LPs in funds could be revealed in lawsuits under proposed FTC rules

LPs may be in store for some headaches, not to mention the potential for lower returns from their private equity portfolios, if proposed changes to federal pre-merger filing requirements are approved, sources told Buyouts.

The Federal Trade Commission’s proposed changes on pre-merger filing requirements are the latest salvo from the Biden administration on the private equity industry. Proposed changes to Hart-Scott-Rodino Act filing requirements, which the FTC and DOJ use when considering a proposed merger or acquisition’s potential impact on market competitiveness, could impact LPS in several ways. Most notably, the proposed changes would require GPs to identify LPs with at least a 5 percent stake in an investment vehicle when filing an HSR form.

According to the FTC, the identities of LPs will be kept private under its proposed rules. However, experts on HSR requirements state that LPs may face the risk of having their names associated with a deal challenged by either the FTC or DOJ.

“There are strict confidentiality requirements for information that’s submitted with an HSR filing. But for any type of matter, there’s a threat that information could come out during litigation,” said Brian Concklin, an attorney with Clifford Chance.

“Before, the consequences of a GP not doing a good job is that maybe you lost money. Now, potentially your name could be in the newspaper or become part of some federal investigation,” said David Kaufman, a partner at the Thompson Coburn law firm.

More paperwork for LPs, along with the potential risks of disclosing personal information, could result from the proposed rules, according to Chris Hayes, founder and president of Redline Policy Strategies, a policy and regulatory advisory firm for LPs and GPs.

“This could be a major compliance headache for LPs,” Hayes said.

Funds of funds may be particularly affected, having to share their LP information with GPs they invest in anytime a manager engages in a transaction requiring a HSR filing, according to Hayes.

The requirements would also increase the amount of documentation managers and their deal teams included in an HSR filing. For example, a PE manager would have to include drafts of a presentation outlining a deal as opposed to just a final version.

The FTC estimates that the proposed changes would add an average of 107 additional hours to the time needed to prepare and file an HSR filing. Currently, the process averages 37 hours.

The increased compliance costs could reduce the returns of a transaction, according to Bruce McCulloch, an attorney with law firm Freshfields.

“Right now, we can do an HSR filing in 10 days without any problem and charge a client under $100,000. With the new rules, we may end up having to spend three months on an HSR filing, which would add roughly 10-fold the costs,” McCulloch said.

Other rules impacting the private equity industry include the SEC’s recently adopted changes to Form PF. The updated rules now force private fund sponsors to, within 60 days after the end of a quarter, report GP-led secondaries deals, the removal of a general partner, investor-led liquidations and other “termination events.”

The SEC also approved rules requiring sponsors with at least $2 billion in assets under management to provide more information about fund strategies and debt loads, in addition to any GP or LP clawbacks.