Private equity: Kanter must make a better case that roll-ups are bad

Masters of the Universe meet The Trust Buster. Jonathan Kanter has warned buyout groups of tougher treatment from the US Department of Justice in an interview with the FT. The head of antitrust enforcement says financial sponsors increasingly use portfolio companies as Trojan horses to storm whole sectors, such as medical practices or single-family homes.

Kanter suggests private capital businesses are now so vast that they may be intrinsically anti-competitive. Thinking must evolve to recognise this, he believes. Is he right?

Alternative asset managers now control $10tn in assets. Their empires extend beyond leveraged buyouts into every conceivable strategy. Their scale benefits are equally enormous. The biggest alternatives group, Blackstone, is worth more than Goldman Sachs. Its businesses employ 500,000 people.

There was a time when private equity portfolios were just a collection of separately acquired, midsized companies that would be sold off in three to five years. The time horizons of some private equity funds now extend beyond a decade. Mega-funds have no problem buying multibillion-dollar businesses. This makes it easier for financial sponsors to use a portfolio company as the pebble around which a roll-up snowballs.

Private equity managers are these days more attuned to portfolio company operations. Many have gangs of internal consultants who apply common practices across disparate companies. They even use centralised purchasing to lower costs.

The US Securities and Exchange Commission oversees the largest managers. The industry remains far less regulated than banks.

But it remains to be seen whether current antitrust rules and theories give the sector a free pass. Critics will say Kanter’s comments reflect just another attempt by the Biden administration to constrain one of the most lucrative business models of recent years.

Kanter said the DoJ must craft a “legally sound framework” that is “broad enough and flexible enough” to apply to any anti-competitive depredations by private equity.

For now, scepticism is appropriate. The key question is this: if conglomeration is such brilliant strategy, why have conglomerates themselves done so badly?