Election Impact: What to Watch in the Private Capital Markets

Billy Fink Axial | November 5, 2014

With the Republicans now controlling both houses of Congress, dealmakers seem to be excited about the next couple of years. As it turns out, Dykema Gossett, a national law firm, ran a recent survey and learned that 62.3% of respondents believe a Republican election would have a positive impact on M&A.

Here are a few changes a Republican Senate may yield:

H.R. 2274

Nothing better embodies the inefficiency of the 113th Congress than H.R. 2274, a.k.a Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2014. On January 14, 2014, the House unanimously passed the bill to amend the Securities Exchange Act of 1934. Despite the clear bipartisan support, the same version of that bill is still in the Senate Banking, Housing, and Urban Affairs Committee.

Yesterday’s election could accelerate development on this bill since Tim Johnson, the current chairman of the Committee, is not seeking re-election. Although there seems to be little party division on the bill, a new GOP majority and a new committee chairman may seek to quickly bring the bill to Senate. And, depending on Mr. Johnson’s replacement, the Banking, Housing, and Urban Affairs Committee may seek to make grander changes to regulations.

If passed, the bill will bring clarity and legitimacy to an industry and profession long hampered by uncertainty and impractical interpretive guidance – finally, making clear the activities in which unregistered brokers may engage in.

Dodd-Frank

Although Dodd-Frank isn’t going anywhere, the GOP will likely make efforts to undercut the effectiveness of the bill.

As Alison Fitzgerald of the Center for Public Integrity commented, “At least 30 bills have been proposed to the House during the 113th Congress, aimed at chipping away at aspects of Dodd-Frank… At least 21 have been referred to the House Financial Services Committee and three have been passed to the Senate.” A Republican-controlled Senate will likely have a greater appetite for these bills.

Gridlock for key components of the bill should only worsen. As it currently stands, the Volcker Rule has an implementation deadline of July 21, 2015 — but a GOP majority will likely make several attempts to either undermine or delay that date.

Corporate tax reform

Obama and Republican leaders are more closely aligned on corporate tax reform than some would expect. During his 2012 election campaign, Obama announced he planned to reduce corporate tax rates from 35% to 28% (and 25% for manufacturers). The GOP wants 25% across the board.

However, the difference between 25% and 28% has significant implications for how much Congress is willing to cut tax expenditures. As Gene Sperling, former Director of the National Economic Council, recently wrote, “The president hasn’t called for rates below 28% in part to preserve and expand the widely backed Research and Experimentation Tax Credit, which supports high-skill jobs in the U.S. Going lower than 28% may require Congress to take even tougher action, such as significantly lowering the tax incentive for debt over equity in corporate financing.”

An additional problem is rooted in the benefit of the tax break. As Robert J. Leonard of Akin Gump Strauss Hauer & Feld wrote, “a fundamental difference of opinion must be bridged between congressional Republicans who favor structuring tax reform to be ‘revenue neutral’ and President Obama and congressional Democrats who favor raising some additional revenues from tax reform to be utilized for deficit reduction.” This mismatch has prevented any agreement so far.

As both parties may look for some early success in the next Congress, corporate tax reform may be an easy win. If so, we could see even greater activity from strategics

Uptick in Activity

Regardless of which party controls the Senate, one of the most likely results of the midterm elections is increased activity in both the public and private markets. Investors are notoriously averse to uncertainty and the conclusion of an election will help lend some visibility into the future.

As a result, we’ll likely see an uptick in activity for Q4. The same trend has been seen for decades. As Fox Business reported, “In the 90 days following a midterm election, stock returns have been positive 86 percent of the time since 1928, according to data compiled by Barclays Capital.” Such increase could mean higher engagement and higher valuations. Admittedly, this post-election uptick might be relatively muted given the lack of any major macro issue in this midterm.

Even if all of these developments are realized in the 114th Congress, the consequences would mostly impact the timing of laws, not which ones are implemented. One wild card to watch, however, is the capital gains tax. Some believe that a Republican majority could restart the conversation around the capital gains tax hike.

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