Key Implications of Trump 2.0 for Private Equity

The Importance Of Being Nimble

Donald Trump’s victory in the U.S. presidential election has stirred significant response in markets. While pre-election polls projected razor-thin margins, Trump solidly won the election (including the popular vote), and the Republicans gained firm control of the Senate and seem poised to maintain their majority in the House . The speed of the outcome was surprising, with the lack of uncertainty catalyzing rallies in risk assets (particularly U.S. small cap equities and the financial sector) and further increases in U.S. Treasury rates due to inflation concerns.

A Republican sweep could increase the likelihood that Trump will be able to implement many aspects of his agenda. So what are some of the potential implications of Trump 2.0 for private equity?

Mr. Trump is inheriting an economy that, by most metrics, is performing well: The U.S. boasts the strongest growth among the G7 nations¹ ; its equity markets are thriving; unemployment is low; and interest rates are on a downward trajectory. Moving forward, we believe key areas worth watching include taxes, deregulation and antitrust policy, tariffs and trade, and inflation.

Since the policies and implications of Trump 2.0 remain difficult to predict, the range of potential outcomes is wide. Not only is it difficult to predict which policy initiatives a new President will actually implement, but also the effect such policies could have on private equity in a complex economy. We do believe, however, that the nimbleness of private equity managers and private-equity-backed companies provides significant advantages in navigating a dynamic policy environment.

Taxes: Potential Rate Reductions May Not Significantly Affect Private Equity

Personal tax rates. Trump and Republicans have indicated that further cuts in personal tax rates will be enacted. We note that, despite the proposal to eliminate taxes on tips and social security benefits, rate reductions are more likely to eliminate a headwind by extending the TCJA cuts that expire at the end of 2025 rather than introducing material new tax cuts. Even if such rate cuts are implemented, they are likely to have little direct impact on private equity, in our view.
Corporate tax rates. President-elect Trump has made statements about the desire to reduce corporate tax rates yet has provided few specifics. We expect corporate tax reductions to be limited. We also would not expect any such reductions in corporate tax rates to materially affect private equity, as many private-equity-backed companies are not significant corporate taxpayers.

Deregulation and Antitrust: Looser Policy Could Reignite Animal Spirits

Trump has highlighted his intent to prioritize deregulation, which has potential to spur “animal spirits” among U.S. corporations (including small businesses) and drive increases in capital spending. Deregulation can be particularly beneficial for small and midsized businesses, which is the largest segment of the private equity asset class. If successful, we believe regulation could be a meaningful tailwind for private equity.
In recent years, the Biden administration has shown an increased aggressiveness in the field of antitrust, challenging more activities than had been the case under many other recent administrations. Republicans have historically had a narrower view of antitrust, though these policy views have been evolving in recent years. While President-elect Trump has not made his views on this topic clear, we believe his appointments to the FTC and the Antitrust Division of the Justice Department could be a meaningful indicator.
A continuation of stricter antitrust enforcement could have a chilling effect on M&A by large companies, particularly in sensitive industries such as technology. On the one hand, this might limit the exit opportunities for existing private-equity-backed companies by limiting large corporates as potential buyers, particularly for large and mega-cap private equity managers; however, it could also create interesting new buying opportunities for private equity managers facing fewer competitive bids from strategic buyers.
If a Trump administration were to pursue a more traditional approach to antitrust, this could lead to a more favorable M&A environment, particularly for the exits of larger private-equity-backed companies.

Tariffs and Trade: Higher Tariffs Would Likely Weigh Less on Private Equity Than on the Broader Economy

During the campaign, President-elect Trump spoke of his support for tariffs. He stated his desire to implement headline tariff rates of 20% across the board, and of 60% or more for imports from China. While the U.S. President has broad authority to implement tariff increases , it is yet unclear if these tariff increases will be implemented, and if they are, how quickly and how uniformly. Some of President-elect Trump’s policy advisors have stated that the aim of these policies is to renegotiate better trade deals for the U.S., rather than full imposition of the tariffs themselves.
The consensus view among economists is that higher tariffs would be inflationary, but to what degree depends on the extent and speed with which they were implemented. It should be noted that the U.S. economy is more self-sufficient than many other developed countries: U.S. imports equal approximately 15% of its GDP, roughly half that of the United Kingdom and one third that of Germany.
Private equity as an asset class is overweight intellectual property and service-based sectors relative to the economy as a whole. Tariffs, by their nature, are taxes on the importation of goods. While certain private-equity-backed businesses could be directly affected by tariff increases, our proprietary analysis of private equity portfolios suggests that the typical diversified portfolio is likely less exposed to tariff risk than the broader economy.

Inflation: Private-Equity-Backed Companies Have Shown Ability to Protect Their Margins When Costs Rise

There are concerns that some of President-elect Trump’s proposed policies—including tax cuts (if deficit increasing), tariff increases and workforce reduction through lower immigration—could be inflationary. We believe this outcome is far from certain as many of the most inflationary aspects of those policies could be avoided and/or overwhelmed by other macroeconomic and market forces.
If inflation did reappear, what would it mean for private equity? Fortunately, we have insights based on how private equity managers and private-equity-backed companies responded after the COVID pandemic. By and large, private equity dealt with COVID-induced inflation successfully: Portfolio companies were generally successful in addressing supply chain issues and protecting their margins while continuing to generate higher revenue and EBITDA.

NBPE: Analysis Highlights Resiliency of Investment Approach

When examining NBPE, although there are numerous unknowns in relation to Trump 2.0, we feel the portfolio today is well-placed given its investment approach. Preliminary analysis on the impact of tariffs, for example, specifically on the private companies within the portfolio, appears limited.
In our analysis, we found that about 81% of NAV would likely not be directly affected by tariffs, as our holdings are primarily service-oriented companies rather than manufacturing businesses. Only a handful of companies, making up a low single-digit percentage of the portfolio, would likely experience any meaningful tariff-related disruptions.

Conclusion

While the policies and implications of Trump 2.0 are difficult to predict, we remain optimistic about private equity’s ability to adapt to changing rules and market conditions, capitalize on opportunities and move aggressively to mitigate risk. We expect this to continue to be the case as the U.S. transitions to a new administration.

¹ Source: OECD, past year real GDP growth by the end of Q2 2024.

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RISK CONSIDERATIONS RELATING TO PRIVATE EQUITY FUNDS

Prospective investors should be aware that an investment in any private equity fund is speculative and involves a high degree of risk that is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of such investment and for which the investment does not represent a complete investment program. An investment should only be considered by persons who can afford a loss of their entire investment. This material is not intended to replace any the materials that would be provided in connection with an investor’s consideration to invest in an actual private equity fund, which would only be done pursuant to the terms of a confidential private placement memorandum and other related material. Prospective investors are urged to consult with their own tax and legal advisors about the implications of investing in a private equity strategy, including the risks and fees of such an investment.

You should consider the risks inherent with investing in private equity funds:

Market Conditions: Private equity strategies are based, in part, upon the premise that investments will be available for purchase by at prices considered favorable. To the extent that current market conditions change or change more quickly anticipated investment opportunities may cease to be available. There can be no assurance or guarantee that investment objectives will be achieved, that the past, targeted or estimated results be achieved or that investors will receive any return on their investments. Performance may be volatile. An investment should only be considered by persons who can afford a loss of their entire investment.

Legal, Tax and Regulatory Risks: Legal, tax and regulatory changes (including changing enforcement priorities, changing interpretations of legal and regulatory precedents or varying applications of laws and regulations to particular facts and circumstances) could occur that may adversely affect a private equity strategy.

Default or Excuse: If an Investor defaults on or is excused from its obligation to contribute capital to a private equity fund, other Investors may be required to make additional contributions to replace such shortfall. In addition, an Investor may experience significant economic consequences should it fail to make required capital contributions.

Leverage: Investments in underlying portfolio companies whose capital structures may have significant leverage. These companies may be subject to restrictive financial and operating covenants. The leverage may impair these companies’ ability to finance their future operations and capital needs. The leveraged capital structure of such investments will increase the exposure of the portfolio companies to adverse economic factors such as rising interest rates, downturns in the economy or deteriorations in the condition of the portfolio company or its industry.

Highly Competitive Market for Investment Opportunities: The activity of identifying, completing and realizing attractive investments is highly competitive, and involves a high degree of uncertainty. There can be no assurance or guarantee that a private equity strategy will be able to locate, consummate and exit investments that satisfy rate of return objectives or realize upon their values or that it will be able to invest fully its committed capital.

Reliance on Key Management Personnel. The success of a private equity strategy may depend, in large part, upon the skill and expertise of investment professionals that manage the strategy.

Limited Liquidity: There is no organized secondary market for investors in most private equity funds, and none is expected to develop. There are typically also restrictions on withdrawal and transfer of interests.

Epidemics, Pandemics, Outbreaks of Disease and Public Health Issues: Private equity funds’ operations and investments could be adversely affected by outbreaks of disease, epidemics and public health issues in Asia, Europe, North America, the Middle East and/or globally, such as COVID-19 (and other novel coronaviruses), Ebola, H1N1 flu, H7N9 flu, H5N1 flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics, pandemics, outbreaks of disease or public health issues. Coronavirus, or COVID-19, has spread and is currently spreading rapidly around the world since its initial emergence in December 2019 and has negatively affected (and will likely continue to negatively affect or materially impact) the global economy, global equity markets and supply chains (including as a result of quarantines and other government-directed or mandated measures or actions to stop the spread of outbreaks). Although the long-term effects of coronavirus, or COVID-19 (and the actions and measures taken by governments around the world to halt the spread of such virus), cannot currently be predicted, previous occurrences of other epidemics, pandemics and outbreaks of disease, such as H5N1, H1N1 and the Spanish flu, had material adverse effects on the economies, equity markets and operations of those countries and jurisdictions in which they were most prevalent. A recurrence of an outbreak of any kind of epidemic, communicable disease, virus or major public health issue could cause a slowdown in the levels of economic activity generally (or push the world or local economies into recession), which would be reasonably likely to adversely affect the business, financial condition and operations of private equity funds. Should these or other major public health issues, including pandemics, arise or spread farther (or continue to worsen), private equity funds could be adversely affected by more stringent travel restrictions (such as mandatory quarantines and social distancing), additional limitations on fund operations and business activities and governmental actions limiting the movement of people and goods between regions and other activities or operations.

Valuation Risk: Due to the illiquid nature of many fund investments, any approximation of their value will be based on a good-faith determination as to the fair value of those investments. There can be no assurance that these values will equal or approximate the price at which such investments may be sold or otherwise liquidated or disposed of.

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IN ADDITION TO THESE RISK CONSIDERATIONS, THERE ARE SPECIFIC RISKS THAT MAY APPLY TO A PARTICULAR PRIVATE EQUITY FUND. ANY INVESTMENT DECISION WITH RESPECT TO AN INVESTMENT IN A PRIVATE EQUITY FUND SHOULD BE MADE BASED UPON THE INFORMATION CONTAINED IN THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM OF THAT FUND.

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