Belief that the Trump administration will be positive for private fund managers has plummeted over the past 12 months, but there are plenty of reasons to be optimistic in 2018.
By Claire Wilson
January 21, 2018
Private fund managers expected Donald Trump to do good things for the industry, regardless of their personal views. A 2016 year-end survey by the Association for Corporate Growth found that 79 percent of mid-market managers thought his policies would have a positive effect, a sentiment shared by a similar proportion of delegates polled at sister title Private Equity International’s CFO and CCOs Forum last January.
But a year on, the ACG noted a “shock decline” in opinion; only 49 percent of those polled at the end of 2017 viewed the Trump administration as positive for the industry. Nineteen percent said it was negative and the remainder neutral.
On the surface it’s unclear why the tide has turned. Unfavorable measures included in the tax reform act approved in December, such as limits to interest deductibility, were already on the cards at the end of 2016. Many of its other provisions, such as lower corporate tax rates, are beneficial to the industry. Trump’s campaign pledge to change the treatment of carry has been watered down, and carried interest on assets held for more than three years will still be taxed as a capital gain.
The much-hyped regulatory rollback hasn’t happened, but the Securities and Exchange Commission has said its focus will be on retail rather than institutional asset managers in 2018. It’s unlikely the lack of large-scale change has triggered a shift in sentiment; most CFOs pfm spoke with over the past year did not expect legislation to be dismantled, plus they favored clarity over a bonfire of regulations.
So if it is not the change that has altered opinion, what has? The ACG said it was a consequence of the short-term uncertainty created by tax reform, rather than tax reform itself or the regulatory status quo.
While there is still optimism the new regime will prove beneficial to the industry, enacted policies are always different than they were on paper. It also takes time for them to filter through to the economy. Fund managers are still in the early stages of assessing and acting on tax reform measures, as reported by pfm earlier this month, which is overshadowing its positive consequences.
“Private fund managers are very sensitive and a little uncertainty translates into great caution,” David Acharya, Executive Vice President of ACG New York and Partner at AGI Partners LLC, tells pfm.
He adds there is reason for optimism because many tax reform measures are positive for private fund managers. Lower corporate tax rates, for example, will increase their cashflows and therefore their ability to hire more staff. The requisite three-year holding period to qualify for the lower capital gains tax on carry is “not a big deal” because most managers keep assets in their portfolios for longer than that. Reducing the ability to deduct interest from tax bills is a negative, but its impact will lessen with the proportion of leverage a firm uses – not everyone is affected equally.
Elsewhere, continued economic growth – the pace of which has not been seen for a decade – means more businesses will be bullish in their growth ambitions and will be looking for private capital backing, so it’s unlikely there will be a shortage of investment opportunities. The only risk here is that valuations will be driven higher by strong competition and the availability of cheap credit.
The year might be off to a challenging start but once tax reform has been successfully navigated, it should be plain sailing.