Antitrust Regulators Probe Private Equity Board Seats

Today is a short post on something I covered here last week - interlocking directorates.

Interlocking directorates (overlapping board seats) occur when an individual sits on the board of two competing companies. This is illegal according to the Clayton Act of 1914. However, in the case of private equity, firms who invest in many companies within the same industry may put representatives of their investment firm onto the board of those "competing" companies. Sometimes those companies are in the same investment fund. This also could be anticompetitive, according to the Department of Justice.

“Competitors sharing officers or directors further concentrates power and creates the opportunity to exchange competitively sensitive information and facilitate coordination -- all to the detriment of the economy and the American public," said Jonathan Kanter, according to Bloomberg.

The DOJ has now taken further action against private equity firms, sending warning letters to firms like Apollo, Blackstone, and KKR that they may be violating antitrust law.

The DOJ is particulary interested in private equity's involvement in concentrating ownership and power in healthcare. In a soon to be released paper on serial acquisitions (also known as rollups), my co-authors and I detail how the strategy of buying up small businesses in disaggregated industries such as dentistry, veterinary practice, speciality medical practices like anesthesiology, nursing homes, youth addiction treatment facilities, and many more have been an ongoing tactic of private equity firms. Rolling up healthcare practices can be lucrative business, as pricing power gives the aggregators the ability to raise prices on consumers. One study showed that quality of care dramatically decreases under private-equity owned nursing homes, amounting to a 10% higher death rate of Medicare patients.

Typically with a private equity rollup, the acquired companies will be merged or integrated into one larger company, thus potentially avoiding these kinds of illegal interlocking directorate concerns. Again, much of this depends on market definition questions and how to define which companies are really competitors.

The reason this is significant, according to Axios, is: "Were overlapping board seats to violate U.S. antitrust law, then the same argument could apply to overlapping investments. That would blow a huge hole in the core investment strategies of many industry-focused PE firms. Plus of more diversified firms with robust industry practices. It also could drive up the price of private equity deals, because of added regulatory uncertainty."

Whether or not this is true remains to be seen. However, overlapping boards are still very common among health companies that are publicly traded. A recent study of over 2,240 life science companies since 2000 showed that "at any given time, 10-20% of board members are interlocked; their tenures are 50% longer than non-interlocked directors." And that "the number of interlocks has more than doubled in the last two decades."

What do you see? Is this a problem in private equity or in your industry?