A regular briefing for the alternative asset management industry.
When the President of Microsoft says that the EU is now "a more attractive place to start a business" than the UK, British entrepreneurs might wonder what went wrong with the UK's post-Brexit regulatory strategy. They might also have been concerned to hear last week's announcement that the government is about to give the UK's anti-trust regulator even more powers.
Brad Smith's comments – a reaction to the UK competition authority's decision to block Microsoft's acquisition of Activision, a leading publisher of video games – drew a swift and sharp rebuttal from the UK government. And of course, Microsoft – which says it is planning to appeal the decision – has an interest in piling on the pressure. But it is certainly true that regulators in Britain have become increasingly important in the M&A market – and their reach extends well into private markets as well as public ones.
For example, acquirers are now getting used to the UK's National Security and Investment Act, which came fully into force in January 2022. One of the most significant reforms to the UK's regulatory landscape in recent years, the regime requires mandatory notification and pre-clearance of deals in certain specified sectors. Unlike foreign direct investment regimes in other jurisdictions, the UK rules do not include any requirement for the acquirer to be a foreign person. Instead, the mandatory regime focuses on the sector in which the target business operates.
Early signs are that around 1,000 deals will be notified to the regulator each year and the government has already shown that it is willing to intervene in deals in a variety of sectors – including defence, semi-conductors, energy, aerospace and communications. It has completely prohibited some deals, but has also been pragmatic in agreeing remedies in others – for example, restrictions on the sharing of information and maintenance of strategic capabilities in the UK – even when politically sensitive states are involved.
Importantly, despite initial concerns that the notification process could be cumbersome and time-consuming, deals which do not raise material national security issues are being cleared quickly: filings are generally accepted by the government within a few days, with clearance received within the initial 30 working day review period. The new rules are generally a timing and process issue for the typical private equity transaction, rather than being of more substantive concern.
Private equity firms have had some cause for concern, though, in relation to other recent competition authority activity. The Competition and Markets Authority (CMA) has doubled down on the EU's (controversial) approach to parental liability: private equity investors with "decisive influence" over portfolio companies have been fined for the anti-competitive behaviour of their investee companies – even in the absence of wrongdoing on their part.
The regulator has also been concerned that leveraged acquisitions in certain sectors – most recently, children's social care – might make firms less resilient to changes in the trading climate, with consequences for vulnerable stakeholders. The regulator has not taken any enforcement action, and there is no evidence that private equity ownership in these sectors negatively affects competition in the more traditional sense, but it is a concern that should be watched.
Another strategy that has come in for greater regulatory scrutiny is the "buy and build" or "roll up" model, which seeks synergies by bringing together similar businesses. The particular nature of the UK's merger control regime gives the CMA significant discretion to investigate such deals. Regardless of the level of target turnover, the UK "share of supply" test enables the CMA to take jurisdiction over transactions where the purchaser group and target have a combined share of 25% or more of any plausible description of goods or services in a "substantial part of the UK".
The CMA has considerable discretion in how to apply this test: in a recent case involving private equity acquisitions of veterinary practices, its "local area analysis" found that areas with a population of 100,000 people represented a "substantial part of the UK" for the purposes of the CMA's jurisdiction. Careful analysis is therefore required before any deals can be consummated, even if the impact on competition may seem insignificant to the parties involved.
But it would be wrong to say that the UK is distinctive in this respect. Governments around the world have an increasing appetite to monitor deal activity.