I’ve previously described the last fifteen months of Private Equity as the “Comfortably Numb” phase – low interest rates, low growth, no major, meaningful change in macroeconomic events to drive any substantive movement off of trend. However, we are forecasting Q4, 2016 as a quarter where a trend-breaking number of deals in the middle market get done. Here is the logic:
- While there have been fits and starts, we believe clarity of an interest rate rise of at least 50 – 75 basis points will come into view by the end of the year
- Business owners and investors will begin to see the “long in the tooth” recovery and think to reposition their capital before a recession
- The focus will turn substantively to the election and the real chance of a Democratic president and Congress, as well as the chances of higher capital gains rates and changes in the carried interest tax treatment for private equity
In 2010, CMF created a template to compute the potential impact of capital gains rates on seller behavior. Our analysis shows that a 5 percentage point increase in the capital gains rate from 25% to 30% would require a potential seller to generate 7.1% in additional EBITDA just to stay even on an after tax sale proceeds basis.
Request a copy of the tax template and run your own scenarios by clicking here.