By David Acharya, ACG New York, Executive Vice President and Partner at AGI Partners —
As unpredictable as Donald Trump was as a candidate, as President-elect, his policies continue to be difficult to forecast despite the approximate 1,000-point increase in the Dow Jones Index since the election. Once his cabinet appointments are confirmed, and Republican leadership in the House and Senate galvanize around a set of legislative priorities, his administration’s policy objectives will become clearer.
In the meantime, early signs of consensus between the Trump administration and Republicans on Capitol Hill suggest significant positive changes could be looming for middle market deal-makers more.
Here are the six key areas that will impact middle market private equity:
Global Trade Agreement
Global trade agreements, like the proposed Trans-Pacific Partnership and NAFTA, will likely lower tariffs between countries and make other changes that could encourage M&A activity.
President-elect Trump will not tear up these agreements, rather negotiate parts of the agreement to benefit U.S.-based employees, and penalize companies that move manufacturing overseas. Such a move could limit and therefore hurt private equity backed companies’ ability to move to low cost manufacturing and service centers.
Opposition to proposed and existing trade agreements, even if that opposition doesn’t result in negating the agreements, could negatively affect the environment for cross-border deals but it will not stop it.
Taxes
Mr. Trump has proposed income tax cuts across the board and proposed reducing from seven brackets to three: 12 percent, 25 percent, with 33 percent rates.
The bigger changes under the Trump plan come in the treatment of so-called “pass through” taxation. Under current law, S corporations, LLCs and partnerships do not pay entity-level tax; instead, the income is allocated to the owners, who pay the corresponding tax at the individual level, based on the applicable individual rates.
Mr. Trump, however, would provide a unified business rate of 15 percent, meaning not only would corporations pay tax at that rate, but all business income – even the income earned by an individual from an S corporation, partnership, or sole-proprietorship and reported on the individual’s tax return — will be subject to the same 15 percent rate. If these taxes pass or pass in a similar form, the expectations are that the U.S. economy would expand rapidly – and consumers will have more after-tax income for spending and businesses will generate a higher return on capital.
Healthcare
President-elect Trump has stated “Either Obamacare will be amended or repealed and replaced,” mentioning just two parts of the law to keep, both favored by House Republicans despite their eagerness to axe the law. Mr. Trump reiterated his support for a rule forbidding insurers to refuse coverage to people with preexisting medical problems. And he said young adults should be able to stay on their parent’s insurance policies until 26 — an aspect he did not discuss during the campaign.
While the updated healthcare law is nowhere near completion, the expectation is that competition between healthcare providers, including healthcare exchanges, will increase, thereby making insurance for individuals and small businesses less expensive.
Business Tone
President-elect Trump views businesses as an important ally in reducing poverty, growing incomes and increasing U.S. strength abroad. For that to happen, I believe he will not vilify businesses compared to the prior administration, which will likely result in improved future hiring and spending plans, and therefore result in higher GNP growth rates.
Labor Relations
Recent National Labor Relations Board rulings have expanded the definition of “employee” to include workers who are not directly employed by a company, such as employees of a company’s franchisees or of a company’s contracted staffing agency. For private equity firms that own franchise portfolio companies, they could be exposed to unionization, healthcare and benefit obligations, labor complaints and worker lawsuits. This is perhaps the single biggest regulatory concerns that the middle market dealmaker community should be concerned with.
I think a Trump presidency will reverse these rulings and/or lessen the regulatory concern as he is a global CEO who understands that regulatory overreach severely limits business growth.
Regulations
This is one area that if President-elect Trump promises to act, will lead to a more robust economic environment and increased risk taking. It will benefit middle market businesses across the board by increasing access to more capital markets (roll back parts of Dodd-Frank), reduce the regulation (and cost) for smaller companies to go public, more pro-business regulations and more importantly, updated regulations to reflect the changing business environment.
Among President-elect Trump’s proposed views towards regulation includes:
- Issue a temporary moratorium on new agency regulations.
- Require each federal agency to prepare a list of all of the regulations they impose on American business, and rank them from most critical to to least critical. Least critical regulations will receive priority consideration for repeal.
- Remove bureaucrats and replace them with experts who know how to create jobs.
Dodd-Frank
During his campaign, candidate Donald Trump repeatedly pledged to “get rid of” Dodd-Frank, the set of sweeping financial services reforms passed in the wake of the 2008-2009 financial crisis. Now that President-elect Trump has the benefit of Republican majorities, this will be area of immediate attention during the first year of his presidency especially since it left many private equity funds, particularly those in the middle market, to view themselves as having been unwillingly swept up in an impulse to regulate an industry that was clearly not the cause of the 2008-2009 financial crisis.
Another cornerstone of Dodd-Frank that has impacted private equity is the “Volker Rule.” Among its restrictions, the rule restricts banks and their affiliates from investing in and sponsoring private equity funds. Notwithstanding his opposition to Dodd-Frank, when asked about the rule during the campaign, Mr. Trump was noncommittal but the expectation is that he will not impede capital flows into growing middle market companies. In light of the above, it is reasonable to expect a roll-back of Dodd-Frank, or at least portions of it.
Generally, many fund managers point to these regulatory changes as having had a negative impact overall on general lending activities among banks, leading to a decline in loan origination for buyouts and the corresponding rise of unregulated institutional investors lending via private markets funds and business development companies.
Although Donald Trump capitalized partly on anger against Wall Street to secure his presidential victory, a number of private equity players were his staunchest defenders during the race and they are now positioned to educate lawmakers on the benefits of private investment. Overall, the general feeling is that President Trump’s presidency will be mostly positive for middle market private equity.
About the Author:
David Acharya is a Partner at AGI Partners LLC, where he is responsible for investment sourcing and performing due diligence, transacting/financing structuring, and post-close value creation and portfolio management. In addition, he is very active in managing the firm and its strategy. Mr. Acharya is a Board Member of Impact XM, a provider of experiential marketing solutions for global clients and a portfolio company of AGI Partners LLC. Mr. Acharya is a frequent speaker and recognized by his peers for his expertise on topics such as private equity, family offices, and post-close value creation. In addition, Mr. Acharya is the Executive Vice President for ACG New York, the premier networking platform for middle market deal making professionals.
© 2017 Private Equity Professional | January 19, 2017
