Potential Election Impacts on the Private Equity and Private Credit Sectors
With President-elect Trump announced as the winner of the 2024 election, the private equity and private credit sectors are poised for significant developments. Positive economic trends, such as waning inflation, anticipated interest rate cuts and cautious optimism for a soft landing, suggest 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.
To a large degree, the extent to which the Trump administration will be able to enact its plans will also be dependent on the outcome of the congressional elections, but read on to discover the potential changes and their implications.
Regulatory Environment
Changes implemented by the Trump administration may 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 will 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.
Investment Scrutiny
With Trump elected, 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 recent announcement of an outbound investment security regime, PE investors must develop a strategy to navigate potential national security risk from the transaction’s inception.
Antitrust Environment
A return to fundamental antitrust principles and reduced regulatory overreach will provide more regulatory certainty as to whether transactions will likely obtain antitrust clearance based on objective evidence and economics. The expected departure of Lina Khan as FTC Chair may create a more business-friendly environment, encouraging investments in innovative companies. An increase in negotiated settlements, which have largely disappeared under the Biden administration, may lead to fewer lawsuits and a return to more settlements that efficiently balance the interests of government, private companies and consumers.
Tax Policies
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. investment. Imposing tariffs of 10-20 percent on all U.S. imports and 60 percent on imports from China may create supply chain issues for many companies. Trump will 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.
Environmental Policies
A Trump administration will 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. And with respect to federal regulations regarding per- and polyfluoroalkyl (PFAS) substances, which have been a focus of regulatory scrutiny in the Biden administration, EPA’s “hazardous substances” designation for certain PFAS and expectations for groundwater cleanup are less likely to be revisited. The potential involvement of Robert Kennedy, Jr. in the Trump administration adds an additional element of uncertainty to these expectations. But independent of any revisions to federal policy, state regulatory scrutiny and policies will continue to expand for PFAS.
Labor and Employment Policies
Trump has previously indicated he will veto the Protecting the Right to Organize (PRO) Act if passed through Congress. If passed, the PRO Act will limit employers’ ability to communicate to employees regarding potential unionization questions and interest. The PRO Act will also make it more difficult for employers to treat workers as independent contractors and would heighten the consequences of doing so. The PRO Act will 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 will result in a loss of more than US$1 trillion in federal government revenues over a decade and may 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 administration has not indicated whether Trump will work to expand this policy direction by supporting paid leave for non-public employees, adding uncertainty to the labor policy landscape.
Noncompete Agreement
Trump has not directly commented on the Federal Trade Commission’s rule banning noncompetition agreements that 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.
Change of Personnel and Leadership
Replacement of key figures like the Federal Reserve Vice Chair for Supervision and the Acting Comptroller of the Currency under the Trump administration may 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. The 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.
Privatization of the GSEs
Under the Trump administration, privatization may 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.
The Trump administration’s policies and actions may 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.
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