President Barack Obama secured another four years in office Tuesday. Now, the private equity community must consider how to move forward under a President whose reelection campaign turned a harsh spotlight on the industry.
So far, the industry’s reaction has been mixed. The President’s campaign, which frequently targeted Romney’s background at Bain Capital, left a bad taste in the mouths of many sources.
“While not everyone in the industry is sour on Obama's criticism of private equity, many feel that the President's unfair mischaracterisations of the asset class will leave a lasting impact on how the industry is widely perceived,” said Anna Dayn of LP consultant Dayn Advisors.
I think most GPs in the private equity community expected that the President would get re-elected
Others, however, have argued that the political realities faced by Obama will force him to compromise. Even though arcane policy issues such as the tax treatment of carried interest and the deductibility of interest payments on corporate debt never whipped the electorate into populist fervour, those issues are poised to play a key role as Congress and the President negotiate a long-term vision for the country and economy.
“I think the issue remains pretty much the same, and the risk remains pretty much the same,” said Steve Judge, President of the Private Equity Growth Capital Council. “What might change is the willingness of Congress and the President to deal with comprehensive tax reform and fiscal reform. And within that, a lot of issues that we deal with it may come up.”
Even if issues such as carry's tax treatment do come into consideration, the industry itself would only change “on the margins”, according to Adam Max of The Jordan Company.
“But the core concept [of private equity], which is providing capital for businesses away from the public markets and providing the operating focus that PE firms bring, that need is not going to disappear,” he said.
Although tax policy remains a concern, several sources said that the President’s future handling of a slow growth economy will have an ever greater effect on the industry’s long-term prospects.
“Putting aside parochial issues, like taxation … If the overall environment makes it harder for businesses to grow and invest, then it becomes more problematic for people in our industry whose job is to invest in and grow businesses and more importantly, bad for this nation as a whole,” said Thomas H Lee co-President Scott Sperling.
Others expressed disappointment that the essential make-up of the government seems to have remained remarkably static, with Republicans owning the House of Representatives, and Democrats ruling the White House and the Senate. The stalemate that existed during the last two years could continue unabated, including in the immediate debate that will occur over the so-called “fiscal cliff” next year, when Bush-era tax cuts are set to expire and automatic spending cuts are set to kick in.
“I think most GPs in the private equity community expected that the President would get re-elected and [that] somehow there might be some sort of resolution that would be better for us all,” said Carl Thoma, managing partner at Thoma Bravo.
“We’re probably just kidding ourselves that this election was somehow going to solve all these problems. The reality
Many feel that the President's unfair characterisation of the asset class will leave a lasting impact.
is, eventually this will all work itself out, but none of us like uncertainty and the fiscal drag that will come with higher taxes,” Thoma said.
While the industry was bruised and battered over the past year, ultimately Obama’s re-election is nothing for private equity to panic over, according to the British Private Equity and Venture Capital Association.
“This may have been an election which ultimately ended in deep disappointment for one notable ex-private equity executive. That does not mean that it will spell misery for the many others in the US still engaged in that activity,” the BVCA said.
Chris Witkowsky, Graham Winfrey, Yolanda Bobeldijk and Nick Donato contributed to this report.