Delayed capital gains tax, vaccine distribution to fuel PE M&A in 2021

Over 40% of PE respondents in a Citizens survey characterized the current dealmaking environment as weak, but had an upbeat forecast.

Expedited deal activity as a result of worries about an upcoming capital gains tax, as well as the rollout of the covid vaccine, will drive deal flow upwards this year, according to the findings of Citizens’ annual M&A survey.

Almost half of surveyed executives at 230 PE firms agreed that there will be a marked improvement in the M&A environment, especially in the second half.

“Many people believe legislation will be effective next year,” Citizens’ Kevin Burke told PE Hub when asked about the capital gains changes. “So, firms will accelerate execution of deals in the present tax environment.”

The proposed change by the Biden administration will raise the top corporate tax rate to 28 percent from 21 percent, making dealmaking significantly more expensive. Additionally, the new administration aims to treat long-term capital gains as regular income, taxing individuals with over $1 million in income at a 37 percent tax rate – up from 20 percent.

This means owners and operators exiting their businesses would be subject to almost double the taxes.

For buyers and sellers, the amendments will have a trickle-down effect, according to Burke, a managing director at the firm: “We’ll see a little bit of pressure on valuations.”

That said, technology and healthcare might find it easier to absorb the rates compared to industrial and utilities that don’t grow at a torrid pace, according to Burke.

But, for now, with covid top of mind, tax reforms will likely take a backseat, which leaves executives feeling more relaxed.

Besides legislation delays, availability of the covid vaccine is improving the confidence in the market. Over 50 percent of executives surveyed feel bullish with respect to their own corporate outlook.

Looking ahead, the return to normalcy will accelerate with a wider range of available drugs, according to Burke. “We think this will be a good year because of the support extended by the Federal Reserve and the covid vaccine rollout picking up pace.”