PitchBook's latest analyst note provides an in-depth review of how recent US tax reform will impact private equity, spanning the impact on portfolio companies to timing of liquidity.
The reduction in the US corporate tax rate from 35% to 21% will lead to an increase in free cash flow (FCF)—and therefore enterprise value (EV)—for most PE portfolio companies as tax payments, on average, decrease. As a result, we expect this to put upward pressure on EV/EBITDA multiples.
Large conglomerates will be more willing to do carveouts and divestitures because their tax payments will have dropped by 40%, which will lead to more opportunities for PE firms.
We expect fewer exits to occur in less than three years due to the changes in carried interest taxation requiring a three-year hold period to realize long-term capital gains rates on the carry. These quick exits represented only 16.9% of exits in 2017, and we expect that number to further decrease.