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U.S. government shutdown causing delays in private equity deals

The U.S. government shutdown is causing private equity deals to take longer to close and creating uncertainty, some private equity industry insiders say.

"At this point, it's not shutting down deals, but (the government shutdown) is prolonging deals," said A.J. Weidhaas, partner and co-chairman of the private equity group at law firm Goodwin Procter.

One reason is that the government shutdown is affecting staffing at the Federal Trade Commission and the Department of Justice. Under federal law — Hart-Scott-Rodino Antitrust Improvements Act of 1976 — parties to mergers, acquisitions and other transactions valued at more than $84 million have to get approval from the two federal government agencies, Mr. Weidhaas explained. The FTC and DOJ are charged with determining whether there is an overlap in the businesses and whether the deals would be anti-competitive.

Although the law gives the agencies 30 days to act, Hart-Scott approvals in the form of early determinations had been taking 10 to 14 days. Now deals are more likely to wait 30 days due to the light staffing caused by the government shutdown, Mr. Weidhaas said. What's more, should the shutdown last 30 days or more, it is possible that the FTC and DOJ's skeleton staffs could require what is called a second request for information that could delay deal closings even longer, giving the staffs more time — as long as two months — to make a determination, Mr. Weidhaas said.

The government shutdown is coming at a time when debt for deals is less certain, causing private equity buyers to "drag their feet" to make sure they have the financing in place before finalizing a deal, he said. This was not the case six months ago when private equity firms were so "highly confident" of getting financing that they would agree to acquire the company with equity from their funds and put the debt in place after the deal closed, Mr. Weidhaas said.

Delays are not only being caused because there are not enough people at government agencies to check on whether deals should be preapproved or stopped but also because the IRS is also closed and there is nobody to issue tax ID numbers needed to open bank accounts, according to sources close to the situation who declined to be identified.

"This can delay a deal where the timing between signing and closing is very tight," said a source familiar with the situation at a large private equity firm.

Private equity mergers and acquisitions that require government approvals are taking longer, and the volume of private equity-backed initial public offerings in the first quarter of 2019 is also slowing, said Laurence G. Allen, managing member and CEO of NYPPEX, a secondary market brokerage firm.

"The government shutdown has slowed responses from various government agencies such as the SEC to approve registration filings for IPOs," Mr. Allen said.

"So we expect a further slowdown in IPO volume" in the first quarter of 2019.