What Will Happen In Private Equity During The Election Season?
by Patrick Galleher, originally published on forbes.com on July 14, 2020
At the start of 2020, everyone thought the biggest story would be the presidential election. It was, and still is, expected to be a big contest that will have a far-reaching impact on the future of the United States. Of course, the Covid-19 pandemic has upended any notions that 2020 will be business as usual.
The 2020 presidential election is definitely still on everyone's minds. We all just have much more to consider come November. In the wake of coronavirus, as we slowly but surely reopen the country, focus on the United States economy and its future has become exponentially magnified. As we reopen and begin looking at how we will rebuild, we're also asking how private equity (PE) factors into all of it.
Regardless of where you fall on the political spectrum, there's no question that the election is going to have an impact on the private equity market. I've spent much of my career in the world of private equity and am the managing partner of a Richmond, Virginia, middle-market investment bank. As such, I'd be lying if I said I wasn't at least curious about how everything is going to pan out in 2020.
Even so, I'm not here to tell you one way or another whether I think these effects will be good or not. Instead, I'd like to give you a better idea of which way the wind is blowing and what you can expect as we inch closer to election day.
Will A Democrat Send Private Equity Running For The Hills?
The Democrats and their base have made it clear they have their sights set on increasing taxes for the wealthy and closing loopholes for corporations. This has many donors squirming in their seats concerning who Joe Biden may pick as a running mate. Of the potential running mates, the consensus is that Elizabeth Warren is the one with the most aggressive stance toward private equity.
Warren's plan includes raising capital gains taxes. As part of her plan, she would institute a yearly mark-to-market tax that would extend beyond when an asset is sold. In fact, Warren took things a step further with her proposal for the Stop Wall Street Looting Act in 2019.
The act calls for limiting tax breaks, the payment of dividends and, perhaps most controversially, requiring PE firms to take on liability for debt and legal obligations, like pensions, for their acquisitions. If this proposal were enacted, it would greatly affect the willingness of PE to invest in troubled or distressed companies, cutting a valuable lifeline for the American economy.
It's a serious and far-reaching proposal, but right now it's only a proposal. Given the drastic nature of many of these changes, I'd recommend taking this proposal with more than a grain of salt. Rather than legislation that stands a chance of passing through Congress, Warren's proposal can instead be seen as political posturing to give candidates something to hang their hats on while on the campaign trail.
Experts Said The Same Thing About Republicans In 2016
While many investors see a Democratic president as a portent of doom, you should remember there's nothing new under the sun. This is especially true when it comes to media opinions about politics. These talking heads said the same thing about Trump during the 2016 election regarding how a Republican victory would affect the stock market.
In the last election, research groups like the Brookings Institution suggested that a Trump win would send stocks plummeting. There were estimates that the market would drop by as much as 15% in the wake of a Republican victory. Up until the pandemic hit, they couldn't have been more wrong.
Private Equity Will Make The Most Of The Market Before Election Day
With so many businesses and industries, including PE firms, feeling the effects of the Covid-19 pandemic, many have wondered what the economic ecosystem will look like when things settle down. Some major PE firms such as Blackstone are already making large investments where possible. As we draw closer to November, there's a strong likelihood we will see similar deals with other firms, as well.
It makes sense that companies would want to make the most of an administration friendly to private equity while they know they still can. There are expectations that many PE firms will be looking to increase business and do as many deals as possible leading up to November 3.
You Can't Predict The Weather
In these uncertain times, it's extremely difficult to make any kind of prediction on the economy or the election. Right now, our focus should be on keeping people safe and getting things back on track as responsibly as possible.
What's best to keep in mind is that, just as with past elections, the market is likely going to be fine. With $1.5 trillion in dry powder sitting in reserve, it's safe to say that private equity is going to be fine no matter who gets elected.
