It was a timely visit. Based in the US, Duff & Phelps executives David Larsen (managing director), Chris Franzek (managing director, portfolio valuation) and Warren Hirschhorn (vice chairman) were all in London this morning at a seminar, the agenda of which was now a little more focused on the US election result than had originally been planned.
They were joined by London-based managing directors Ryan McNelley (a US national) and Yann Mangan to provide views from the valuation and corporate finance adviser on what Donald Trump’s extraordinary and unexpected triumph may mean.
Here are six key reflections:
1. Brexit is the reference point:
Neither result was anticipated and both were shocks to the system. As a Trump win became likely, the futures market took off on a rollercoaster ride. Similar public market volatility was seen in the immediate aftermath of the Brexit vote, but eventually the situation calmed down. That is also the hope now.
However, where the similarity may end is that Brexit had some certainty over what was expected to happen, being based around a specific issue. In the case of Trump, it’s very difficult to predict what he will do and what his policies will be. There is very little detail. Will certain trade agreements be torn up? We simply don’t know at this point.
2. There will be very little visibility until the new year:
Trump will not become President until inauguration day on January 20, 2017. Only then will it become apparent what a Trump administration will look like and who will occupy the key positions.
For this reason, when it comes to fund managers trying to assess valuations of portfolio companies, it may be wise not to expect radical adjustments by December 31. That stance could change in the first quarter of next year when there’s greater visibility on key appointments, policies, the “first 100 days” plan – and possibly also in response to changing market conditions.
3. Private markets are less volatile than public, but currency fluctuations are a major factor:
At times of volatility, private markets are less hit by turbulence than public markets (at least in the immediate aftermath). Significant valuation effects may only be seen in response to changing market conditions (such as a growth spurt or recession) which may only unfold gradually.
But currency fluctuations may well have an immediate effect, for example where funds are denominated in a particular currency and making investments in a different currency. The currency issue was a major feature of the Brexit outcome, and the plummeting of the Mexican peso as the likelihood of a Trump victory increased was one indication that it will be a big consideration once again.
4. Times of uncertainty and dislocation can bring opportunity:
If the market experiences a downturn, there could be good buy-side opportunities even as the sell-side becomes more challenging. With vast amounts of dry powder having been raised, fund managers are poised to take advantage when the change arises. Furthermore, even though many funds have a lot of capital to invest, their long-term investment time horizon means they needn’t rush into doing anything hasty.
Notably, whenever Trump’s standing in the polls improved, sentiment in certain industries appeared to also improve. Healthcare and finance are two industries hoping that the new President will be true to his word when it comes to rolling back regulation.
5. Don’t expect much change in investor sentiment:
One thing that achieves the rare accomplishment of being perfectly clear today is that public market volatility will continue. Combined with fixed income delivering record low returns, alternative assets look no less of an attractive long-term option for institutional investors today than was the case yesterday. Pension plans face some very tough choices: the likes of private equity, private debt, infrastructure and real estate are undoubtedly compelling options as they seek to meet their long-term liabilities.
6. Watch out for (re-)negotiations on price:
If a deal is expected to close today, chances are you can expect it to close on the agreed terms. But if closing is expected a few weeks from now, you may see that timetable pushed out as an opportunity to renegotiate on the price becomes apparent. This will depend of course on the nature of the business, and a lot of sector-focused analysis will be undertaken to try and determine the risks (and possible price implications) on a case-by-case basis.