 165mn).

Once a niche industry, PE firms, which include giants such as Blackstone, KKR and Apollo, now hold almost $10tn in assets under management, according to a McKinsey study.

Makan Delrahim
Makan Delrahim has criticised the agencies’ stance on private equity © Bloomberg

Critics have accused the trio of politicising competition policy, and argue that attacking private equity’s business model — rather than the deals themselves — could open a can of worms.

Makan Delrahim, Kanter’s predecessor appointed by Donald Trump, said that “taking legal aim at an industry, or any particular actor . . . rather than taking aim at the effects of the specific conduct or transaction is counter to the way law enforcement should be conducted”.

Kanter disagrees: “In order to understand how to apply the antitrust laws in a modern economy, you have to understand the business models of major market participants and private equity is a major market participant.”

The battle over Revlon’s valuation heads to bankruptcy court

A group of Revlon minority shareholders is convinced that the distressed cosmetics company could be the next Hertz.

The car rental agency chartered a miraculous comeback after going bankrupt early in the coronavirus pandemic — and left shareholders with a juicy $1bn payout as the underlying business recovered.

Revlon’s stock price has had a resurgence of its own. Shares in the 90-year-old group had fallen to about $1 a share when the bankruptcy reorganisation kicked off two months ago, but have since hit more than $8, implying an overall market capitalisation of roughly $500mn.

The minority group is so convinced of a chance for recovery that they plan to ask a judge for their own official committee in the company’s bankruptcy proceedings when they face off against Revlon’s debt holders at a hearing in a New York courtroom on Wednesday.

Revlon’s debtors will take a less optimistic view. The company’s junior debt still trades at distressed levels and, with its billionaire owner Ron Perelman still clinging to 83 per cent of its stock, the unexpected price gauge appears to mirror Reddit-borne phenomenons like AMC Entertainment, GameStop and as DD delved into yesterday, Bed Bath & Beyond.

Company management appears to agree. Revlon has already hit back at the minority shareholder’s proposal, asking the judge on Sunday to deny their request due to a lack of evidence that the equity actually is worth anything.

It will be up to the judge to peel through the varnish and determine what Revlon’s valuation really looks like.

Retail traders, as Lex points out, might be wise to treat their Revlon shares like lottery tickets and cash in their winnings before the bankruptcy proceedings are in full swing.

Not to mention the other drama playing out at Revlon. The cosmetics group was recently sued by Citigroup, which is attempting to recoup $500mn that it claims it is owed after accidentally wiring hundreds of millions of dollars to Revlon’s creditors last year.

Revlon’s baggage will test shareholders’ hope, but denying the company’s recent stock surge risks complicating things even further.

“Rightly or wrongly, the market thinks there is value,” he said. “The court could say the market is bonkers, but rejecting markets evidence like that really opens up a can of worms,” said Anthony Casey, a law professor at the University of Chicago.

Who wouldn’t be tempted to boast when on stage among fellow Wall Street tycoons?

Victor Khosla, the founder and chief investment officer of Strategic Value Partners, appeared to pump up one his fund’s biggest wins during an appearance at the Milken Global Institute conference earlier this year.

“The mall is shut down and we got bids for it for a few hundred million dollars,” he said.

Victor Khosla, founder of Strategic Value Partners
Victor Khosla, founder of Strategic Value Partners, has said the company does not engage in ‘scorched earth’ tactics © Bloomberg

In 2021, SVP had taken control of US shopping mall operator Washington Prime Group after it had filed for bankruptcy. The Connecticut-based firm was WPG’s largest single creditor and swapped its debt position for a dominant equity stake in the new WPG, valued in aggregate at about $3bn.

But a dominant shareholder isn’t always a 100 per cent owner.

Other stakeholders in WPG held roughly a tenth of it until just a few months ago, when SVP executed a “squeeze-out” merger in June that granted it full ownership. Some of those squeezed out, including Cygnus Capital, aren’t happy about being bought out and have sued SVP in Delaware court.

The plaintiffs allege that SVP short-changed them in the deal just as WPG was starting to thrive, DD’s Sujeet Indap reports.

Cygnus presented its own valuation analysis, which it redacted in its complaint. But it also points out that Khosla’s comments were evidence that WPG was thriving.

A court will now decide who’s right. But the fight is the latest example of the growing tensions in distressed debt situations where even seemingly innocuous comments can be seized upon as evidence of treachery.

Job moves

  • Private equity firm TPG Capital has hired General Atlantic veteran Peter Munzig as a partner and head of business services.

  • Real estate services group CBRE has appointed Blake Hutcheson, chief executive of the Ontario Municipal Employees Retirement System, to its board.

  • Skadden Arps has hired Robert Chaplin as a partner in its corporate practice, based in London.

Smart reads

Trending topic Elon Musk may have just received a leg up in his fight to back out of a $44bn deal to buy Twitter — an explosive whistleblower report from the social media group’s former security chief Peiter “Mudge” Zatko alleging widespread issues surrounding security, privacy and spam bots, according to The Washington Post.

Running out the clock The University of Texas has used its lucrative swath of America’s largest oilfield to build an endowment that rivals Harvard. But the strategy risks ageing poorly as the industry moves towards clean energy, Bloomberg reports.

East Hampton’s private jet problem Conflict between Long Islanders and summer visitors in the lush Hamptons enclaves is a tale older than Gatsby, the FT’s Madison Darbyshire writes. A scrap over a local airport that caters to the 1 per cent threatens to bring years of tensions to a boil.

News round-up

French minister calls for restrictions on flights by private jet (FT)

Adani launches hostile bid for Indian news channel NDTV (FT)

J&J tries to extend its ‘Texas two-step’ to halt two states’ talc cases (FT)

Malaysia ex-PM Najib fails in final bid to avoid jail over 1MDB scandal (FT)

Andreessen Horowitz bets on crypto to break up Big Tech power (FT)

BT says UK government to take no further action over Altice stake (FT)

AMG chief slams asset management industry deal wave (FT)

Indian tycoon takes on South America’s ‘Switzerland’ (FT)

Credit Suisse: lower legacy costs needed to signal turnround (FT)

Cryptofinance — Scott Chipolina filters out the noise of the global cryptocurrency industry. Sign up here

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