LET'S TALK LEVERAGE
Good morning, Term Sheet readers.
Donald Trump’s tax bill has been referred to as “a net positive for private equity,” but the new law has thrown a few curveballs at PE firms’ business models. The New York Times delved into how the new changes could force private equity firms to re-think the way they do deals for the first time in 30+ years.
The big takeaway: The tax overhaul has the power to disrupt how potential buyout targets are valued, how quickly PE leaders can reap their rewards, and how some of the “leverage” will have to be removed from leveraged buyouts.
Previously, the tax code allowed interest expense on debt to be deducted from pretax income, favoring the use of lots of debt over equity. Additionally, there was no limit on the amount of interest that could be deducted. Now, a company can only deduct interest expenses equal to 30% of its EBITDA. This means that the change in interest deductibility would affect how much firms are willing to pay for companies. Since the cost of capital will be higher, the value of the buyout target is bound to change as well.
So for bigger PE firms that rely heavily on the use of leveraged financing, this can’t be good news.
From the story:
This change to the tax code will take a bite out of the bottom line of heavily leveraged Main Street companies owned by private equity firms and will reduce the incentives of these firms to overload the companies in their portfolios with debt,” observed Eileen Appelbaum, a senior economist at the Center for Economic and Policy Research. “This is a curious development considering the lobbying effort to defeat this provision and the large number of PE big shots in positions of influence in the Trump administration.
DAVOS: The World Economic Forum in Davos, Switzerland kicks off tomorrow, and the theme is “Creating a Shared Future in a Fractured World.” Ahead of the summit, I spoke with WEF attendee BCG Digital Ventures CEO Jeff Schumacher to get his take on the topics of conversation at the annual meeting.
• Populism: If President Donald Trump attends, he is expected to advance his “America First” agenda, which is bound to clash with the globalist approach of the attendees. “It’s going to be a colorful Davos,” Schumacher said. “Trump is the first president to come to the forum since Bill Clinton. There will be much to discuss, so I don’t think we’ll see him playing a lot of golf.”
• Corporate tax change: There will also likely to be chatter, particularly among American attendees, on what the new tax overhaul means for domestic businesses. “It will be a huge topic that’s bound to be front and center,” Schumacher said. “Corporations need to figure out what to do with all of that capital that is coming back to the U.S.”
• Blockchain: Although there’s previously been skepticism around cryptocurrencies and the blockchain at Davos, the sentiment may shift at this year’s event. There are several cryptocurrency-related panels on the agenda, featuring speakers like Treasury Secretary Steven Mnuchin, International Monetary Fund head Christine Lagarde and BlackRock CEO Larry Fink. “There’s a lot of opportunity but there’s also a heck of a lot of risk too,” Schumacher said. “It’s moved its way into the executive narrative in recent months.”
Artificial intelligence, the digital economy, immigration, inequality, and the gender pay gap are also on the agenda.
BIG DEAL: Sanofi agreed to buy hemophilia specialist Bioverativ for $11.6 billion. The deal, which is Sanofi’s biggest deal in seven years, would strengthen its presence in treatments for rare diseases. The French healthcare group will buy all outstanding shares of Bioverativ for $105 per share in cash, a 63% premium on Friday’s stock price. Here are four reasons why Sanofi made the deal.
THE LATEST FROM FORTUNE...
• The World Economic Forum tries to meet the #MeToo moment (by Claire Zillman)
• How tech firms are embracing ex-prisoners (by Jennifer Alsever)
• Is President Trump good or bad for the economy?
• Facebook is making big investments in Europe (by David Meyer)
• The world’s richest 1% took home 82% of wealth last year
Sphero lays off dozens and shifts focus to education. Tile lays off dozens after a disappointing holiday. Silicon Valley’s quest to educate the world’s poorest kids. Bitcoin’s energy appetite.
• Maxi Mobility Inc., the Spain-based startup behind ride-hailing app Cabify and Easy, raised $160 million in funding. The investment values the company at $1.4 billion. Investors include Rakuten Capital, TheVentureCity, Endeavor Catalyst, GAT Investments, Liil Ventures, and WTI.
• Rokid, a China-based startup that makes an AI voice assistant and smart devices, raised approximately $100 million in Series B funding, according to TechCrunch. Temasek Holdings led the round, and was joined by investors including Credit Suisse, IDG Capital and CDIB Capital. Read more.
• Snow, a South Korea-based selfie app company, raised $50 million in funding, according to TechCrunch. Investors include SoftBank and Sequoia China. Read more.
• PacketFabric, a Culver City, Calif.-based connectivity-as-a-service platform, raised $25 million in Series B funding. NantCapital led the round.
• Hippo, a Mountain View, Calif.-based insurtech company, raised $25 million in Series B funding. Comcast Ventures and Fifth Wall.
• Highsnobiety, a Germany-based streetwear blog and media brand, raised $8.5 million in funding, according to TechCrunch. VC Felix Capital led the round. Read more.
• City State Entertainment LLC, a Fairfax, Va.-based game studio, raised $7.5 million in funding. Investors include GF Capital Management & Advisors LLC.
• Cargo, a New York-based in-car commerce platform, raised $5.5 million in seed preferred funding. Investors include CRCM Ventures, eighteen94 capital, Techstars Ventures, Fontinalis Partners, Detroit Venture Partners, Rosecliff Ventures, RiverPark Ventures, and Chaifetz Group.
• Apprente, a Palo Alto, Calif.-based AI technology company, raised $4.75 million in seed funding. Investors include AME Cloud Ventures, Greylock Partners via Discovery Fund, Morado Ventures, Pathbreaker Ventures, and StageOne Ventures.
• Techcyte Inc, an Orem, Utah-based provider of deep learning image analysis platform, raised $4.3 million in funding. The investors were not named.
• VSORA, a France-based provider of digital signal processing IP for 5G wireless networks, raised $1.7 million in Series A funding. Investors include Omnes Capital and Partech Ventures.
PRIVATE EQUITY DEALS
• Lindsay Goldberg is considering selling Dealer Tire LLC, a Cleveland, Ohio-based tire distributor, according to Bloomberg. Read more.
• GiveGab Inc, a portfolio company of Rand Capital, acquired Kimbia, an Austin, Texas-based online fundraising, crowdfunding and event platform provider for nonprofits, higher education and community foundations. Financial terms weren't disclosed.
• MidOcean Partners made a significant investment in The Planet Group, a Chicago-based provider of outsourced human capital and consulting services. Financial terms weren't disclosed.
• GPB Capital Holdings acquired MatrixOneSource, a Jacksonville, Fla.-based provider of professional employer organization services to small and medium-sized businesses. Financial terms weren't disclosed.
• TRG, which is backed by Polaris Partners, acquired Screen Group, a Netherlands-based market data software company. Financial terms weren't disclosed.
• Summit Companies, which is backed by CI Capital Partners, acquired Alliance Fire Protection, a Tempe, Arizona-based provider of commercial, industrial and multi-family residential fire protection systems. Financial terms weren't disclosed.
• American International Group Inc agreed to buy Validus Holdings Ltd (NYSE:VR) for $5.56 billion or $68 a share.
• Vista Equity Partners Management LLC is exploring options for two software companies it owns, PowerSchool and PeopleAdmin, that could involve combining them in a deal worth between $2 billion to $3 billion, according to Reuters. Read more.
• Wal-Mart Stores Inc is in talks with Advent International Corp and other funds to sell a major stake in its Brazilian operations, according to Reuters. Read more.
• Dalian Wanda, the Chinese internet giant, has tapped Citigroup, CLSA, and UBS for an IPO of its sports business, Reuters reports. Read more.
• GrafTech, a Brooklyn Heights, Ohio-based graphite products maker, said it filed confidentially for an IPO. Read more.
• Toshiba, a Japanese tech giant, is was considering an IPO of its $18 billion memory chip unit should the segment’s sale to Bain Capital fail to gain antitrust approval, the Financial Times reported citing sources. Read more.
• TPG Growth agreed to acquire a majority stake in TRACE, a France-based multi-platform media and entertainment company that connects with multicultural audiences through premium afro urban music and content. Financial terms weren't disclosed. TPG Growth will invest alongside Evolution Media and Satya Capital. MTG will sell its stake in the company.
FIRMS + FUNDS
• Sentinel Capital Partners, a New York-based private equity firm, raised $2 billion for its sixth fund, according to an SEC filing.
• Accomplice, a Cambridge, Mass.-based venture capital firm, raised $205 million for its second fund, according to an SEC filing.
• Translink Capital, a Palo Alto, Calif.-based venture capital firm, raised $107.5 million for its fourth fund, according to an SEC filing.
• Bloomfield Capital, a Birmingham, Mich.-based real estate private equity firm, raised $100 million for its third fund, Bloomfield Capital Income Fund III.
• Katalyst Ventures, a San Francisco-based venture firm, raised $34 million for its debut fund, according to an SEC filing.
• Align Ventures, a New York-based venture firm, is seeking to raise $20 million for its debut fund, according to an SEC filing.
• J.F. Lehman & Company promoted Michael S. Friedman to principal and R. Benjamin Hatcher and Kevin Vallès to vice president.
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Polina Marinova produces Term Sheet, and Lucinda Shen compiles the IPO news. Send deal announcements to Polina here and IPO news to Lucinda here.