International | Nov 04 2024
Observations on the impact of the U.S. election on the private markets
By Drew Schardt, Vice Chairman, Global Head of Investment Strategy, Co-Head of Direct Equity at Hamilton Lane
While the election outcome isn’t likely to have a significant impact on private market operations and deal making overall, there may be a near-term pause around some deal making if the election is contested, though we expect private markets investors will largely operate with a business-as-usual mentality. The environment for transactions was already improving meaningfully ahead of November 5.
Investing in private assets will continue to be attractive, especially given the likelihood of persistent public market volatility and the potential for strong relative outperformance within the private markets. That said, depending on which candidate wins the presidency and congressional control dynamics, there will be various tactical overweight / underweight opportunities and likely a wider dispersion of returns. As such, the specific investment area, geography or theme will play a more impactful role on longer term results across strategies.
Election results
Investors like certainty, which is the biggest challenge with this election. We are in for a tumultuous ride. There is a reasonably high probability that we won’t know who the victor is for several weeks or a couple of months due to legal challenges. Investors aren’t going to love the fact that it could take months for certainty.
Interest rates + inflation
-Over the last 6-9 months, we’ve been given better clarity around interest rates and monetary policy globally, and deal activity has started to increase dramatically because of the favorable outlook on rate policy. It is unlikely that interest rates will increase, so having the inflation and interest rate picture look better has led to a significant buildup in pipeline and demand. Although anticipation around this election has put some deal activity on hold, if it weren’t for that you would continue to see dealmaking surge, reflective of a good North American growth outlook.
-Trump and Harris have put forth policies that aren’t divergent they are both generally inflationary and focus more on an “America first” stance although there are differences in the magnitude and contemplated implementation around these policies.
-Trump is clearly more extreme in this view. 10% universal tariffs (signaling potentially moving to 20%) and 60% on China (potential to strip it of its most-favored nation status).
-Harris has a softer/targeted view, but likely to still maintain existing tariffs on imported goods and create subsidies for American manufacturing.
-The question becomes: does the growth outlook still look strong enough to offset the higher cost of goods and services with those policies? Our view is that it will be something policy makers will have to keep an eye on if inflation starts to peak, it will be more on the modest side, which means policy makers, the Fed and others can stay the course on stable, higher for longer rates, with a more gradual reduction.
Key investment sectors
-Geographically, the U.S. will continue to be the overweight for most investors given its favorable macro growth outlook and a greater abundance of deal making opportunities. Overall, the appetite for demand in U.S.-based businesses tends to be strong.
Infrastructure
-The treatment of the Inflation Reduction Act (IRA) will be important what it means for infrastructure, including the demand for energy and power within the U.S., as industrial growth, the buildout of data centers related to chips and AI creates opportunities for investors around electrification in the U.S.
-A key constraint in addition to the power and set up required for the continued electrification of the U.S. (digitization, AI, datacenter demand, industry complex growth) will be how to connect the new sources of energy generation to the grid to efficiently fill demand. This is a huge opportunity for investors and supported by IRA tailwinds.
-Defensive areas like healthcare offer a wide range of sub-segments with varying characteristics. Generally speaking, there are many underinvested areas (drug development, need for greater efficacy / efficiency of delivery of services, ageing population dynamics, etc.) that continue to make this segment attractive more broadly.
-Global supply chains and logistics management investment opportunities could see greater demand given continuing trends around de-globalization and the need for greater efficiency to control supply channels/costs.
-Recent underinvestment in the commercial industrial complex globally and need for upgrading of various functions/new capital expenditure needs given dampened spending over the last 4-5 years.
Energy transition
-A Trump victory will not change the progress around renewables and energy transition. Rather, you’re likely to see a reduction in the regulation / red-tape around oil and gas production, making it lower cost, but not to a point where it makes the development of renewable generation unattractive.
-Harris will likely continue to support fiscal policy that creates greater tailwinds toward renewables. Also, she has taken a more moderate stance around energy generation including comments that she would NOT seek to ban fracking (counter to previous views).
-When Trump was president, renewable energy generation grew 11% and has grown stably at 5-6% since (but expected to pick back up). At the end of the day, the need for greater energy is there and the challenge is how you connect generation onto the grid and into the system.
Taxes
-We are less worried about major changes impacting the private markets. Amending the capital gains tax has been a topic discussed for many years. Whether they have to pay a bigger tax rate or not, the fees on private investing have not changed. Overall, we don’t expect this will have any impact on dealmaking.
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