How US tax reform will impact PE

Recent changes to the US corporate tax rate are a mixed bag for private equity. Reducing the top-line rate from 35% to 21% affects PE at both the fund and portfolio company levels, as both are structured as corporate entities in the first place. For portfolio companies in particular, that should lead to a climb in free cashflows in tandem with reduced tax payments. Higher cashflows will likely also translate into higher enterprise values in the market—as if the PE industry needed any help keeping valuations high. How big an impact this will have on aggregate valuation data is hard to say, but we may see an uptick or two in the coming quarters. On the other hand, PE investors will want to pay those valuations using less debt, since the new law also capped interest deductibility at 30% of EBITDA. Net tax payments will go up for portfolio companies shouldering more than 6-7x of debt obligations. As such, we could see more equity put to use in the coming years.