This is a syndication from Axial.net.
The last year was like most election years – tentative. Deals picked up in the summer and early fall, but then fell dramatically after the election. It appears we’re right back where we started, as uncertain as ever.
We decided that it would be good to take a quick look at 9 general trends that will affect private equity next year. While there are many other affecting individual industries – like shale growth, commodities fluctuations and the Affordable Care Act – We’re saving those for a separate report. Here’s what to watch for in 2013:
Government
Risk has become much less predictable than it used to be because most of your risk is now based upon the level of government intervention. – Will Deitrick, New Oak Capital.
- Capital Gains moving from 15% to 20%
- A new “Investment Income Tax” of 3.8%
- Dividend Rate moving from 15% to 39.6%
- Government Spending cut by $110B per year
Other changes to watch in 2013:
- Corporate Tax Rate Proposals.
- Flat 28% tax, few deductions.
- Carried interest would be eliminated.
- Emerging Growth IPO’s: Less than $1B in revenue removes most of the reporting requirements – lowering difficulty of being public
- Regulation A+: The exemption size for Reg A+ transactioins, which are basically IPO’s exempt from SEC registration, has been lifted from $5M to $50M
- General Solicitation: Reg D private placements can now be advertised far and wide without fear of “general solicitation”. However, all investors in Reg D must be accredited, so this is really just shifting a lot of the burden to ensure compliance and accredited status of prospects.
”Relaxation of ban on general solicitation, combined with increase in limit of private holders to 2000++, means that issuers can actively solicit investors and ‘build a book’ of demand for an offering.” – Don Carlson, Founding Partner, ForeFront Law Group
Expect 2013 to start calming down for private equity in the press. Private equity will go back to being private in 2013, though carried interest may still be affected as part of the simplification of the corporate tax code.
PE Structural Trends
With so much dry powder sitting on the side, it appears that valuations have nowhere to go but up. In our recent survey, nearly 58% of respondents felt valuations would rise in 2013 and dry power was one of the top issues respondents were concerned about next year.
While this is great for juicing gains of private equity firms, it can also create difficult situations if things go awry like the fiscal cliff for example. The bright spot is that the companies they’re financing seem to be on more solid footing than those financed prior to the boom.
Stephen A. Schwarzman, the chief executive of Blackstone, bristles when Blackstone is referred t as a “private equity firm.” He has a point. The pool – Will Deitrick, New Oak Capital.
International
- Basel III – implementation isn’t going perfectly, but international banks have already raised liquidity to $700B of the expected $1.5 trillion. US has opted out of it in favor of Dodd-Frank regulations.
- ECB and other EU banks more tightly aligning rules and governance. Previously there wer ea few different rule structures, approval committees and places for oversight. Trying to put it all in one place.
- Social spending, austerity, and corporate taxes. There have been recent issues with taxes in France as their rates are soaring as high as 75% for some individuals. As Angela Merkel, PM of Germany said recently in the Financial Times, “If Europe today accounts for just over 7 per cent of the world’s population, produces about 25 per cent of global GDP and has to finance 50 percent of global spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life
While Latin America, one of the traditional powerhouses of private equity, dropped from $17B in investment during 2010 to less than $2B in the first half of 2012, other markets seem to be opening up. Funds have been raised for Middle East investments and African investments. PwC predicts that Nigeria and Egypt will join Vietnam, Bangladesh, and the Philippines as some of the fastest growing economies in coming years.
Watch for interest in manufacturing, manufacturing assets, and training for manufacturing to start picking up again next year.
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good stuff!
I would prefer having to read less, but thanks for the info. My response to the first quote by Will Deitrick can best be expressed by another quote from Nicole Kidman in Days of Thunder; "Control is an illusion, you infantile egomaniac. Nobody knows what's gonna happen next: not on a freeway, not in an airplane, not inside our own bodies and certainly not on a racetrack with 40 other infantile egomaniacs."
Really good stuff, thanks for posting
Compounding the problem is corporate balance sheets, which are flush with cash.
When you combine roughly $450B in dry powder with $1.3T in corporate cash, achieving the necessary required rate of return is quite difficult for either investor type (source: Pitchbook).
Of course, if growth finally kicks up (domestically and internationally), purchases at higher multiples now may see similar or even higher exit multiples down the road.
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