Proposed FTC rules risk exposing names of LPs in funds

Limited partners in venture capital, buyout and other private funds may be at risk of having their names disclosed if proposed changes to federal pre-merger filing requirements are approved, attorneys said.

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.

Venture and buyout funds frequently deal with HSR since most of their exits come from selling portfolio companies, not IPOs. The owners of a company must seek regulatory approval for transactions of $111.4 million or greater and/or where the so-called “size of person” of the seller is $22.3 million or greater and/or where the SOP of the buyer is $222.7 million or greater, according to a January memo by law firm Nelson Mullins Riley & Scarborough.

The memo notes, “For example, under the new thresholds [for 2023], if a seller with total assets or if engaged in manufacturing, annual net sales greater than $22.3 million proposes to sell its business for $112 million to a buyer with total assets or annual net sales greater than $222.7 million, the parties may be required to file HSR and wait the required waiting period, unless the HSR Act or its rules exempt the transaction.”

The FTC has said the identities of LPs will be kept private under its proposed rules, but experts on HSR requirements said 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.

David Kaufman, a partner at the Thompson Coburn law firm, added, “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.”

Chris Hayes, president of Redline Policy Strategies, a regulatory advisory firm for LPs and GPs, noted that the proposed rules could result in more paperwork for LPs and may increase the risk of disclosing personal information. “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 any time a manager engages in a transaction requiring a HSR filing, Hayes said.

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 might even reduce the returns of a transaction, said 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,” he said. “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.”

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.

Lawrence Aragon contributed to this story