Private Equity and Compliance in the Portfolio or “Why Should Private Equity Funds Pay More Attention to Compliance in Their Investments in the Future?”

Compliance issues in target companies can place a heavy economic burden on the acquisition and the continuation of the same. This is all the more true if, as a result of legal violations, there is a threat of fines and even liability being imposed on the investor, which is capable of jeopardizing the profitability of an entire business. The latter is now particularly the case in antitrust law, which is why attention to compliance in this area deserves special attention.

The topic of compliance has increasingly become the focus of public and corporate attention in recent years. If investors already ask private equity funds about their corporate social responsibility (CSR) policy during the fundraising process and check compliance with environmental, social and governance (ESG) compliance standards, what significance must compliance have in the portfolio of private equity funds? Compliance is now the talk of the town in private equity. Thus, for private equity investors, carefully screening a target company for potential compliance risks is no longer a question of "if" but rather "how".

In this context, it is necessary to assess which topics are particularly risky, how in-depth a due diligence needs to be designed, and finally, to what extent continuous monitoring of the acquired company's compliance is required in the period leading up to the exit.

Compliance risks are all the more considerable for the private equity investor if, in the event of legal violations, the target company's liquidity deteriorates so massively that it is no longer able to service the regularly high claims on the debt capital invested or there is even a threat of liability being passed on to the fund itself. Even if, as a result of compliance violations, only the profit expectation can no longer be realized or the target company can no longer be sold on the planned date, the investor may find himself in serious distress.

In the area of antitrust law, the economic risks have multiplied following the development of legislation and case law in recent years. Severe penalties are imposed on individual companies, which, in view of their size, have even contributed to corporate insolvencies. Moreover, the fines do not only threaten the company involved in the cartel, but in some cases the parent companies or owners of entire groups.