The election of Donald Trump will lead to a short-term slowdown in U.S.-targeted private equity deal-making and fundraising as industry players await clarity on how the president-elect’s policies might ease their regulatory burden but also disrupt their ability to deal with international investors.
Trump’s victory over Hillary Clinton means that the 45th president of the U.S. will be a man whom private equity professionals aren’t quite sure what to make of yet because he didn’t spend much of the campaign doling out policy details.
"The biggest thing about Trump is the unknown," said Jeff Eaton, a partner at placement agent Eaton Partners, which raises capital for private equity firms, hedge funds, real estate funds and other alternative investments. "Who knows how much change he’s actually going to do, and how much was rhetoric to help get elected?"
Those involved in the private equity industry, including firms, funds, limited partners, consultants and legal advisers, are waiting to hear the specifics of what Trump’s policies will be, and experts say there could ultimately be both positive and negative effects on the industry. Until it is clear exactly how his administration will handle a number of issues, including regulatory matters and general global relations, investors can be counted on to do what they always do when uncertainty abounds: take pause.
"Overall, financial sponsors need to take a patient course of action in order to better understand the new government’s policy direction," said Jeremy Swan, who leads the private equity and venture capital practice of consulting firm CohnReznick LLP. "Uncertainty will remain, and we expect to see a level of volatility in the markets until the policy direction of the Trump administration becomes clearer."
That stagnation probably won’t be long-lasting, however, as once it becomes clear where the Trump administration falls on a range of issues, the industry will look to take advantage where they can, experts say.
"Everyone’s a little shocked right now," Michael Fieweger, head of Baker & McKenzie LLP’s global private equity practice, told Law360. "But I also tend to think that private equity guys are going to keep doing what they do. As long as we don’t get a big disruption in the debt markets, it’ll be business as usual."
One area where Trump and the industry appear to be on the same page is a desire for less federal regulation. Private equity has been one of the targets of a U.S. Securities and Exchange Commission crusade against improper practices related to things like disclosure and fee allocation over the past few years, and Trump has publicly said he’d like to eliminate the Dodd-Frank Act of 2010, which essentially gave the regulator jurisdiction over the industry.
While Dodd-Frank served to implement some positive changes to the private equity industry, including by mandating better reporting practices and requiring private equity fund managers to register as investment advisers with federal and state regulators, Eaton said it also disrupted the industry greatly.
"It may have gone too far, but there are certain things it forced, the implementation of [which] should hopefully remain," he said.
But Eaton added that the industry was already heading in the direction of better reporting practices before Dodd-Frank.
"I don’t think it would have taken Dodd-Frank or a regulation to get us to where we are because there are groups like the [Institutional Limited Partners Association] that have migrated the industry towards certain types of reporting and back office protocols anyway," he said.
The president-elect’s overall opinion on federal regulation, meanwhile, is clear from a page on the Trump campaign’s official website titled "Donald Trump’s Contract With the American Voter." The so-called contract outlines a number of things Trump intends to do during his first 100 days as president, including that "for every new federal regulation, two existing regulations must be eliminated."
"I do think his pledge to take two regulations off for every one that’s implemented would be viewed generally favorably," Fieweger said. "If he actually does that, then presumably, appointees to the SEC would be inclined to take a less intrusive stance with respect to Dodd-Frank."
Many private equity professionals may be pumped about the potential for less regulation under Trump, but some have concerns about his relations with foreign trading partners, including China, Japan and Mexico. Trump has promised to renegotiate trade deals that in his view are unfair to the U.S., which could create icy relationships with major international trading partners.
That could make it difficult to reach international agreements and could cause foreign limited partners to have less interest in investing in the U.S., experts say.
"His larger worldview creates uncertainty," Fieweger said. "We don’t want to see conflict. We don’t want to see battles with large trading partners. These are the kinds of things that rile the markets [and] create inhibitions for investment outside of our own jurisdiction."
Depending on which issues Trump decides to take on first, and how much change he is actually able to enact, it's possible that his election will affect many parts of the private equity industry, including which areas are ripe for investment and how much capital is being raised for specific sectors. For now, however, the industry is keeping a close eye on Trump as he transitions into the role of president.
"It’s going to take awhile to see how this all plays out," Eaton said.