The election is over, and George W. Bush has resumed his seat in office. Some private equity pros, such as George Soros or Steven Rattner are probably disappointed, while others, namely Brad Freeman or Henry Kravis, may still be gloating. The broader financial community is just happy to see a final result, one that is free from the legal squabbles that plagued the 2000 election. Buyouts took 15 minutes in the week following the election to quiz Lincoln Partners Co-heads James Lawson and Robert Barr on what G.W.’s win means for private equity.
Buyouts: What do you think was more important to private equity, the reelection of George Bush or simply a quick result, without the legal tie ups of the 2000 election?
Barr: Both are helpful to private equity, but the election of Bush will have a longer-term impact because any legal tie-ups, while painful, would’ve been relatively short. The quick result brought certainty to the political climate, and that’s important to business and the private equity community. But this administration has been friendly to business, and George Bush’s tax policies have been favorable, so we’re really expecting the positive momentum to continue in the market.
Buyouts: How will Bush’s re-election affect deal flow?
Barr: Because of the favorable treatment on capital gains, we’ve seen many private owners trying to complete deals by year end due to the uncertainty. They’ve really been trying to get in front of that. Now that the uncertainty is gone, we could see that rush [of private owners coming to market] spread out a bit and continue for the next several years.
Buyouts: Which sectors will benefit from Bush staying in office?
Barr: We’re working a lot in the chemicals area right now, and we see reason to believe that some of the end markets there will continue to be treated well, such as pharmaceuticals. Also, in terms of the coal utility sector, there have been some legislative initiatives that will be more favorable than what was being proposed under Kerry’s energy plan. It’s not just the administration continuing in office, but with a Republican majority in the Senate and House, that will allow Bush to realize many of the initiatives the administration is pursuing… We are also expecting continued interest in the aerospace and defense sector because of the Administration’s policies on defense.
Buyouts: Are there any potential landmines that could arise from the Bush win?
Lawson: One of the considerations of Bush winning that won’t necessarily have an immediate impact, but will likely play out in the next 12 to 24 months, is what’s being called the Double D’s-the trade deficit and the budget deficit-which are at record levels… Ironically, many people believe Kerry would’ve addressed the deficits better. Bush wants to keep the lower taxes in place and still aggressively pursue terrorism and the war in Iraq. Kerry was expected to downsize the Iraq exposure and he likely would not have maintained the tax reductions Bush put in place.
Barr: Some people say [Bush] spends like a drunken sailor. He pursued a war and tax reductions at the same time, and we went from a balanced budget under [Former President Bill] Clinton to record deficits that, in terms of absolute dollars, are larger than when Reagan was in office.
Buyouts: What does this mean to private equity?
Lawson: It really depends on a second derivative impact, if you will: If the deficits cause inflation, which causes interest rates to rise, which causes companies and individuals to slow spending, which causes an economic slowdown, which reduces the revenues of companies, then the value of many private equity portfolio companies will likely decrease. People who remember the stagflation of the 1970s know it was not a fun time economically. The Dow was at 1200 in 1973 and at 800 in 1982. Fortunately, we do not view that inflation will cause interest rates to dramatically rise in the near or intermediate term.
Buyouts: So would Kerry have been a better fit for private equity?
Barr: Not necessarily. Regulatory burdens and taxes on business would likely have increased under Kerry. Even if regulations and taxes did not increase, the threat of that occurring could reduce the valuation of private equity portfolio companies. The Bush election overall will likely maintain the current, very positive and active private equity market. If there had been a change in the administration, it wouldn’t have resulted in a major shift, but there would have been a cloud of uncertainty in the market going forward.
Robert Barr and James Lawson co-founded the Chicago-based Lincoln Partners in 1996. The firm concentrates on M&A in the middle market, private capital raising and financial recovery for global clients.