Post-election considerations for private equity strategies

As the DJIA average and S&P 500 both hit record highs yesterday, it seems the market is still pricing in the news that former Vice President Joseph Biden is now President-Elect Biden following a contentious and historic election. While analysts are awaiting what the make up of the U.S. Senate will be next year, other experts are expecting a variety of impacts on M&A, trade, labor and taxes. The expectation for private equity and other deal makers is to be as busy as ever, according to one of the key predictions of law firm Dechert. The fervor they say will be the same as it has been in recent years, though officials say it is critically important that the pandemic is brought under control. The week before the election, U.S. consulting firm Callan, released a report on their expectations for private equity, and the team is planning additional blog posts on plotting the asset classes future role in institutional portfolios. “In volatile times like these, institutional investors may be inclined to focus on new investment activity as the primary means to play offense,” wrote Jay Nayak, senior vice president at Callan. “While this may be appropriate in some circumstances, for mature private equity portfolios the most impactful source of returns during a period of recovery is the in-place private equity portfolio.” The Callan team added that for mature private equity programs that recoveries on capital already invested have tended to outpace the returns generated on newly invested capital. The consulting firm is recommending that their clients conduct a comprehensive review of the investments within private equity, including an assessment of performance results and a refreshed view about performance expectations. Actively identifying core and non-core private equity fund holdings is also advised where appropriate, according to Callan. The team also suggests engaging with general partners in the pursuit of enhanced transparency, efficiencies in reporting processes and improvements to investor governance. Mostly, they add that investors need to maintain close ongoing oversight of their private equity programs to track key investment and performance milestones in light of refreshed expectations. According to Dechert, the dealmaking activity going forward may seem a bit different as adjustments are made to take into account tax and other changes, as well as particular industry developments. But the deals will continue, they said. Most notably, the incoming Biden administration is expected to increase the corporate tax rate, the tax rate on offshore earnings and the individual income tax rate. “While an increase in tax friction may lead some potential sellers to stay on the sidelines, tax impacts are often only one of many factors motivating a transaction,” Dechert officials added. Although tax impacts are always a concern, the law firm said it doesn’t appear that there will be the kind of reduction in the deductibility of interest expense that would fundamentally change the leverage buyout model. Perhaps more notably is the talk of the “new green deal” and whether Biden will be able to move such an initiative through a divided Congress. Either rate, as Dechert pointed out, Biden’s spending priorities are focused on infrastructure, the green economy and U.S. manufacturing and advanced technology capabilities. Clean energy companies, businesses involved in designing and supplying materials for construction projects are likely to benefit.

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