The past 18 months have presented significant challenges for private equity (PE) and venture capital (VC) funds and their portfolio companies worldwide. Factors such as high inflation, escalating interest rates, public equity market volatility, and the collapse of key financial institutions supporting the PE and VC ecosystem have created economic hurdles. Additionally, political unrest, both in the U.S. and globally, and union-led strikes fueled by macroeconomic shifts and innovative technologies have added to the complexity of the business landscape.
Economic Outlook for 2024: A Glimpse of Recovery?
Looking ahead to 2024, optimism emerges as experts predict a potential uptick in investment and mergers and acquisitions (M&A) activity. However, the evolving legal and compliance landscape demands careful consideration from industry players. U.S. laws are adapting swiftly to balance worker, consumer, and innovator protection with the imperative to foster technological evolution in business practices.
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Corporate Transparency Act (CTA): A Game-Changer for Reporting Obligations
The first part of this series explores crucial considerations for PE and VC funds in 2024. A pivotal development is the implementation of the Corporate Transparency Act (CTA), effective January 1, 2024. Historically, U.S. and foreign entities conducting business in the U.S. had minimal reporting obligations regarding ownership. However, the CTA aims to address concerns related to illegal activities conducted through shell companies.
Under the CTA, U.S. entities and most foreign entities operating in the U.S. must report the identity of beneficial owners, including senior officers, directors with substantial control, and individuals controlling 25 percent or more of equity or voting interests. It’s estimated that over 30 million entities will need to comply in 2024, with exemptions available but limited.
Antitrust Enforcement: A Growing Challenge
In addition to economic uncertainties, antitrust enforcement poses a growing challenge for the industry. In 2022, the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) filed 10 lawsuits to block anti-competitive deals, marking a significant increase from previous years. The proposed merger guidelines released in July 2023 could further impact the landscape by lowering thresholds for review and broadening the types of deals subject to scrutiny.
While a new DOJ policy offers leniency for acquirers disclosing wrongdoing and cooperating with authorities, the focus on industry roll-ups could affect PE firms engaging in smaller transactions. The guidelines suggest scrutiny of a platform company’s overall roll-up strategy, potentially putting more deals on the regulatory radar.
Despite uncertainties surrounding the adoption of these guidelines, the current administration’s commitment to aggressive antitrust law enforcement is evident, as emphasized by FTC Chair Lina Khan. As the industry navigates these challenges, strategic planning and compliance with evolving regulations will be essential for sustained success in the dynamic private equity and venture capital landscape.
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