The 2016 election season will be one no one will soon forget. Even as the cycle winds to its ugly conclusion, accusations continue to be thrown by both sides, passions are high and no matter who wins, neither candidate appears to have a strong mandate from the American people.
Buyouts staff writer Sam Sutton discovered through an extensive data project that people who worked at firms affiliated with the American Investment Council, while donating $6.5 million to various political campaigns, political action committees and Super PACS and other organizations, sent no money directly to Donald Trump. You can read that story over at pehub.com.
Meanwhile, we turned to a few of our trusted experts in private equity and venture capital to give us their views on the post-election world and how the industry will be affected. Below are their answers, edited by our journalists for space.
Peter Freire, CEO of Institutional Limited Partners Association
Among ILPA members, is either candidate considered more PE-friendly?
Both of them have spoken widely, fairly widely, on this issue. And their comments have been parsed over. They’ve both spoken about carried interest. I believe Hillary Clinton has gone so far as to invoke, or say, she’d use an executive order to get progress on this. I think at the level of carried interest — probably the most noteworthy issue on the campaign trail for the industry — I think they’ve both come out on the same place.
Based on my reading of what Donald Trump has said, even if he does change the tax status of carried interest, if he goes on to implement some of his other tax proposals, it could be GPs and their employees go on to do better based on other changes in the tax code.
[Our worry on the tax front is] if it is changed from long-term capital gains to income, the net effect on take-home pay of GPs is not in some way … passed on to the LPs through higher fees. Or changes to the LPA that may include language to allow fees to change based on tax changes.
Would a change like that in LPAs worry LPs?
Our members would not be keen to seeing anything like that appearing in LPAs in any shape or form. This is an asset class that’s already considered [expensive] in terms of fees. That’s not to say it’s not a rewarding asset class but, in absolute terms, an expensive one. Anything that would be pushing fees any higher would not be well received.
Do you have a sense of how many firms include language in their contracts where fees would rise if carried interest’s tax treatment is changed?
I do not. I have not heard it a lot. I have heard it mentioned as a concern, but I can’t actually think of someone who’s come to me and said they just saw it in an LPA. So I don’t know if it’s just out there as a “what if?”
But one could imagine those circumstances happening because GPs don’t want to have to turn around in a competitive labor market and tell their employees, “your after-tax income is going down.”
How will congressional elections affect bills like HR 5424 or other efforts to roll back Dodd-Frank-mandated regulatory reforms?
The House, which I think … most people until recently would’ve considered pretty safe for the Republicans, may indeed not be safe. I have no better information than anybody else, so I’m not going to make a prediction.
Clearly there are elements in Congress, particularly in the House, who would like to see more substantial rollback of Dodd-Frank. They tend to be on the Republican side. There are those that are comfortable with where we are and in some ways would like more regulation, and they tend to be on the Democratic side. The more the House leans Democrat, the more sweeping a Democratic victory — should that happen — the more those voices are raised.
Depending on the strength of the victory of the winning party, that could end up driving things. The role of the SEC, and bodies like that, will be very much determined by who key personnel are, and that depends on how the vote falls on Election Day.
This interview was edited and condensed by Sam Sutton.
Brett Palmer, president, Small Business Investors Alliance
Is there any sense among your membership that one candidate is more industry friendly?
No. I don’t think in this election that anyone related to finance has become a popular hero. You’ve seen both presidential candidates beat up carried interest. You’ve seen both Hillary Clinton and Donald Trump combine banks with anyone in the finance world being of unsavory nature. From [Trump,] who’s claiming to be a business guy, if you’re a business person, do you want to be in business with a track record like his? People with business dealings in NYC say that’s not an attractive prospect.
Will Democrats will gain seats in the House or Senate? If so, what does that mean for efforts like HR 5424, which sought to limit industry regulation?
Anyone who says they knows their legislative agenda for next year doesn’t know what they’re talking about.
…It just happened in this election that 34 seats are up in the Senate and 24 of them are Republican. The deck was loaded in favor of the Democrats and they’ll pick up seats. The question is, how many?
If Republicans do maintain their majority, they have a significant schism in their party on what they want to achieve. You saw that with John Boehner. Paul Ryan is facing something similar. If the GOP has a significant lead, Ryan may be able to function as an effective leader. He’s a very good guy, but that’s one of the big question marks in this election.
Along the same lines, given likely changes to the makeup of the House/Senate, what’s the likeliest path to comprehensive tax reform?
Every time you put the word comprehensive ahead of it, the chance of it passing are near zero. Ryan is a person who can cut a tax deal. Hillary Clinton has relationships that President Obama didn’t. Hillary will call Congress. She’ll take their calls. And she’ll take time to learn. You may not like her, but she gets the two-way nature of how government works.
The worst thing the private equity industry can do is complain about carried interest. The more they complain, the more certain is they’ll lose it. In the SBIA, we have small private equity managers where it really affects their ability to exist. That’s a different story and it’s more persuasive. Carried interest also aligns GP interests with LP interests. The only way a GP in a $200 million fund can get rich is by making money for his LPs because the 2 percent management fee on a smaller fund isn’t that much.
Is deductibility of interest going away?
It would be destructive to the small- and middle-market economy if they can’t access debt. It would punish them for seeking debt to grow. We’re talking about hundreds of billions. When people see this big fat hog, that makes it so attractive. But it’s very difficult to implement. A lot of concepts and tax policy make very good talking points, but when you put them on paper, it gets much harder.
So what’s the SBIA planning?
We’re one of the only groups that’s been getting anything done for years. We’ve been getting small wins. Our model is to win the argument with a positive vote, earn credibility and come back for more.
We’ve gotten wins on taxes, regulations — all sorts of small wins. We want to continue that to promote a healthy private equity industry. We’ll take the opportunity to have a regulatory and tax system that’s the best we can get. We’ll try to make sure taxes are not increased, that punitive taxes aren’t put into place and underlying businesses are able to grow. We’ll look at BDC reform, and SEC reform in how it deals with private equity firms. There may be big opportunities. We’ll go after what we get and not get greedy. I’d rather chip away. I’ll hold off until I see who the people are in Congress. If things go completely south, we’ll have a very aggressive defense of the industry.
This interview was edited and condensed by Steve Gelsi.
Gary LaBranche, president and chief executive of the Association for Corporate Growth
Do you have a sense of ACG membership’s support for either candidate?
On a normal year, go back to 2012, certainly in that year, I would have easily said no question about it, a majority of the members favored Mitt Romney, maybe a third supported President Obama. You would think, given demographics, membership would [skew] slightly toward Trump and not Hillary, but I don’t think that’s the case. I don’t sense there’s a huge majority supporting Trump.
When you look at it purely on [a] policy level, I’m not sure that Clinton’s policies are better. I don’t believe they’re better for the industry than Trump’s policies. I think what that shows is ACG members don’t necessarily choose to support one candidate over the other purely on the basis of who is best for the industry.
How will regulatory regimes change depending on who wins in November?
The age of regulation is here to stay regardless of who becomes president. That said, we believe that a President Clinton is likely to, as she has indicated thus far, make good on her promise to provide even more scrutiny on financial firms. [If Clinton is elected], we anticipate over the next two years an enhanced focus on enforcement.
If Trump were elected, who knows? What he’s said might lead one to believe he would attempt to eliminate regulation, but again, if he were elected, [rolling back] that regulation might be more difficult than he imagines.
How could a change of control in Congress affect legislation affecting private equity on issues like the tax treatment of carried interest?
There is an increasing sense that the Democrats may well take control of the Senate. In either case, even if the Republicans retained control or if the Democrats took control, it will be a bare majority on either side. That really is an almost ungovernable situation in either scenario.
[If the Democrats take control of the Senate,] we’ll see one of two scenarios play out: Either the Democrats use 2017 to 2019 to achieve big goals, or the Democrats play it very cautiously, hoping to limit damage in the 2018-2019 cycle when they have 23 people up for reelection. We think about that as a potentially moderating influence.
This interview was edited and condensed by Chris Witkowsky
James Maloney, vice president of public affairs, American Investment Council
Hillary Clinton’s basically pulled away at this point, but is there a sense from your membership whether Donald Trump or she is better for the industry?
Hillary Clinton has been vocal on her intent to change the tax treatment of carried interest. She’s emphasized that she’d work with Treasury via executive order if necessary, even though Treasury has repeatedly expressed that such an action would require an act of Congress. But I think she’s seen as pragmatic, and she’s seen as someone who understands what’s required for pro-growth tax policies and an environment to revamp economic growth.
As you mentioned, she has been more hawkish on carried interest. Do you have sense of what sort of regulatory regime you’d see under Trump vs. Clinton?
We haven’t seen much on the regulatory side from either candidate. I’d also add that both have relatively big tax plans at this point.
As you know, a campaign is one thing and the actual practice of governing is another. Once the campaign ends we’ll have a better sense of how she or he governs while in office.
It’s starting to look as if the Democrats will gain some ground in both the House and Senate. What does that mean for some of AIC’s legislative efforts?
We’re going to look at HR 5424. I think what we’ll see, and this is typical for every new Congress, it’s really not so much an issue of a particular legislation, it’s more of a broader educational effort over what private equity is. That’s how we’ll start the conversation with any senator or representative, regardless if they’re a Democrat or Republican.
Any new or different effort you’re looking at launching? What about PE’s role in the debate around comprehensive tax reform?
The American Investment Council is for a fair and pro-growth tax code. So, we would like to see comprehensive tax reform that provides a fair and pro-growth tax code. Our belief, within that, carried interest will remain a capital gain and it will continue to have full interest deductibility.
I think there’s an environment for change and for comprehensive tax reform to come together. And that’s something we’ll be keeping an eye on, on Nov. 9, when we have a sense of the House and Senate’s composition.
If we have Sen. Schumer, if we have Sen. Hatch, both feel strongly about moving forward with tax reform. On the House side, Speaker Ryan and Chairman of Ways and Means Kevin Brady have said it’s a priority as well. And on the campaign trail, both Clinton and Trump have said changes to the tax code would be a driver of economic growth.
This article was edited and condensed by Sam Sutton
Bobby Franklin, president and CEO of the National Venture Capital Association
It looks like Hillary Clinton will beat Donald Trump for the presidency. According to Crowdpac, the tech industry has donated $7.7 million to Clinton, against $300,000 to Trump (before Peter Thiel’s $1.25 million contribution). Is there a sense among your membership that one candidate is more industry-friendly?
What we do is look at each candidate’s track record and policy proposals to get a sense of where they stand on the issues you care about. In the case of Hillary Clinton, she put out a tech agenda [that] included a lot of things that align with our priorities, and if the details are as good as the blueprint, we would be very supportive of much of her agenda. In the case of Donald Trump, unfortunately, there just haven’t been enough policy proposals to really get a sense of where he stands on our issues.
Do you expect to see changes in the tax code, particularly on carried interest or the deductibility of interest?
One of the most important priorities for the U.S. economy is encouraging entrepreneurship because this activity has become the foundation for job creation and economic growth in the U.S. economy. Our job is to make sure that lawmakers understand that new-company formation should be a priority in tax reform.
Certainly, proposals to double the tax rate on carried-interest capital gains are a real and direct threat to these priorities. But we are actively laying out a case that instead of raising taxes on the entrepreneurial ecosystem to pay for unrelated priorities, Congress should modernize the tax code to reflect the unique nature of startups.
We can argue about tax rates and everything else, but one thing everybody should be able to agree on is that we want more U.S. companies hiring people and paying taxes, and that can only be accomplished by bolstering entrepreneurship.
This article was edited and condensed by Eamon Murphy
Photo: Republican U.S. presidential nominee Donald Trump and Democratic U.S. presidential nominee Hillary Clinton finish their third and final 2016 presidential campaign debate at UNLV in Las Vegas, Nevada, U.S., October 19, 2016. REUTERS/Mike Blake