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After much anticipation, the UK’s National Security and Investment Act (NSIA) entered into force on 4 January 2022, heralding a far-reaching UK investment screening regime. Investors wait to see how the regime’s broad powers will ultimately be substantively exercised in terms of the breadth of application of national security but a material impact on contractual risk allocation, transaction completion timelines and disclosure of investors’ interests should be expected by financial investors.
The Biden Administration has made clear that a shift to more aggressive antitrust enforcement is under way in the United States. With private equity investment models firmly in the FTC’s crosshairs more intense scrutiny of transactions and their impact on competition can be expected.
With the EC flagging concerns about foreign subsidies that distort the EU market, 2022 is likely to bring dealmakers a new regulatory hurdle to consider when conducting European transactions. Investment funds with links to non-EU governments or those that receive other forms of beneficial treatment (e.g. tax exemptions) can soon expect heightened scrutiny and an un-level playing field in auctions as a result. Depending on whether your fund is state backed or state linked (or not) this could be a boon or a curse for private equity.
The European Commission’s repurposing of Article 22 EUMR to capture any deal with adverse competitive effects irrespective of EU turnover introduces a further layer of potential uncertainty for dealmakers. Investors will need to consider carefully the associated call-in risk and how best to address the potentially significant impact for candidate transactions.
Political and regulatory concerns around private equity are not new, but in the UK and US, a new angle is being pursued – highly leveraged models leading to reduced competition in markets. Concerns- fuelled by a cost of living crisis in the UK and a Biden administration focus on greater intervention by antitrust agencies- have been raised that highly-leveraged PE deals raise competition problems and that acquired businesses could be weaker competitors or higher priced operators as a result of a focus on funding debt repayments and shorter investment horizons.
With antitrust enforcement expected to make a strong come-back in 2022, the evolving EU practice on “no fault” liability for shareholders and subsidiaries will be important to keep in mind. Managing portfolio company compliance and conducting detailed due diligence are important tools to manage potential exposure.
2022 looks to be another year of high activity levels with authorities set to up their enforcement efforts and apply new tools. The new UKNSI Act is now in force, the European Commission looks set to “call-in” problematic transactions and the US administration has announced their intent to increase antitrust scrutiny (to name a few).