Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Exactly how will the Trump administration's potential changes to the U.S. tax code roil the private equity industry? 

While nothing has been formally proposed, a blueprint put forward by House Republicans last June offers some clues. It outlines a cut in corporate tax rates and introduces both a border-adjustment tax (designed to exempt exports and tax imports) and the immediate deductibility of capital expenditures (such as spending on plant and equipment). It also includes the scrapping of interest deductibility, a move that could severely impact returns from leveraged buyouts, which are traditionally heavily reliant on debt. 

Rearview Mirror
Favored sectors for buyout deals may be completely different under a new tax code, compared to last year
Source: Preqin Private Equity Online
*Data is global. 54% of all private equity-backed buyout deals in 2016 were for assets located in North America

Blackstone Group LP's fourth-quarter earnings Thursday gave investors the chance to hear from executives at one of the industry's biggest players -- and their message on the issue was somewhat reassuring. On a call with analysts, Blackstone's chairman, CEO and co-founder Stephen Schwarzman prefaced his comments by saying that any potential changes are akin to "backstage whispers," but then predicted that the potential impact of any reform could be a "net positive."  And while the firm's president and chief operating officer Tony James told media he believed the changes were "almost inconceivable," he acknowledged that if they did occur collectively, they could give the firm's private equity portfolio a slight boost.

Both men encouraged interested onlookers to view the potential reform in entirety, and said any pain that Blackstone's private equity portfolio might absorb from being unable to deduct its bevvy of interest expenses could be balanced out by the other policy changes. We'll see about that. But if both Congress and the Senate end up giving a green light to a new tax code based on the current blueprint, private equity firms may make a concerted effort to target sectors that rack up bigger capital expenditure bills in an effort to deliver returns that are at least on par with past performance.

Honing In on the Future
Comprehensive tax reform could encourage alternative asset managers such as Blackstone Group to favor deals for companies in sectors that require greater spending on capital expenditures
Source: Bloomberg

Based on the capex spending over the past 12 months by companies that comprise the S&P 500 Index, utilities, energy, real estate, materials, telecommunication services and industrial deals may take center stage.

Blackstone is the biggest real estate investor in the world, with $102 billion under management and and a private equity arm that oversees $100.2 billion -- more than Carlyle Group LP and Apollo Global Management LLC combined. The New York firm has long been in the pole position when it comes to being shown new deals. If any eventual tax reform measures end up resembling the House blueprint, Blackstone could use its first-pick power to target big spenders. That is, if Warren Buffett hasn't gotten to them first.

Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It should be noted that Schwarzman is also chair of the President’s Strategic and Policy Forum, a committee of business leaders set to advise Trump on job creation and economic growth.

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Gillian Tan in New York at

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Beth Williams at