The 2024 Election Throws Additional Uncertainty into PE Dealmaking

Predicting private equity deal activity in the 2024 election year as up, down or steady requires balancing a number of factors, sources told SPS by Bain & Co. Though usually, elections have minimal effect on North American PE deal activity, uncertainties are weighing on PE deal flow, even as overall M&A volume has improved from last year.

Macroeconomic factors like wars in the Ukraine and Gaza, and rising inflation could mute optimism at the moment, but this year’s election includes competing arguments around capital gains taxes, a tax imposed on the sale of assets, directly affecting M&A. In his proposed 2025 fiscal year budget, released March 11, President Joe Biden included an increase to the maximum capital gains taxes to 39.6 percent from 20 percent, while conservative groups endorse a 15 percent maximum capital gains tax.

“From a statistical point of view, US election years typically don’t have an impact on closed deal activity in North America,” said Nadim Malik, founder & CEO of SPS, adding that they have more direct influence on the stock market. However, “if the capital gains tax may change as a result of a new administration, this could accelerate or decelerate deal activity until after the change goes into effect,” added Malik.

“For example,” said Malik, “in 2020-2021, Biden’s suggestion that he would increase the capital gains tax caused sellers to try and close deals before the change while the rate was lower, further boosting 2021 deal volume, although the tax change never happened.”

Daniel Gajewski, director, sponsor coverage group at Lazard, pointed to a resurgence in this messaging to founders on a recent SPS deal sourcing webinar: “The election will likely be a non-issue for the private markets, but I would flag that I’ve seen a number of pitches dusting off the 2020 push on (capital gains) tax changes for founders.” We may see a direct effect on closed deals depending on what that discourse looks like, he surmised.

With a similar increase in capital gains rates on the table during this year’s election cycle, sellers may be influenced to bite the bullet in apprehension of the prospective tax change. At the same time, PE is facing rising pressure to create value as record-high dry powder was reached in 2023. The convergence of these tensions could lead to common ground when it comes to price negotiations.

Recent indicators, however, seem somewhat pessimistic. Until the March consumer price index was released at a 3.5% year-over-year increase, economists largely anticipated multiple 2024 rate cuts beginning in June. As Fed Chair Powell indicated in a mid-April update, any rate cuts this year will likely be delayed until the Fed is confident that inflation will cease climbing. Some officials, including most recently Minneapolis Fed President Neel Kashkari, have now suggested a no-cuts scenario for the remainder of 2024.

But M&A activity is showing signs of growth. While Q1 deal volume is not yet fully baked, Q4 2023 deal volume increased by 6% from the previous quarter, breaking a seven-quarter streak of declining or stagnant activity.

Hugh MacArthur, chairman of global private equity at Bain & Co., recently gave a discussion on findings from Bain’s 2024 Global PE Report, acknowledging that buyouts, IPOs and sponsor-to-sponsor deals are stressed. LPs have a liquidity problem that will take two- to three-years to resolve. But the fall in M&A in 2023 seemed worse than it was because of the spike of 2021 and is still a “reasonably healthy” market. Pointing to green shoots on the financing side, he said he’s “hearing positive noises that banks are back and willing to lend.”

All told, ambiguity prevails as the overarching theme of 2024 market activity predictions as competing variables influence market perspectives, with the impact of the 2024 election being somewhat of a wildcard. Though candidates’ proposed changes to the capital gains tax may nudge deal activity, it’s not likely to be the driving factor in a potential dealmaking comeback.

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