Private equity has all eyes on Trump
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President Trump has unleashed a flurry of controversy with his issuance of often contentious and headline-grabbing executive orders, but it’s his proposed policy changes that have the private equity community paying attention.

Of course, there is still a great deal of uncertainty surrounding the impact of President Trump’s policies on private equity, but notable is his preference for America taking a more inward-looking and less prominent role on the world stage that has raised fears of protectionism. For example, his decision to exit the Trans-Pacific Partnership trade agreement will undoubtedly have wide ranging consequences for international trade, and presents potential ramifications for portfolio companies of private equity groups that import or export products.

Other potential changes that loom on the horizon that are likely to impact private equity include the expected rollback of the U.S. financial regulatory framework, changes in carried interest tax, interest deductibility, and corporate tax rates.

The president’s executive order in early February that took aim at existing U.S. financial regulation has generated a lot of buzz on Wall Street. But the reality is that reform won’t happen overnight, as Republicans are pushing their own farther-reaching version of financial regulatory reform.

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Potential future tax changes, meanwhile, could complicate matters for private equity investors. The proposed revision of the existing rules on tax deductibility of interest expenses would increase the cost of debt, reduce the attractiveness of leverage, and change the outlook for future investment. Any amendments would alter the way that deals dependent on leverage would be evaluated.

 

As part of the new administration’s tax reform, the Republican party-backed plan includes a new border-adjustment tax. In simple terms, it aims to repatriate jobs and manufacturing to the United States by favouring the taxing of spending on imports instead of taxing sales of exports. The effects are unclear, but would be disruptive for certain industries and could lead to an even stronger U.S. dollar.

Nevertheless, savvy and forward-thinking private equity firms will manage these challenges. Indeed, many of them will be optimistic. Some of Trump’s promises, including his $1 trillion plan to shore up America’s aging bridges, roadways and dams, offer promise for private infrastructure investment and may boost the long-term business prospects for U.S. companies.

Still, there is some uncertainty around the long-term impact of President Trump’s campaign rhetoric on the taxation of profits earned by private equity fund managers. The current way private investment firms are taxed on carried interest (their share of profits earned from investment) is by treating the profits as capital gains which allows general partners to pay a lower tax rate — 20 percent for long term capital gains — as compared to the almost double ordinary income rate of 39.6 percent. Trump discussed potentially raising the tax rate at which private fund managers are charged. While not impacting investors directly, this could have indirect effects on the private equity industry itself.

In any case, the corporate tax reform talked about during the election campaign is a particularly welcome development in the United States among businesses. The president’s pledge to slash U.S. corporate tax rates from 35 percent to around 20 percent will benefit companies’ revenue growth, margins and potentially encourage business investment and expansion, particularly when coupled with the proposed tax reform that would allow companies to fully expense capital equipment. As a result, corporate earnings should rise along with expansion in U.S. economy with gross domestic product (GDP) growth.

While geopolitical uncertainty, risks around global trade wars, currency shifts, and diplomatic relations have increased since President Trump assumed office — and these factors are taken into account by smart private equity investment groups when considering potential investments — the underlying economic policies proposed are largely geared towards U.S. business growth. If executed well, the majority of U.S. companies should benefit from the policy changes.

Jennifer Mernagh is an investment strategist at Aberdeen Asset Management, a global investment management firm with more than $370 billion in assets under management.


The views expressed by contributors are their own and are not the views of The Hill.