Donald Trump’s victory in the US presidential election has stirred significant response in markets.
While pre-election polls projected razor-thin margins, Trump solidly won the election and the Republicans gained firm control of the Senate and will maintain their majority in the House.
The speed of the outcome was surprising, with the lack of uncertainty catalysing rallies in risk assets – particularly US small cap equities and the financial sector – and further increases in US treasury rates due to inflation concerns.
A Republican sweep could increase the likelihood Trump will be able to implement many aspects of his agenda. So, what are some of the potential implications of Trump 2.0 for private equity (PE)?
Moving forward, key areas worth watching include taxes, deregulation and antitrust policy, tariffs and trade, and inflation
Trump is inheriting an economy that, by most metrics, is performing well. The US boasts the strongest growth among the G7 nations, its equity markets are thriving, unemployment is low and interest rates are on a downward trajectory.
Moving forward, we believe key areas worth watching include taxes, deregulation and antitrust policy, tariffs and trade, and inflation.
That said, since the policies and implications of Trump 2.0 remain difficult to predict, the range of potential outcomes is wide. It is difficult to predict which policy initiatives a new president will actually implement, as well as the effect such policies could have on PE in a complex economy.
We do believe, however, that the nimbleness of PE managers and PE-backed companies provides significant advantages in navigating a dynamic policy environment.
Trump has highlighted his intent to prioritise deregulation, which has potential to spur ‘animal spirits’ among US corporations
Trump has highlighted his intent to prioritise deregulation, which has potential to spur ‘animal spirits’ among US corporations – including small businesses – and drive increases in capital spending.
Deregulation can be particularly beneficial for small and mid-sized businesses, which is the largest segment of the PE asset class. If successful, we believe regulation could be a meaningful tailwind for PE.
In recent years, the Biden administration has shown an increased aggressiveness in the field of antitrust, challenging more activities than had been the case under many other recent administrations. Republicans have historically had a narrower view of antitrust, though these policy views have been evolving in recent years.
While Trump has not made his views on this topic clear, we believe his appointments to the FTC and the Antitrust Division of the Justice Department could be a meaningful indicator.
A continuation of stricter antitrust enforcement could have a chilling effect on M&A by large companies
A continuation of stricter antitrust enforcement could have a chilling effect on M&A by large companies, particularly in sensitive industries such as technology.
On the one hand, this might limit the exit opportunities for existing PE-backed companies by limiting large corporates as potential buyers, particularly for large and mega-cap PE managers; however, it could also create interesting new buying opportunities for PE managers facing fewer competitive bids from strategic buyers.
If a Trump administration were to pursue a more traditional approach to antitrust, this could lead to a more favourable M&A environment, particularly for the exits of larger PE-backed companies.
While the US president has broad authority to implement tariff increases, it is yet unclear if these tariff increases will be implemented and, if they are, how quickly
During the campaign, Trump spoke of his support for tariffs. He stated his desire to implement headline tariff rates of 20% across the board, and of 60% or more for imports from China.
While the US president has broad authority to implement tariff increases, it is yet unclear if these tariff increases will be implemented and, if they are, how quickly and how uniformly. Some of Trump’s policy advisers have stated that the aim of these policies is to renegotiate better trade deals for the US, rather than full imposition of the tariffs themselves.
The consensus view among economists is that higher tariffs would be inflationary, but to what degree depends on the extent and speed with which they were implemented. It should be noted the US economy is more self-sufficient than many other developed countries: US imports equal approximately 15% of its GDP, roughly half that of the UK and one third that of Germany.
While the policies and implications of Trump 2.0 are difficult to predict, we remain optimistic about PE’s ability to adapt to changing rules and market conditions
PE as an asset class is overweight intellectual property and service-based sectors relative to the economy as a whole. Tariffs, by their nature, are taxes on the importation of goods. While certain PE-backed businesses could be directly affected by tariff increases, our proprietary analysis of PE portfolios suggests the typical diversified portfolio is likely less exposed to tariff risk than the broader economy.
While the policies and implications of Trump 2.0 are difficult to predict, we remain optimistic about PE’s ability to adapt to changing rules and market conditions, capitalise on opportunities and move aggressively to mitigate risk. We expect this to continue to be the case as the US transitions to a new administration.
Peter von Lehe is head of investment solutions and strategy, and Ralph Eissler is head of private markets research at Neuberger Berman
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