Pantheon warns on long-term Trump effect

Trump 'likely' to be positive for PE in the short-term but firm warns on 'serious impact' for US buyouts if key tax rule is scrapped.

Donald Trump’s economic policies are likely to provide a boost to private equity in the short-term, but the proposed scrapping of tax deductibility on debt payments, and a wider protectionist approach, may harm private equity and the US economy in the longer-term, according to private equity investor Pantheon.

In the half-yearly report for PIP, the listed fund investor managed by Pantheon, the firm said that “it is difficult to be optimistic about the medium to long term economic prospects for the US economy if trade barriers are erected,” but that the Trump administration “could be positive for equity investors, at least in the short term.”

The £1.3 billion listed fund-of-funds, which has nearly 60 percent exposure to US private equity funds, pointed to Trump’s proposed fiscal stimulus and further interest rate rises as potentially having “a significant positive impact on US economic activity and therefore on corporate earnings. This might provide support for the current high equity valuations, and at the same time a steeper US yield curve could provide greater opportunities for normalising monetary policy. Should these come to pass they are likely to be positive for private equity.”

However, the firm said that the proposed removal of the tax deductibility for interest expenses “would have a serious impact on the cash flow characteristics for companies acquired by US buyout fund managers, given the amount of debt normally used to finance such acquisitions.” However it said that “the proposed lower corporation tax rate should mitigate this impact.”

PIP bets heavily on US managers, with 58 percent of its assets invested in GPs focused on the country. Its largest fund manager relationships are with Providence Equity Partners, which comprises 6.3 percent of the listed vehicle’s fund exposure, and TPG, which comprises 4.2 percent.

When asked about its US fund investment approach in light of its warning on the Trump administration's impact, a spokeswoman said that “Pantheon is already investing with high quality managers in the US that have strong track records of identifying the best deals and managing their assets through economic cycles, times of uncertainty and challenging trading environments. We will continue with this approach.”

Among its top 12 fund holdings are four investments with funds it describes as focused on “special situations,” including Unison, an investment manager which says it focuses on “purchasing low valuation asset classes,” and MatlinPatterson, which invests in distressed credit.

In the second half of last year PIP made a number of investments in US funds including a $12 million commitment to Veritas Capital Fund VI, a $3.55 billion fund closed in February this year; $7 million to Arbor Investments IV, a $765 million US mid-market fund closed last July; and $2 million to KKR Americas Fund XII, a $13.9 billion vehicle that closed earlier this month.