Private Equity Set For Post-Election Deal Rush If Democrats Sweep White House And Congress
Democratic U.S. Presidential candidate Joe Biden wants to push through tax increases on Americans should he win on November 3rd. Individuals earning above $400,000 would see increased income taxes, payroll taxes and capital gains taxes and corporations would also be subject to higher income taxes. The polls have Biden way ahead of Donald Trump. Private equity fund managers are bracing themselves for a hit.
“Democratic leadership has made no secret of its desire to roll back corporate tax reductions under the Trump administration that pulled down business rates as low as 21%,” said Brian Richards, Chair of law firm Paul Hastings’ Private Equity practice. “Add to that a likely rise in capital gains rates, which would hamper investment returns. Plus, probable legislation pushed by the Progressive wing to tax carried interest as ordinary income, which is a third-rail for private equity – but which will not matter if Biden is successful in raising capital gains rates to the same level as ordinary income rates, as he has proposed.”
Should the Democrats gain control of the White House and Congress, the private equity industry expects to see a flurry of deal activity in 2021.
“A lot of industry players are looking to get ahead of that wave by trying to get deals done by year’s end in advance of expected significant changes to the tax regime that would negatively impact after-tax PE returns. Look for more action – and transactions – among entrepreneurs looking for equity partners even with depressed valuations, as well as corporates seeking deals before the tax laws change.”
There is one bright spot. Richards says that the ‘Made In America’ label is becoming increasingly important to U.S. lawmakers and private equity is well positioned to support what is an important political topic in the States.
“Lawmakers in the U.S. want to see more goods manufactured and assembled in U.S. plants by American workers,” he says. “That could well favour homemade manufacturing and even service companies in need of private capital.”
Richards thinks that other types of transactions that will continue to attract private equity investment - regardless of who wins the White House next week - include deals driven by government subsidies, like renewable energy and industries which rely on tax credits; ESG-branded deals; and Covid-19-impacted companies, particularly those in dire need of support, like companies in the retail, transportation and hospitality industries. If Trump wins next week or if the Republican party is able to maintain control of the Senate, Richards thinks it’ll be largely business as usual, but a Joe Biden victory will clearly, in his view, have an impact on an industry where many of its constituents are already facing headwinds.
“If the Democrats control the White House and the Senate, and push the tax changes through, there’s no doubt that will have an impact on private equity fund returns in the next few years,” he said. “But regardless of who wins, the industry is facing a tough year in 2021. The Covid-19 pandemic has impacted many portfolio companies of many private equity funds. But private equity has been through challenges before and I’m sure it’ll find a way to adapt.”
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