“It was a shock to me, and also to the world,” said Yann Magnan, European valuation services leader at Duff & Phelps in London. He was speaking at a seminar held by the firm at London’s Shard with Donald Trump’s election triumph still fresh, and was reflecting on the moment when his wife shook him from his slumber as the news broke.
Magnan was seated alongside three senior US-based colleagues who had flown over for a conference and had originally expected the seminar to comprise a general overview of the valuation environment for alternative assets. Unsurprisingly, the agenda shifted to a rather more specific focus: trying to make sense of extraordinary events.
In our news coverage on Wednesday, we provided six observations about how a Trump presidency may impact fund managers. Below are some further musings that we hope will provide food for thought.
Don’t assume carried interest is under threat
There was one thing (it’s hard to think of another) that Donald Trump and Hillary Clinton could agree on during the campaign: carried interest was a tax loophole that needed to be closed. However, the Duff & Phelps executives were not convinced that Trump would choose to pursue the issue.
There are many different uses of the limited partnership and carried interest-type arrangements, and they are not by any means restricted to alternative investment funds. Would alternatives managers be isolated and told they could not benefit from such a scheme while others could? Achieving the desired end result may well be easier said than done – and the revenue raised by closing the loophole would be relatively small. More trouble than it’s worth?
Private debt funds can hedge – but can they stop a bank comeback?
Aside from keeping a watching brief on the Fed and the possibility of rate rises, required actions for private debt fund managers appear to be fairly limited. One obvious item to tick off the “to-do” list is making sure appropriate currency hedging is in place given renewed volatility – highlighted in dramatic style by the plunge of the Mexican peso.
However, there is a ‘bigger picture’ issue to consider. Trump did not go into specifics, but did indicate he thought regulation of the banks had gone too far and was stopping them lending. In particular, he attacked the 2010 Dodd-Frank Act – leading to speculation that he might restrict the number of institutions subject to it. By rolling back regulation, might Trump put banks back in the lending game and reclaim some territory lost to fund managers?
Don’t expect a lasting pause on the deal front
At times of volatility and uncertainty, it’s natural for investors to take some time out to let the immediate storm blow over. However, across the alternative asset class spectrum, fundraising has been strong in recent years and the larger fund managers have built up huge war chests.
The pressure of this capital dictates that they can’t afford to wait too long before putting that money to work. In any case, evidence is piling up that volatility is the new normal. Better get used to it – and get on with it.
Time to get busy with valuations
When it comes to valuations, a gap may emerge between what’s necessary and what’s demanded. In reality, there may be no pressing need for fund managers to re-value portfolio companies in the fourth quarter. Trump does not assume the presidency until his inauguration in late January. Until then, it will be a case of ‘wait and see’ with few clues of what lies ahead – and probably little impact on valuations in many cases.
Nonetheless, fund investors will be expecting a rigorous valuation process to be completed by year-end – on a granular basis and applied to every single investment. They will acknowledge the uncertainty and they will forgive you for not possessing a crystal ball, but they will not be too pleased with any valuation-related complacency.
Ultimately, there’s nothing to worry about
One or two people in the room admit to having been around at the birth of the private equity industry. Since then, there have been many bumps in the road – the unexpected vote outcomes in the UK and US being merely the latest examples. The abiding hope is that smart fund managers will find a way of figuring things out.
PS, We’re in the process of deciding the shortlists for our annual awards – the only private debt awards for the industry decided solely by the industry. Do you think you should be nominated? Tell us about your 2016 milestones here.