Private equity’s pet problems are a harbinger of things to come

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As private equity squats across ever-greater swaths of the business world, the lines between itself and traditional enterprise are blurring. Witness, for instance, its expansion into asset classes such real estate, infrastructure and private credit or the push to offer products to retail clients. Now, the sector sports a new — less desirable — badge of corporate normality: the attention of antitrust regulators. 

The UK’s Competition and Markets Authority plans to launch an investigation into the domestic petcare market. In the past 10 years, six major groups, three of which are private equity-owned, have bought 1,500 vet surgeries. That brings the share of such facilities owned by IVC Evidensia (owned by EQT and Silver Lake), Pets at Home, CVS, BC Partners’ VetPartners, CVC’s Medivet and Linnaeus to almost 60 per cent of the total. CVS shares lost about a quarter of their value on Tuesday. 

While the CMA is focusing on the whole market, rather than on private equity-owned firms specifically, the sector is attracting increasing regulatory attention. In the US, Federal Trade Commission chair Lina Khan has private equity acquisition strategies in her sights. In September, the FTC sued US Anesthesia Partners, the dominant provider of anaesthesia services in Texas, and its private equity owner Welsh, Carson, Anderson & Stowe. 

Regulators are getting wise to “roll up” strategies, whereby firms acquire a platform company and then use this to hoover up rivals. Rather like traditional, strategic M&A, the idea of this strategy is to gain scale, improve margins and lift valuation multiples. Taken individually, transactions may not warrant regulatory scrutiny. But the overall effect on the market can be significant. 

Petcare has been an attractive hunting ground for private equity. In the UK alone, there are 16mn pet owners, increasingly keen to give their furry companions the best that money can buy. Supply is local, and — prior to the buying spree — fragmented. There are other industries that fit the bill, particularly in the healthcare sector. The CMA itself has recently called in transactions involving private equity-owned dentistry companies. 

Roll-ups are big business, for private equity, accounting for some 70 per cent of deals in 2023, according to PitchBook, up from 54 per cent in 2014.

It is not hard to see why. The high cost of debt has torn up the industry’s traditional playbook, which focused on leverage to juice up returns. To make the sort of money their investors expect, firms now need to show a real improvement in their portfolio companies’ operations. That means an increasing focus on M&A, and the accompanying attention of the world’s competition watchdogs.

camilla.palladino@ft.com