If you're indifferent to Tuesday's congressional elections, you're probably not alone. But if you're hoping to sell your company in the next 12 months--or if acquisitions are part of your growth strategy--then it's fair to say you have a fiscal interest in the midterm results.
That, at least, is the majority opinion of the 190 CEOs, CFOs, and financial advisors recently polled by national law firm Dykema Gossett PLLC in its annual Mergers & Acquisitions Survey. Specifically:
- 62.3 percent of respondents believe congressional election results in favor of Republicans will have a positive impact on M&A activity over the next 12 months.
- 50 percent of respondents believe congressional election results in favor of Democrats will have a negative impact on M&A activity over the next 12 months.
Those results are hardly surprising, in and of themselves. So I asked Dykema's Thomas S. Vaughn--who's helmed the survey for 10 years--one basic question: How much of this response stemmed from stereotypical party-line ideologies (or perceptions thereof), and how much of it came from legit concerns about laws that might change, pending election results?
"I suspect in part it is perception," says Vaughn. But the one legal topic he believes could affect M&A activity is the regulation of so-called carried interest.
You've probably heard about carried interest, since it's a pertinent regulatory subject not only for private equity firms (and thus, the M&A universe) but also for venture capital firms. Here's how it works, in rudimentary terms: Current tax laws permit partners in VC and PE funds to pay capital gains tax rates on their profits. Those rates are usually 20 percent.
However, there's a school of thought that believes the profits of VC and PE partners should be taxed at the rate of regular income taxes--usually between 35 percent and 39.6 percent.
This debate--whether the income of partners in VC and PE funds should be taxed at capital gains rates or ordinary income tax rates--is not a new one. Max Chafkin addressed both sides of it a few years ago. My colleague Jeremy Quittner covered it earlier this year.
Going into the midterm elections, it's clear the private equity world remains concerned about losing the ability to pay capital gains rates on its income. Vaughn points out that "a number of proposals in the 2013 [federal] budget proposed treating carried interest like ordinary income."
"It's not just a Republican issue," he adds. "There are Democrats out there who support not taxing carried interest."
Still, he says, it's evident from the survey that election results in favor of Republicans would allay respondents' concerns about how their carried interest gets taxed. Likewise, if Democrats win out, it won't be as easy for PE partners to rest assured that they'll continue to pay capital gains rates on their profits.
Connecting the dots from how carried interest is taxed to M&A activity is straightforward.
"The private equity world would say that [paying the capital gains rate] encourages them to continue putting together private equity firms and completing deals," Vaughn said.
While it's fair to argue that lower taxes encourage PE firms to keep forming and making deals, Vaughn does not believe higher tax rates would derail a healthy deal-making market. "Part of it is just a perception thing," he said. "In reality, a booming hot M&A market is unlikely to be dramatically impacted by government elections."