Private equity professionals expressed relief, dashed with cautious optimism, with the result of the mid-term elections on Nov. 3, which saw generally more business-friendly Republicans take control of the U.S. House of Representatives and bolster their presence in the Senate.
“To the extent that we’ve elected a more business-friendly Congress, this helps the American economy, and by extension the private equity industry,” said Alex Slusky, founder of tech-focused buyout shop
At stake for the industry is its lifeblood, carried interest. Legislators have proposed time and again to increase taxes on buyout shops’ main source of profit to no avail. But the prospect nonetheless looms like a cloud as Congress is expected to search for revenue offsets amid debates over tax cuts and spending decreases.
Slusky, who personally lobbied senators against a change in carry’s tax treatment last spring as they debated financial reform, said the issue will likely retire for the time being. “I don’t see a Republican majority supporting increased taxes on capital formation,” he said. “It seems like that discussion should be put to rest for a while.”
Others interviewed were equally optimistic, if a bit more cautious.
One concern is how newly elected Republicans affiliated with the Tea Party, who are generally unanimous in their suspicion of big government but also critical of Wall Street, will take to the carried interest issue. “I don’t know if I can say with confidence that a Tea Party House member is instinctively likely to embrace private equity,” an industry lobbyist told Buyouts. “Some might, but some might see private equity as part of the Eastern establishment financial power axis that they’re not terribly sympathetic to. You can’t just assume that because there are 60 more Republicans that they’re all your friends.”
The lobbyist added that in a so-called pay-go environment, in which Congress will debate bills that would decrease revenue or increase spending, he could envision scenarios in which Republicans and Democrats could settle on carried interest as an offset. “There’s a lot of pressure on both parties to put the fiscal house in order,” he said. “I don’t think there’s a day on this job that I don’t worry” about carried interest.
Also at stake for the industry is the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including a requirement for most private equity firms to register with the Securities and Exchange Commission and the Volcker Rule, which would limit the ability of bank holding companies to sponsor buyout funds and prohibit them from investing in third-party funds.
Just a day after the election, Rep. Spencer Bachus, a Republican of Alabama who is a lead candidate to chair the House Financial Services Committee, wrote a letter protesting the Volcker Rule to Treasury Secretary Timothy Geithner and other regulators, according to Reuters, publisher of Buyouts. “If the Volcker Rule’s prohibitions are expansively interpreted and rigidly implemented against U.S. institutions while other nations refuse to adopt them, the damage to U.S. competitiveness and job creation could be substantial,” Bachus wrote.
The lobbyist interviewed said that more Republicans in an oversight position in the House can create a new “organic reality” in Washington D.C., with Republicans putting pressure on regulators and regulators more conscious of the new political environment.
With Democratic control, he said, regulators could afford to be more aggressive. Depending on the issue, that could change come January, after which Republicans can drag them before Congress to explain new rules, he said. “If they’re going to put out a rule that Congress is going to go over the ledge about, one would think they would be more sensitive about not incurring their wrath,” he said.
Those interviewed believe the rule calling for private equity firms managing $150 million or more to register with the SEC will not likely change. The rule, which exempts venture capital firms, does not affect the major industry players, many of which are already registered. “I think this was settled by the Act itself, which is pretty detailed on who’s going to have to register and who won’t,” said Scott Moehrke, a partner and head of the investment management practice at the law firm Kirkland & Ellis LLP. “There’s some rule-making to be done, like the definition of venture capital, but the basic framework is set and unlikely to change.”