5 IDEAS YOU MISSED FROM ACG PRIVATE EQUITY: NY MONTHLY LUNCHEON MEETING

1 The incoming administration will engage in counter-cyclical fiscal policy: The new administration is expected to engage in counter-cyclical fiscal policy largely because the U.S. economy has experienced secular stagnation, characterized by long periods of slow growth, low interest rates, and low inflation. “While the low-interest rates and low inflation are going to persist for some time, the political entity refused to wait till the demographics change, where we would see a natural pick up in productivity and growth, and they intend to break the Gordian Knot now,” said Joe Brusuelas, Chief Economist at RSM. It is believed that the new administration will pursue comprehensive tax reforms including tax cuts paired along with massive deregulation of laws to achieve their objective. Regarding deregulations of laws put by the previous administration, Joe remarked that “There have been 8,000 regulations that have been put in place, that carry a deadweight loss to the economy of $872bn.” Paired with business-friendly tax reforms, this will bring in the age of risk taking in the US investment market.
2 The proposed tax reforms will have a major impact on the U.S. Economy: The tax reforms will include the proposed Border Arrangement Tax, which will be akin to a destination based cash flow tax with border arrangement. As emphasized by Joe, “This is the single most revolutionary step put forward by the federal government since the inception of the income tax via constitutional amendment in 1913. If put in place, it will give favor to exports over imports, equity over debt, and private fixed business investment, which is certainly needed due to a slowdown in productivity, to around 0.5% per annum, and immediate depreciation of expenses.” This tax is expected to generate $120bn in revenue which will help offset the cost of incoming tax cuts. The tax reform will also favor the PE players as without tax deductions on interest expense there will be a significant movement towards raising money through private equity and IPOs over time.
 
3 Domestic M&A Volume in 2017 is expected to be volatile: M&A volume witnessed a slowdown in 2016, as transaction volume was down over 20% y-o-y, including a deceleration in the fourth quarter. On the other hand, the panel also observed that valuations are reaching their peak and credit availability is at an all-time high. Speaking about the outlook for M&A in 2017, Dan Galpern, Partner, TPZ Group said, “You have two things happening, number one is the anticipatory run-up in the markets in the hopes that things will be better and growth will return, and on the other side you have a sense of massive uncertainty as to what is actually going to happen.” This will cause increased volatility in the M&A market in 2017, which is expected to benefit sell-side players. The proposed amendment to tax laws and its impact on the sector will also play a major role in increasing volatility. As Carl Roston, co-chair of Akerman’s M&A and Private Equity Practice pointed out, “We see, and increasingly so, from the entrepreneurs perspective, that there is so much uncertainty that is it cutting both ways. For those who are heavily regulated, all of a sudden there is no pressure to exit, and for those who are concerned about the economy being long or are concerned the taxes will drop in 2018, we see a lot of discordance in whether the entrepreneur is interested in selling the business.”.
 
4 Infrastructure and Power will be the most attractive sectors for M&A Activity: An uptick in M&A activity is expected in 2017 as improved public market conditions help justify higher valuations for both the sellers & buyers. The amount of capital raised is at its peak since 2005, leading Philip Edwards – Managing Director, Stifel Financial Corp to remark, “If there’s a middle market business that is not owned by private equity today, it will be owned by private equity soon.” The increased focus of the new administration on infrastructure and power will be one of the primary reasons for the increased investment activities in these sectors.
 
5 Buyout and Private Debt Funds are the most promising sectors for PE Deal-Making: Private debt fund businesses have seen the most capital raised than any other sector in the U.S. in 2016. A large number of these funds are using subscription finance lines as an alternative to warehouse lines. This source of the fund has primarily been the capital deployed to originate loans to the companies that are being acquired by other mid-market equity companies. With respect to the buyout side, Stephen said, “When these buyout funds go on and acquire a company, and they call capital, put it in as the equity, finance the rest of the balance sheet, there are times, where buyout funds are borrowing at the fund level, to enhance returns, and back-levering the equity investment they made.” This has prompted certain PE funds to target secondary debt in the secondary market as an attractive market opportunity tapping onto the LPs who are concerned about over leveraging.
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