Economic Outlook: What to Expect Under the Biden/Harris Administration
February 11, 2021
Alternative investment managers are expected to be impacted by the new administration in numerous ways. The day after the inauguration, EisnerAmper hosted a webinar titled Economic Outlook: What to Expect Under the Biden/Harris Administration to discuss the topic.
- Jennifer Bellah Maguire, Partner, Gibson Dunn
- Andrew Slimmon, Managing Director, Morgan Stanley
- Zack Ellison, Managing General Partner, Applied Real Intelligence
- Simcha David, Partner in-Charge of the Financial Services Tax Group, EisnerAmper
The following topics were addressed:
Impact of Tax Changes
Even though the Democrats hold both the Senate and the House, it is unlikely that Biden will try to force through his entire tax plan as his majority in Congress and the Senate are slim. One of the first changes could be the elimination of the SALT cap of $10,000 which should receive support from both chambers. This could be packaged with an increase in the corporate tax rate with a maximum being at 28%.
The biggest potential impact under Biden for fund managers is the potential repeal of the preferential tax treatment of long-term capital gains and qualified dividends for earnings over $1 million taxed at ordinary tax rate, without changing the carried interest three-year rule to a longer term. Another potential impact is if Biden raises the individual tax rate from 37% to 39.6%, there will be increased concerns among investors about the after-tax return from investments. The further the year progresses, the less likely it is that the changes will be retroactive.
Impact on Deals
There is currently no major proposed financial or investment regulation. Despite a lot of talk of deregulation, the Dodd-Frank Act is still the cornerstone of the recent era, having survived the last administration. The regulatory environment for private funds has been fairly stable. There is strong interest in the Democratic Party to toughen the anti-trust movement and this will continue. Other areas of focus include consumer protection and equitable access to financial resources. Most impacts will be indirect rather than trying to change the way funds are structured or what they’re allowed to do, and thus it is hard to foresee what will play out.
Environmental Social Governance (ESG)
A change in human behaviors could result in a shift in the investment universe. The energy ETF, SPDR Energy Select Sector Fund (XLE), was down 40% in the last four years under Trump, while S&P was up 80%, and last year the solar ETF, Invesco Solar ETF (TAN), was up 250% in 2020 and 500% over four years. The panelists believe there will be a convergent trade in 2021 rather than a continued divergent trade. A continued economic acceleration this year should help energy. ESG and corporate social responsibility (CSR) are on top of every board’s priority list and within venture capital, the social and governance components are the most important. The first step towards ESG is diversity: Currently, 6% of funding goes to female-founded companies, and less than 1% of funding goes to minority-owned business. This is changing and is being dictated by the LPs which will accelerate change. Research shows that diverse perspectives and backgrounds lead to better investment results, helping leadership to see risks and opportunities they would not have otherwise seen.
Transaction Volume for Venture Capital
2020 was a record year, with $156 billion deployed on the equity side and a further $20 billion deployed in debt within the VC space. This is because of the convergent outcomes, and investors see opportunities in innovation. The VC space is expanding most in software, biotech, health care, and fintech. Fast growing regions in the VC space include New England (up 44%), the Great Lakes Region (up 25%), and the West Coast (up 21%). VC continues to be an inefficient market which is good for investors as they can achieve high returns. In terms of transaction volume within the VC space, even during COVID-19, more capital was raised in 2020 than in 2019, in terms of volume. There was a decrease in fund formation activity, but more capital raised in VC. The driving forces are strategy, track record, and relationships, which are vital to capital raising.
M1 money supply has gone through the roof because of packages the government has offered. A new group of investors with extra cash are the millennials, using services like Robinhood which offer free trades, increasing margin debt, and overall market participation. These investors want volatility so are buying tech stocks; this has caused a perceived bubble in the tech sector. In addition, consumer confidence is soaring which leads to the stock market responding in the same way.
Some people say that special purpose acquisition companies (SPACs) might not be a sustainable phenomenon; however, SPACs have been a driver of transactions and market explosion. Many people may not like the opportunity they find in a SPAC, due to the uncertainty of receiving a return on your investment. From the perspective of a seller, SPACs can be cumbersome, expensive and slow so this might be a hindrance (vs. from a buyer where there is little risk). It is not new from regulatory perspective. What is new is the broad acceptance, as historically a blank check company encountered both regulatory hostility and market skepticism. The SEC has come out with further regulatory guidance on what people need to be thinking about, who is managing the SPACS, how they manage it, and what conflicts they may have. It might be premature to call it bubble, but certainly, SPACs have been a driver in current market and valuations that we cannot ignore.
The entire webcast can be viewed here.