While the final pieces of a Joe Biden presidency are still being put in place, key agenda issues of interest to private equity are starting to emerge.
In interviews with market players, Buyouts identified four areas that could be a focus of the new administration’s first 100 days. PE investors are eager for action on covid-19 and economic stimulus and are fairly confident they will see this in the near term. On the tax front, there is little worry about tax hikes on capital gains and carried interest with a narrowly split Congress. Most also expect a push in clean energy and healthcare, but the more ambitious goals of the Biden-Harris campaign likely wouldn’t get tackled if we end up with a divided government.
Covid-19 relief and stimulus
The Biden-Harris campaign pledged swift action to battle the covid-19 pandemic, such as increased testing, mask mandates and protective equipment for frontline workers. The president-elect also called for a follow-up relief package – everything from extended unemployment insurance to support for small businesses and fiscally challenged state and local governments.
“There’s a lot of stalled demand for a covid-19 package, so it will have a big bold neon sign above it,” said Brian Fortune, founder of Farragut Square Group. He expects to see a small- to medium-size package in the near-term, followed by something larger early next year.
Biden also proposed to bolster a US economy still reeling from efforts to halt the spread of the virus. A main plank is federal spending of $5.4 trillion over the next decade, touching on several priority areas, including clean energy, education, healthcare and infrastructure.
“Watch for the inclusion of shovel-ready stuff beyond covid-19 relief in Q1,” Fortune said. “You’re in the honeymoon period, the economy has been roaring back, you just had another big drop in the unemployment rate, and there’s urgency to fire up the economy and get it ready again. I think the odds are they will try to push for as much stimulus as they can.”
Kelly DePonte, a managing director with Probitas Partners, agreed, saying that a GOP-controlled Senate might be more open to covid-19 relief and recovery initiatives, depending on the price tag. Deficit hawks among Democrats and Republicans are unlikely, however, to vote for “a big slug of cash.”
Economic stimulus is important to PE investors, DePonte said. It is crucial for PE-backed portfolio companies in industries hit hardest by the pandemic, such as aerospace, energy and retail.
As part of a stimulus program, the new administration will target the manufacturing sector and Buy American incentives. Eric Siegel, a partner with law firm Dechert, said this should resonate with “folks on both sides of the aisle.” In addition, Biden’s proposed credit facility for small manufacturers “may go a long way to jump-starting development in those businesses and onshoring capability,” he said.
In the pre-election period, PE investors gave close attention to the Biden-Harris campaign’s tax plans. These aim to roll back key aspects of the Trump era’s Tax Cuts and Jobs Act, a 2017 bill featuring lower individual income tax rates and a single corporate tax rate of 21 percent.
Among his proposals, Biden committed to raise the top individual rate to 39.6 percent, from 37 percent. He also called for taxing investment income, such as capital gains, at the same rate as wage income for earners making $1 million-plus. Taken together, these and other changes could significantly increase the tax bill of high-earning general partners and their investments.
A capital gains tax hike would have “a dramatic impact” on PE deal-making, Mark Bell, Balentine’s head of family office services and private capital, said, especially “at the lower end” of the market. In the mid-market, “you would have a wave of owner-operators and entrepreneurs who would have an incredibly high incentive to sell their businesses prior to that going into effect.”
Bell, however, does not think this measure will be enacted because Republicans in the Senate will be “very much against it.”
Boosting tax rates on higher earners is possible – even in a divided government – as a way of tackling the deficit, DePonte said. This, he noted, may trouble GPs less than the pocketbook impact of taxing carried interest, though DePonte believes that idea is probably off the table. “Taxation of carried interest has been an issue for a decade or longer and has never been pushed through by either Democrat or GOP lawmakers.”
The president-elect also wants to overhaul corporate tax policy, including raising the rate to 28 percent. This has implications for PE-backed companies as well as the tax status of listed PE giants, such as Blackstone, Carlyle and KKR. Bell, however, said he does not expect a major bill in a new administration’s first year.
Healthcare is expected to be a primary focus of the new president. The Biden-Harris campaign made multiple healthcare-related promises, including a commitment to build on the 2010 Affordable Care Act through a new Medicare-like public option and other measures that support and expand coverage. It also pledged to increase access to Medicare and Medicaid and address rising drug prices and healthcare costs.
Healthcare reform of this magnitude is fraught with challenges in a narrowly split Congress, especially in light of recent GOP efforts to scale down or eliminate Obamacare through bills and the courts.
Fortune expects comprehensive legislation will not happen right away and is unlikely to include the Democrats’ most ambitious healthcare goals.
“If you’re talking about surprise billing, drug pricing, the Medicare trust fund and incremental coverage expansion,” Fortune said, “that’s long-talk stuff you can’t really do in a stimulus bill.” He added that he “would have argued the public option was not alive before, but it is now very much dead.”
Rick Zall, chair of Proskauer’s healthcare industry practice, agreed. “There won’t be dramatic increases in coverage,” he said. “I think we will continue with the gains of the ACA, but probably no expansion other than Medicaid expansion. Many red states have been looking at that.”
In a divided government, it is more likely Biden and the Congress will look for areas of common ground, Zall said. “The move to managed care, Medicare Advantage, Medicaid Managed Care, next-generation experimentation with providers taking risk – there’s a lot of bipartisanship there.” Drug costs, he said, is another potential area of consensus.
Fortune also sees opportunity for bipartisan “incrementalism” on various policy fronts. He added that this will be a good thing for healthcare PE investors, who can move forward “with a bit more clarity.”
Renewable energy is another sector that will be a top focus of the new administration. Biden committed to the US rejoining the 2016 Paris climate agreement and achieving net-zero carbon emissions no later than 2050. As part of a stimulus package, a Biden presidency would aim to spend $2 trillion on priorities like clean energy projects and infrastructure improvements that promote energy efficiency and sustainability goals.
A “progressive” approach to climate change will ensure Washington’s agenda is less like the Trump era and more in line with the thinking of leading US CEOs, said Timothy Clark, a partner in Goodwin’s private equity group. In addition, more federal spending will “help catalyze PE investments” in sun, wind and other forms of renewable power, as well as environmentally friendly businesses and technologies.
It is possible the president-elect can “get something done on a bipartisan basis” on clean energy measures, DePonte said – even if he faces a GOP-controlled Senate. That is because many congressional Republicans “are more supportive of progress on this issue than is Donald Trump,” DePonte said. Biden should at least be able to ensure “fewer roadblocks,” he added.
If resistance is encountered in Congress, there “is a lot that can be pursued by executive action,” Clark said. The Biden-Harris campaign promised to use the full authority of the executive branch to reduce CO2 emissions, in part by reversing Trump’s environmental deregulation, such as rigorous methane pollution limits for new and existing oil and gas operations.
A clean energy push will significantly influence traditional energy PE investors, who are already facing headwinds due to oversupply of oil and gas and covid-19’s erosion of fuel demand. Along with regulatory changes, Biden pledged to end fossil fuel subsidies in his first year in office. He also plans to lend aid to communities and workers affected by an energy transition.
The upside of division
The November election’s delivery of a Biden presidency and narrowly split Congress is comforting news for many in private equity who prefer divided government to a “blue wave.” Pre-election polls fueled expectations of a Democratic sweep. While limiting Donald Trump to a single term, US voters also reduced the Democrats’ House majority. If the GOP retains control of the Senate after runoffs for two Georgia senate seats in January, Biden will have to find common ground with Republicans to get anything done.
This is the outcome many PE investors were hoping for. “Private equity, and Wall Street more generally, like divided government,” DePonte said. “They typically don’t want to hand the keys over to either Democrats or Republicans.”
Bell agreed: “We are potentially in kind of the best-case scenario. It’s a constructive environment to put PE dollars to work.”
No blue wave means the most ambitious promises made by the Biden-Harris campaign will be difficult to move forward. It is hard to see, for example, a GOP-controlled Senate passing trillions in new federal spending or hiking taxes on corporations and high earners. Once-emboldened Democrat progressives could for the same reason be sidelined on appointments and pet legislation.
“Divided government will definitely impact the top priorities of a Biden administration,” Clark said. “It will also disappoint progressives.” If Biden steps cautiously and emphasizes bipartisanship, he added, it might be possible to enact some of his agenda’s “low-hanging fruit.”
Another potential virtue of a Biden presidency and narrowly split Congress is stability in Washington and “a turning down of the political temperature,” Clark said. This would be especially welcome to private equity after Trump’s four tumultuous years in office.
“It’s about predictability,” said Siegel. “Predictability allows PE buyers and sellers to better model growth and cash flows and that facilitates deal-making,” Siegel said. “If you combine that with continued access to large amounts of capital at low interest rates – and if we can get the pandemic under control – I’d expect a healthy deal environment.”
Action item: See the Biden-Harris campaign’s Build Back Better plan here.
Reporting by Kirk Falconer, Justin Mitchell, Sarah Pringle and Milana Vinn.