Buyout Market Commentary: Small Buyouts On the Eve of the Inauguration

In the past month, the most common question that we have received from investors (particularly from those overseas) is, “What is the impact of the U.S. presidential election on our part of the private equity market?” As we write this just before the January inauguration, we are between the rhetoric of the campaign and the reality of actual policy. We are at that point where it is hard to discern one from the other, so it is unwise to make immediate predictions.

Our first thought is a very general one that has to do with the tone that the election is setting for the buyout market. Not surprisingly, the overall mood is positive. The Trump agenda is widely viewed as pro-business, lower tax, and less regulation. While this may have a mixed reaction across society broadly, it is music to the ears of the investment community. We have seen the stock market reaction immediately following the election, and we believe that the optimism in the private markets is similar.

Market mood may be an intangible factor, but we think it is an important one. It is also coming at an opportune time. Completely unrelated to the election, 2024 has been a successful recovery year for private equity. The COVID-era dislocations are behind us. The ill effects of high inflation and interest rates have healed substantially in 2024. In particular, we have seen signs later in 2024 that the troubling scarcity of exits is turning around.

If we look deeper into some of the new administration’s specific proposals, some of this market goodwill may be needed! Of the many policy initiatives that may be enacted, we single out trade tariffs as the one area that could be a major risk in our buyout market. Indeed, if some or all of the proposed blanket tariffs (60% or more on China, 25% on Canada and Mexico, etc.) are enacted, the fallout on the U.S. economy and its consumers and companies would be significant. Higher prices and disrupted supply chains would be a direct impact. Retaliation would affect foreign sales from domestic producers. Just as 2024 had been a year of healing for inflation and interest rates, the imposition of tariffs could reignite both, with all of the resultant negative effects for the buyout market. We are not aware of any credible economists or business leaders who consider such high and broad tariffs a good idea.

Is there a mitigant to this dire scenario? The stock market seems to be shrugging off this risk with the assumption that any tariff rollout will be much tamer than the very high and broad proposals. We hope that this is the case.

However, hope isn’t a strategy, and we know that many of our best industrial GPs are assessing specific portfolio vulnerabilities and mapping out contingency plans. As a broad generalization, there are several factors that may provide relative protection for the sort of industrial companies targeted through our small buyout strategy. First and foremost, our companies are relatively small with a primarily domestic footprint and focus. Since “on-shoring” has now become a priority, we have begun to hear that the type of manufacturing companies owned by our GPs may actually command higher strategic value in the marketplace, given their domestic focus. Additionally, the types of industrial companies favored by our GP partners tend to be specialized, making more highly engineered products with higher margins and sticky customer bases. These sorts of companies will be more likely to successfully pass through higher costs and retain customers.

In a broad high tariff scenario (such as that being discussed) where no one will be untouched, the goal for individual producers is to have an advantage relative to their competitors. This, too, is where companies with superior management and top GP oversight will likely have relative advantages as they react more nimbly to avoiding new risks and seizing new opportunities. A new administration is unlikely to fundamentally alter a private sector economy that is as large, diverse, and dynamic as ours. However, it can set a tone and propose specific policies that will shift direction, which can create winners and losers along the way. We enter a new year and a new administration with a good degree of optimism. This is because: (1) we leave 2024 with our market in a good foundational position for success in 2025; (2) our optimism is enhanced by the pro-business and pro-investment stance anticipated from the incoming administration; and (3) small buyouts have many advantages (some of them inherent and some of them through superior leadership and ownership) that should allow them to succeed through the new policy changes proposed by the incoming administration.

This market commentary thought piece (“Thought Piece”) and all information contained herein is being provided solely for educational and informational purposes and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any investment sponsored by RCP or be construed as an offer to sell or a solicitation of an offer to buy any securities or investment products.

This Thought Piece has been supplied for informational purposes only and therefore no representation or warranty is made, whether express or implied, by RCP or any of its affiliates, partners, employees, members, or agents as to the accuracy or completeness of the information provided. An investment in any private fund involves significant risks and certain potential material conflicts of interest. Investment in private equity involves significant risk, including the potential loss of invested capital.