The current Tax Proposal Bill could have huge impacts on companies deducting corporate interest. The proposed bill will only allow companies to deduct interest up to 30%. This will be a big change from the current 100% deductibility of interest.
Private equity firms rely on leverage and would be hurt by not being able to deduct the interest from their companies’ taxable income. Leveraged buyouts rely on a tax shield to embellish their returns. Also, this will be huge for non-traditional bank lenders, who will have to figure out new ways to conduct business.
Conversely, this may not be so bad to have less reliance on leverage. The tax law could force private equity firm to focus more on making companies better rather than on using leverage for their returns. Lately, the industry has been more focused on making improvements rather than financial engineering.
It also seems that portfolio companies could have more money as a result of the corporate tax cut from 35% to 21%. This could make these companies more competitive globally.
Read the full article: 2018 Forecast: 5 Major Trends Hitting the Middle Market