How the US elections will affect private equity in the long run
By Hasib Howlader, director at the London accountants Howlader & Co – The US elections are one of the few elections that have a global impact. The recent presidential race, culminating in Joe Biden becoming the 46th President of the United States, has been a very closely run race. The lead up to the election, and the results of it, have had and will continue to have an impact on the global private equity industry. Here are some considerations on how the Biden victory, a win for the Democrat party, will affect private equity in the long run.
In the lead up to the election, and as votes began to be counted and projections made, it became clear the votes once again didn’t match up to the predicted polls, and the race was a lot closer than expected. As with any contested votes, this causes uncertainty within the markets as the future is unclear. The current situation we find ourselves in is that Trump has not yet conceded and is pursuing legal action in various states to challenge the votes. As the election results get bogged down in litigation, and may even end up being decided in the Supreme Courts, this will cause volatility in the markets as they’re not sure which way it will definitely go. It will also reduce the confidence that others have in the US market.
Under a Biden presidency, taxes are likely to rise. He has made no secret of the fact that he will increase taxes for the wealthiest, and look to close loopholes in corporation taxes. Biden is likely to challenge and significantly amend parts of the Tax Cuts and Jobs Act, signed into law by Trump in 2017. This was the largest overhaul of the tax system in three decades and drastically cut corporation tax from 35 per cent to 21 per cent. Biden has proposed raising the corporate income tax rate from 21 per cent to 28 per cent.
Some argue that Biden’s tax hikes will see a negative impact on US markets and growth. Although he’ll need a majority in the Senate to repeal parts of the TCJA, if he’s successful in doing so, the higher tax rates may result in many companies having a reduced cash flow, therefore impacting portfolios and valuations. Biden is also likely to create tougher regulations for businesses, which creates costs for them.
Both of these factors could impact equity prices, reversing the significant gains made with Trump’s tax overhaul. Additionally, Biden wants to raise the capital gains tax for those earning more than 1 million dollars a year, taxing capital gains and dividends as ordinary income for the highest earners. However, others argue that ultimately it is fiscal spending which will impact the markets, and not tax policy changes. If Biden increases public spending, as he has promised to do in certain key areas, this could see markets outside of the US grow.
Health-care industries and the Green Agenda
Whereas Trump’s time in office saw him invest in the oil and gas industries, the likelihood is that Biden will invest much more public spending in the healthcare industry and the green agenda. He is primed to invest more in renewable energy infrastructure and pledged that he would invest $2 trillion over four years to tackle the climate emergency.
The investments would be in electric vehicles, carbon-free electricity production and zero-emission public transportation. He has also vowed to rejoin the Paris Climate agreement, which Trump famously left in 2017 and agree to tougher measures to help curb global warming.
Biden’s increased spending in these sectors will see the health industry and sustainable industries, for example green tech or renewable energies, do well and become very strong investment opportunities. Private equity sponsors have already shifted their focus to those industries as they have fared better in the pandemic than others. This trend is likely to carry on under Biden’s leadership as they continue to strengthen.
The US/UK special relationship
Looking at how the US election may impact UK private equity, it is important to consider how the long esteemed US/UK special relationship will hold up under the Biden presidency. Biden and Boris Johnson are closer on issues such as climate change and their attitudes towards Russia and China, which holds some hope for the continued strength of the relationship. However, Biden has previously been very vocal in his stance on Brexit, stating that if he had been able to vote, he would have voted to remain. This may pose some problems for the relationship, and the US’s treatment of the UK.
Due to the impact of Brexit, many analysts believe that Biden is likely to shift his focus to Berlin and Paris ahead of London. As London’s influence in Europe diminishes, Biden may look toward the EU as its main place of transatlantic trade. Trade talks for a US/UK deal are set to kick off in February, and may have a significant impact on industries such as car manufacturers. It could offset some of the loss that will be seen with trade in the EU following Brexit. However, Biden has been clear of his loyalty to Ireland, and he will not support any deal that breaches the historical Good Friday Agreement.
US/ EU relations
The EU exports more to the US than it imports, and has a 153 billion euro surplus with the US. US/EU relations will continue to be vital to ensure trade continues at this rate. Historically, shown from Biden’s time as Vice President in 2009 - 2017, his foreign policy will be one of diplomacy. He will rejoin the Paris Agreement and the World Health Organisation, and seek to mend potential rifts formed from America’s abrupt exit from these global initiatives. This will result in an easing of tension in US/EU relations.
However, after the devastation that has swept across the US due to the coronavirus epidemic, causing high rates of unemployment and economic difficulties, Biden will be focused on getting his own house in order. He may be more inward looking in these initial months as he sorts through many of the domestic issues that the pandemic has caused and laid bare. The markets will continue to respond to American policy as Biden works to get the country back on track.
We will have to see how things play out in the next few weeks and months to understand the full impact that these elections will have on private equity in the long term. Ultimately, whilst there may be talk of a democratic win having a negative impact on private equity due to policy changes and tax hikes, this is not a given.
Many moves, such as increased fiscal spending and improved global relations, could help to boost the potential of many companies and be a good sign for private equity and investors. All eyes will be on the White House in the next few months. Issues such as control of the senate, whether Trump concedes and Biden’s first actions as President will give an idea of how the markets may respond, where Biden’s focus lies, and what may be on the road ahead.