European PE Investors Eye Obama Cautiously

European buyout chiefs will be looking to US policies on taxation and regulation adopted by President-elect Barack Obama when he begins his term of office at the beginning of next year, with a view to how it might impact on European domestic issues.

“The danger is that kneejerk support for regulation and a tendency towards protectionism, which has been a feature of the US election, will gain traction internationally regardless of who is elected,” said Simon Walker, chief executive officer of the British Private Equity and Venture Capital Association, shortly before confirmation of Obama’s landslide win was announced.

“It would not be right that the private equity industry in the UK, which has adopted a programme of self-regulation, gets swept up in this sentiment and becomes subject to a punitive tax and regulatory regime.”

Walker praised the private equity industry’s coming together “in the spirit of self-regulation and transparency” during the past 18 months of turmoil and suggested that punitive measures in the US could benefit the UK with an influx of US firms, but warned of the dangers of crippling legislation and regulation being imposed here.

“Should the elections in the US produce a President who ramps up tax and regulation of private equity, this could be a boon for the industry in the UK,” he said. “We already have many US houses working in the UK and we could potentially see more US firms looking to open for business here. To achieve this of course it is imperative that the regulatory and tax regime in the UK remains competitive.

“To erode our competitiveness at a time of economic uncertainty would be to erode the ability of private equity – as a fixer and repairer of companies and with plenty of cash to invest – in helping to haul the UK economy out of recession and into renewed growth.”

Walker’s comment were echoed by Tim Wright, partner in the corporate finance department of law firm SJ Berwin, who noted that Obama’s policies on the treatment of carry could have a wide-ranging impact. “Many are worried that both Obama and McCain will make carry income taxable in the US and that potentially could raise the issue once again in Europe in terms of capital gains,” said Wright. “That’s the fear irrespective of it being Obama that is President-elect.”

The Democrat candidate was projected to have won 349 electoral votes, compared to McCain’s 162, by the morning after the polls had closed. Obama also proved more popular than McCain in a poll of readers of peHUB and PE Week Wire readers. Out of more than 2,200 respondents, 54% plumped for Obama, compared to 35% for McCain, with 75% putting the economy as the most important issues facing the next President, up from 55% in a June poll. However, 62% said that their decision was not based on which candidate would be better for their industry.

At a recent LBO conference in London, European and US private equity delegates suggested that an Obama victory might have a ‘feel-good’ impact on the global public markets but, as with other recent bail-out attempts, the effect would likely only be temporary.

Wall Street and US private equity firms have played a significant role in funding for both candidates’ campaigns. According to the Center for Responsive Politics website, in the US, employees at Goldman Sachs were the second largest contributor to Barack Obama’s campaign with US$874,207 (just behind the University of California’s US$909,283), while JPMorgan Chase & Co came in sixth with US$581,460, Citigroup seventh with US$581,216 and UBS in fourteenth place with US$454,795.

This was significantly above that contributed to McCain’s campaign by employees of Wall Street firms: Merrill Lynch first with US$359,070, Citigroup second with US$296,151, followed by Morgan Stanley with US$262,777, Goldman Sachs with US$228,695 and JPMorgan Chase with US$215,042. Credit Suisse, PwC, Wachovia, UBS, Bank of America and the ill-fated Lehman Brothers and Bear Stearns also featured lower down the list.

In terms of contributions from employees at private equity and investment firms, Obama was also the more popular recipient, amassing US$1,313,333, while McCain received US$967,215. Obama’s running mate Joe Biden also received US$59,950, while McCain’s choice of Sarah Palin didn’t feature on the list. Mitt Romney, one of the early candidates for Republican nominee and co-founder of Bain Capital (as well as CEO of Bain & Co), received US$932,700.