Add-on acquisitions, a common value creation strategy for private equity firms, face the possibility of increased regulatory scrutiny after the US Justice Department and the Federal Trade Commission released a new set of merger guidelines in December 2023.

"Add-on transactions, particularly if viewed as part of a roll-up strategy by a PE firm, will be much more closely scrutinized," Paul Weiss Rifkind Wharton & Garrison LLP partner Scott Sher wrote in emailed comments to S&P Global Market Intelligence.

Roll-ups are when a private equity firm acquires a series of companies in the same industry and builds them into one entity. In 2023, US regulators took action against two different private equity roll-ups, which they viewed as creating market-dominating companies that smother competition.

When reviewing such transactions, Sher said the agencies will consider the cumulative effect on competition of the entire series of transactions, even if prior deals were not reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

The antitrust bodies will also examine a firm's history and current or future strategic initiatives, including strategies in other, unrelated markets, Sher added.

Davis Polk & Wardwell LLP partner Jesse Solomon told Market Intelligence he sees "more willingness by the agencies to bring enforcement actions against sponsors and portfolio companies," which could result in increased enforcement rates from the agencies against private equity funds.

Roll-ups are a particular focus for the agencies. Interlocking directorates, officers or directors serving at two competing companies could also attract a closer review of deals, Solomon said.

Fall-off in add-on transactions

Global private equity add-on acquisitions fell for a second straight year in 2023, likely reflecting the overall sluggish deal environment over the past couple of years.

The volume of add-on acquisitions totaled 4,231 in 2023, nearly 15% lower compared to 4,951 in 2022, according to data from Preqin.

In the US, private equity firms completed over 2,400 add-on transactions in 2023, with the business services sector logging the highest number of deals. These acquisitions comprised about 59% of all private equity deals in the country in the past year, data from Preqin shows.

With high interest rates and geopolitical tensions expected to persist in 2024, the new acquisition rules could add more pressure to executing private equity add-on acquisitions.

– Read about global private equity deal activity in 2023. – Catch up on global venture capital funding rounds in 2023. – Explore more private equity exclusives.

Blackstone's take

Commenting on the draft of the guidelines back in July 2023, Blackstone Inc. President Jonathan Gray said during an earnings call that the Federal Trade Commission announcement "was really just a codification of the way they've been operating the last 3 years."

"They have had this more assertive approach toward mergers. And we've been operating in that environment already," Gray said.