For example, removing interest rate deductibility of portfolio companies would slice private equity returns, he said. Companies now can deduct interest expense from their taxable earnings. Congressional Republicans are proposing to eliminate the interest deduction. “Interest deductions in leveraged buyouts are a pretty consequential part of the economics of the deal,” Mr. Sacher said.
Should interest on business loans no longer be deductible then the value of portfolio companies will drop, because potential buyers will expect to pay less for the companies, said John Toomey, a managing director at private equity fund-of-funds manager HarbourVest Partners, LLC, Boston.
Private equity funds' investors would be hurt because the value of their investments would suffer, he said.
A border tax on imports would affect already-battered retailers and other companies that import goods, making them less valuable investments. What's more, should Congress eliminate companies' ability to amortize capital expenditures, it would materially reduce the valuations of most service companies.
The American Investment Council, a Washington-based private equity industry trade group, is keeping tabs on the developments, said spokeswoman Laura Christof. It is unclear when, or if, Congress will enact tax reform, but the American Investment Council is using the House Republican blueprint, issued June 24, as a reform guide.
“The proposal within this blueprint to eliminate full interest deductibility in favor of 100% expensing would not only damage the (private equity) industry, but all industries that use debt financing,” Ms. Christof said in an email. “This is a critical issue for us and for the health of the economy.”
The American Investment Council is also concerned with the taxation and treatment of carried interest capital gains and pass-through entities, Ms. Christof noted. “We have strong support from both House and Senate Republicans on these two issues,” she said.
Still, most industry insiders say the one thing that's certain is the uncertainty surrounding tax reform. “I'm not even close to calling this,” said Adams Street's Mr. Sacher. “How this all plays out is uncertain, and uncertainty is not a great thing for investors.”
Even though the negative impact of any tax reform proposal could be at least partially offset if Congress also lowers the corporate tax rate, the uncertainty is one reason Adams Street executives are playing it safe. “For lenders, we have a bias toward safer senior secured loans until all of this gets sorted out,” Mr. Sacher said.
While the effect of tax reform is hard to predict, manager optimism on an eventual easing of regulations is being built into deals, boosting prices, said Thierry Adant, investment consultant in the New York office of consulting firm Willis Towers Watson PLC. “People think that something will happen,” Mr. Adant said.
Everyone is asking questions about tax reform as well as the possible elimination of regulations required by the Dodd-Frank Wall Street Reform and Consumer Protection Act but no one is answering them, said Daniel Martin, partner focused on real estate in the New York office of law firm McDermott, Will & Emory.
For real estate, changes could make certain companies less valuable as tenants. Some proposals could make it harder to refinance mortgages and commercial mortgage-backed securities coming due. And elimination of post-global financial crisis regulations, including those regulating securitization of real estate loans, would make them less safe, he said.
“Financial regulations and stricter lending control actually worked,” Mr. Martin said. Mortgages and pools of those mortgages issued after the crisis have more stringent underwriting standards, he said. “The loans are better loans on more conservative terms on better properties” than before the financial crisis, he said.
