Potential Election Impacts on the Private Equity and Private Credit Sectors
While the 2024 election cycle may introduce temporary uncertainty, the convergence of positive economic trends such as waning inflation, anticipated additional interest rate cuts, and cautious optimism for a soft landing suggests robust M&A activity into 2025. Additionally, private equity and private credit firms have significant funds ready to invest, and a backlog of PE portfolio company exits is expected to boost the market going into 2025.
Curious about how a Trump or Harris administration could impact the private equity (PE) and private credit sectors? To a large degree, the extent to which either a Trump or Harris administration will be able to enact their plans will also be dependent on the outcome of the congressional elections, but read on to discover the potential changes and their implications based upon what the candidates have said.
Changes implemented by a new Trump administration could foster more robust M&A activity in industries such as energy (oil and gas) and U.S.-based manufacturing. A generally positive inclination toward cryptocurrency and crypto services could also give a boost to activity in the fintech and financial services sectors. Conversely, “green” industries such as renewables and electric vehicles are likely to receive less government support and incentives, which may dampen related investment and M&A activity in those sectors. Larger technology deals are likely to continue to receive heightened regulatory scrutiny, regardless of the administration. This scrutiny, combined with policies on antitrust regulation and corporate taxation, will weigh on private equity M&A activity.
Most deregulation options and executive orders that Trump would be likely to pursue do not need Congressional action. For instance, conservative appointees might undermine the Basel III Endgame proposal, making bank lending less costly but potentially increasing risks of bank closures. This could impact private equity and private credit firms relying on bank financing. The likely abandonment of the SEC’s Greenhouse Gas Disclosure Rule could reduce compliance costs for PE portfolio companies but may affect ESG-related investment strategies. Notwithstanding government impact, a lot of behavior will depend on the ability of asset managers to attract capital. To the extent a more conservative SEC reduces the necessity to disclose, demands from institutional investors may mitigate any potential savings, underscoring the dynamic of multiple variables between the SEC and marketplace. Limiting regulations impacting homebuilding and opening federal lands for development could create new investment opportunities in real estate.
A Harris administration is expected to continue robust regulatory activity, particularly in green energy, infrastructure and similar industries. This could foster more robust M&A activity in renewable energy projects, environmental services, electric vehicles, govtech, public transportation and infrastructure. Conversely, oil and gas, fossil fuel and related industries are likely to experience increasing regulatory pressures aimed at reducing carbon emissions, creating headwinds for investment and M&A activity in those sectors. Larger technology deals are likely to continue to receive heightened regulatory scrutiny, regardless of the administration. This scrutiny, combined with policies on antitrust regulation and corporate taxation, will weigh on private equity M&A activity.
Stricter oversight over banks is also anticipated under a Harris administration, which could benefit private credit lenders. New regulations that increase capital-reserve requirements may reduce the capital available for traditional banks to lend into leveraged buyouts and other PE transactions, leading to more opportunities for private credit lenders. On a similar regulatory front, Harris will also inherit the ongoing proposed changes around Basel III Endgame, rules aimed at enhancing the capital buffers of major banks. The rules are expected to increase banking costs, leading to less competitive bank financing. Consequently, alternative structures like securitization over direct lending may become more prevalent, allowing banks to achieve better capital treatment. Private credit and non-bank lenders could benefit from this shift by offering more competitive financing terms, provided there is no immediate increase in regulation for these actors. The Harris administration’s focus on financial stability and regulatory scrutiny will likely support these changes, ensuring a more robust banking sector while encouraging innovation in financial structuring.
Under a Trump administration, scrutiny of both inbound and outbound investment is likely to increase, reflecting aggressive measures aimed at protecting American industries, particularly in sectors such as technology, critical infrastructure and personal data. The Committee on Foreign Investment in the United States (CFIUS) may experience heightened political involvement, especially with transactions involving Chinese investors, who will face stringent scrutiny and potential resistance. Private equity investors should prepare for increased restrictions on both inbound and outbound investments. Given the heightened scrutiny by CFIUS on foreign investments in sensitive sectors and the formalization of an outbound investment regime, investors must develop a strategy to navigate potential national security risk from the transaction’s inception.
The Harris administration is expected to maintain stringent regulatory scrutiny on both inbound and outbound investments, particularly involving countries of concern like China. CFIUS will likely continue its rigorous evaluation processes, with increased attention around enforcement, and the outbound investment review regime will proceed as planned to curtail the transfer of advanced technologies to foreign adversaries. Consequently, PE investors must remain vigilant about developing a national security-related risk management strategy from the earliest stages of the transaction planning process to navigate regulatory landscapes effectively.
A return to fundamental antitrust principles and reduced regulatory overreach under a Trump administration could provide more regulatory certainty as to whether transactions will likely obtain antitrust clearance based on objective evidence and economics. The departure of Lina Khan as FTC Chair could create a more business-friendly environment, encouraging investments in innovative companies. An increase in negotiated settlements, which have largely disappeared under the current administration, could lead to fewer lawsuits and a return to more settlements that efficiently balance the interests of government, private companies and consumers.
It is unclear whether Lina Khan would remain as FTC Chair under a Harris administration. However, increased scrutiny on PE roll-up acquisitions and exits is expected to continue, necessitating careful planning and risk mitigation. This scenario could create more favorable conditions for business investments including increasing the reliability of the strategic partners with exit transactions, but PE sponsors must work closely with antitrust counsel to navigate regulatory risks in M&A activities.
Exits into public markets have become much fewer because the public equity market for moderate-sized companies have become less desirable due to the cost of compliance. Reducing the regulatory impediments with respect to de-SPAC and other transactions may make that more of an alternative once again.
Extending tax cuts from the 2017 tax law and lowering the corporate income tax rate to 20 percent, or even 15 percent, could reduce business taxation and incentivize onshoring or U.S. iExtending tax cuts from the 2017 tax law and lowering the corporate income tax rate to 20 percent, or even 15 percent, could reduce business taxation and incentivize onshoring or US investment. Imposing tariffs of 10-20 percent on all U.S. imports and 60 percent on imports from China could create supply chain issues for many companies. Trump would likely seek to extend many Tax Cuts and Jobs Act provisions that are expiring, maintaining provisions favorable to real estate investment, such as the 1031 Exchange and carried interest provisions. This could continue to encourage efficient investment in real estate assets by private equity firms.
Proposed tax changes under a Harris administration include increasing the corporate tax rate from 21 percent to 28 percent, taxing carried interest as ordinary income for high earners, and increasing the capital gains tax rate for high-income households. Additionally, limiting 1031 like-kind exchanges to US$500,000 in gains and providing a US$25,000 tax credit for first-time homebuyers over four years are on the agenda. These tax policies would result in higher tax costs for corporate businesses and PE firms, a potential rush to exit by founders due to increased capital gains tax, increased costs for real estate property exchanges, and a potential increase in mortgage loan originations due to the first-time homebuyer tax credit.
A Trump administration would likely make a major break with the Biden administration on several environmental policy matters. Actions such as withdrawing from the Paris Agreement, revoking the executive order on the social cost of carbon, and rescinding EPA regulations could reduce the environmental regulatory burden on businesses, potentially reducing compliance costs for PE portfolio companies and increasing short-term profitability. However, reliance on less stringent standards could result in non-compliance with ESG-related customer requirements and with more stringent state requirements and non-U.S. market governmental requirements. A reallocation of Inflation Reduction Act funds could alter the economics of pre- and post-FID infrastructure projects, including carbon-sequestration projects, thereby negatively impacting expected returns to private equity fund limited partners and other investors. Additionally, revisiting the designation of pre- and polyfluoroalkyl substances (PFAS) as “hazardous substances” and revising groundwater cleanup regulations and policies related to PFAS could have significant implications for companies involved in these areas. The potential involvement of Robert Kennedy, Jr. in a Trump administration adds an element of uncertainty to these expectations.
Continuation of the Biden administration’s environmental policies is expected under a Harris administration, including promoting clean energy and carbon-sequestration projects. This could increase compliance costs for PE portfolio companies but also encourage investment in green industries due to expanded financial incentives. Additionally, agencies will be required to consider environmental justice in reviews, potentially increasing review times and costs. As a result, businesses may face higher compliance costs, but there will be increased investment in green industries and potential value growth for businesses committed to sustainability.
Trump has previously indicated he would veto the Protecting the Right to Organize (PRO) Act if passed through Congress, and Harris has promised to sign it into law. If passed, the PRO Act would limit employers’ ability to communicate to employees regarding potential unionization questions and interest. The PRO Act would also make it more difficult for employers to treat workers as independent contractors and would heighten the consequences of doing so. The PRO Act would also expand the circumstances where entities are “joint employers,” potentially exposing a significant number of employers, including potentially corporate parents and private equity sponsors, to obligations under the National Labor Relations Act.
Trump has also stated a goal of eliminating taxes on overtime wages, which would result in a loss of more than US$1 trillion in federal government revenues over a decade and could lead to structural changes in compensation for some hourly employees. In 2019, Trump signed the Federal Employee Paid Leave Act (FEPLA) providing twelve weeks of paid parental leave to qualifying federal employees. The Trump campaign has not indicated whether Trump would work to expand this policy direction by supporting paid leave for non-public employees, adding uncertainty to the labor policy landscape.
Harris previously backed a proposal to raise the federal minimum wage to US$20 per hour during her 2020 campaign, and raising the federal minimum wage and implementing paid leave policies could increase operating expenses for companies. These changes would lead to increased regulatory burdens and operating costs for employers, including PE sponsors, and could potentially result in job losses due to higher employment costs. There is also a greater likelihood that a Harris administration would seek to impose responsibility for employees of legally separate entities that have a contractual relationship, like franchisees, thus increasing contracting requirements.
Trump has not directly commented on the Federal Trade Commission’s rule banning noncompetition agreements which is currently enjoined while legal challenges are decided. However, based on his actions during his prior term, Trump may appoint commissioners to the FTC who would rescind the rule or instruct government lawyers not to defend it in court.
The Harris administration is likely to support the proposed rule, and if it were to go into effect in the future, employers would be prohibited from entering into noncompetition agreements with employees, with limited exceptions, and it would invalidate existing agreements with most employees.
Replacement of key figures like the Federal Reserve Vice Chair for Supervision and the Acting Comptroller of the Currency under a Trump administration could lead to deregulation, making bank lending more competitively priced and affecting private equity financing structures. Replacement of Rohit Chopra as head of the CFPB could result in reduced regulations impacting banks and financial services firms, potentially benefiting private credit markets. Potential removal of Fed Chair Jerome Powell and encouragement of faster interest rate cuts could influence investment strategies and cost of capital for private equity and private credit firms.
In a Trump administration, privatization could increase lending and securitization volumes based on market forces, potentially making private label deals more attractive. However, costs for home buyers could rise if state and local tax exemptions on GSE activity are removed.
A Trump administration’s policies and actions could significantly impact the private equity and private credit sector, with both opportunities and challenges arising from deregulation, trade protectionism, increased investment scrutiny, changes in environmental and labor policies, tax reforms and shifts in the antitrust and regulatory environment.
A Harris administration would be expected to continue robust regulatory activity and support for green energy and infrastructure, fostering M&A activity in these sectors. However, increased regulatory scrutiny, potential tax changes and new labor policies may pose challenges for the private equity and private credit sectors. Strategic planning and comprehensive due diligence would be essential for navigating these changes effectively.
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