Joe Biden is the projected winner of the presidential election, while control of the Senate will be won only by a slim margin following runoff elections for Georgia’s two seats in January. What does a divided government mean for the middle market? RSM is looking at the policy implications and key issues for various industries. This is one in our series of industry-focused outlooks for a Biden administration.
According to Joe Biden’s plan
It remains to be seen whether the transition to the Biden administration will have a significant impact on the private equity industry and other alternative investment classes. Biden has said he plans to raise the corporate income tax rate to 28% from 21%, which would make mergers and acquisitions less lucrative. He supports raising taxes on capital gains, which will bring more exits through year-end, but the move could hamper deal-making in the medium to long term. But a closely divided Senate is likely to keep such wholesale changes in check.
Biden is expected to take a more nuanced approach to China, possibly pulling back on some tariffs though maintaining a relatively tough stance. This will spur bilateral investment, especially in manufacturing. The incoming president lists climate change as a priority issue and seeks to reduce emissions, while investing in clean energy technology and infrastructure, which would accelerate social impact investing.
What a closely divided Senate means for private equity
Biden’s heightened legislative platform is unlikely to gain traction; instead, we may see some incremental compromise measures.
Meanwhile, the suppressed economic outlook has damaged confidence in the short term. To reconcile the difference between actual and perceived market prices, we expect to encounter a return of deal terms usually seen in recessionary environments, like deferred consideration mechanisms, indemnification, opt-out terms and earn-outs. The deep discounts in the market, exacerbated by many firms needing financing or wanting to offload troubled assets, could be the call to arms the industry has been waiting for.
What room for growth or evolution exists in private equity?
Current industry dynamics—historically low interest rates, record amounts of dry powder, ample distressed assets in the wake of the pandemic—favor PE in the long term. Expect countless buying opportunities for well-priced companies.
Technology, health care and green energy are the sectors likely to receive significant PE allocations near term. Further out, sectors hardest hit by the pandemic, including real estate, retail and hospitality, may present the highest upside as these sectors offer the lowest buying prices.
On the downside, with rising virus transmission, on-site diligence is not happening, and some managers may move slower than previously; this could further hamper deal-making. The Securities and Exchange Commission will remain judicious in its oversight of asset managers, with focus areas including undisclosed fees and expenses, and potential conflicts of interest.
Questions that frame the path forward:
- Will infrastructure spending plans be revived, creating additional opportunities in the real estate and construction sectors?
- What triggers will accelerate action on the part of strategic investors who have been sitting on the sidelines preserving the cash on their balance sheets, and how will that affect market valuations?