Deals

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.

In Donald Trump's world, the long list of "losers" includes Cher, Rosie O'Donnell and Mark Cuban.

Now, as he proposes an overhaul of U.S. tax and trade policies, President Trump is poised to create a new list of losers -- for private equity.  

The introduction of a potential border-adjustment tax could erode profits at some of the businesses owned by buyout firms, enough to make them not worth hanging onto any longer. That may speed up the timetable for putting them on the auction block or on laying the groundwork for an IPO. 

Exit Plan
U.S. private equity-backed activity may climb if firms can find buyers for companies poised to be dramatically impacted by proposed tax reform
Source: Pitchbook

As firms review their portfolios, key considerations for determining which fall into this "loser" category include the percentage of a company's inputs that are originated outside of the U.S. and how truly flexible supply chains are if the concept of border adjustability becomes law. 

So which companies could be culled? One possible "loser" is American Tire Distributors Holdings Inc., which imports and manufactures some of its tires in Asia and is backed by Ares Management LP and TPG. Another is NBG Home, which leans on Asian manufacturers for many of its products and is owned by Kohlberg & Co.. Then there's also Isola Group, which has offshore manufacturing operations that make laminates for use in the production of printed circuit boards, which is backed by TPG and Oaktree Capital. These are just a few -- there are many more that fall into this bucket.

Private equity firms will likely have to reset their expectations around valuations and accept lower prices than they otherwise might. But in an industry where one's ability to raise new funds depends on past performance and decent returns, minimizing losses is crucial. 

On the subject of losses, the border-adjustment tax could exacerbate problems for private equity-backed retailers that source their products offshore, including but not limited to J. Crew Group Inc., Claire's Stores Inc., Toys "R" Us Inc., Nine West Holdings Inc., Rue21 and True Religion Apparel Inc. These companies are already operating at various levels of distress, mostly due to heavy debt burdens -- a feature that could crush them even more if interest deductibility is scrapped under the new tax code. Worse still, most of these companies carry deferred tax assets which will become less valuable if the corporate tax rate drops as planned. And unlike the potential "losers" mentioned above, these situations are even more difficult for private equity firms to extract themselves from.

Mixing It Up
Private equity firms may seek to sell more of their companies that focus on business-to-consumer and business-to-business transactions, especially if goods are sourced offshore
Source: Pitchbook

Blackstone Group LP has already forecast that the collective impact of tax code changes, in their draft form, will be neutral to slightly positive on its private equity portfolio -- even if some rejiggering is in order. Publicly-traded peers Apollo Global Management LLC, Carlyle Group LP and KKR & Co. -- each set to report their own fourth-quarter results in coming weeks -- will likely echo the same message. It's about self-preservation, after all.

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

  1. Another such company that was exploring sale options even before the election was Springs Window Fashions, a Golden Gate Capital-backed maker of blind, shade and other window coverings. The Middleton, Wisconsin-based company has sizable manufacturing operations in Mexico which could mean its profits are dented by the border-adjustment tax. 

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net