Private equity has been digesting the news that the US has elected former real estate mogul and reality television star Donald Trump as its next president. At the same time, Republicans retained control of Congress.
“Everyone's shocked,” one New York-based service provider told Private Equity International this week. “Most people expected a Democratic administration and a split Congress, meaning business as usual.”
The immediate aftermath in the financial markets was reminiscent of Britain's vote to leave the EU in June.
And as with the Brexit vote, the private equity industry was at odds with the electorate. A survey conducted by PEI on election day found that 77 percent of the general partners, limited partners and service providers who took part in the poll, picked Hillary Clinton as their next president. Only 15 percent chose Trump.
“Trump is unpredictable, inexperienced and sends the wrong message globally,” wrote one private equity advisor. “Too much risk.”
Now private equity professionals from both camps are predicting what the next presidency will mean for the industry. Surprisingly, it might not be as bad as anticipated.
Dodd-Frank Act and other regulations
Trump has been outspoken about repealing, or at least softening the effects of, regulations passed under the Obama administration. His government will “work to dismantle the Dodd-Frank Act and replace it with new policies”, according to his website.
Reduced regulation would be good for some private equity firms. “One thing he can deliver is less regulation. I can't hire a sales person because I need a compliance person,” said one general partner who voted for Trump, before adding that most, if not all, of his portfolio companies are being affected by increased regulation.
If the “dismantling” of the Dodd-Frank Act includes the Volcker Rule – which restricts how much of their own capital banks can invest in private investment funds – there will be significant implications for the private equity industry. Banks have been offloading portfolios of private fund interests since the act was introduced and more had been expected; Goldman Sachs, for example, still has more than $6 billion of investments subject to the rule. Secondaries buyers will be monitoring this situation with keen interest.
Trump has said he plans to tax carry as ordinary income, but sources claim this is unlikely to be a priority in the first 100 days. A Republican-controlled Congress would likely push back as it has in the past. Even if it were to pass, the effect would be somewhat offset by Trump's plans to lower the tax rate on ordinary income.
He also plans to lower corporate tax on US businesses to as low as 15 percent from the current 35 percent. One would expect this to have a positive impact on the wider economy, and “a positive impact on dealmaking in particular”, says one general partner.
Trump's protectionism is a concern. His views on global trade – he wants to revisit the North American Free Trade Agreement and deals with China, for example – will increase costs for businesses and their private equity owners.
“Businesses selling globally or that have supply chains that rely on products and services from overseas will be much less financially sound and less attractive to a potential buyer,” says one advisor. Another pro-Trump GP notes hopefully that the president-elect's views on tariffs may have merely been a populist campaign line: we shall see.
The industry already appears to be shaking off the shock of a Trump victory. As election promises morph into policy detail, let's hope for a pleasant surprise.
PS. We will soon be launching the voting for the Private Equity International Awards 2016. If you believe your firm should be on the shortlist, take a moment to let us know the milestones you hit this year.