Private equity isn’t waiting until the proposed September 15th release of capital gains tax reform draft language before deploying capital. Legislation to pay for President Biden’s $3.5 trillion social policy bill could nearly double capital gains taxes to 39.6 percent, spurring deals to beat the deadline. The timeline bracketing the potential change, however, has important implications for how long the current surge in M&A activity could last.
When will a potential tax increase bite? The boost could be effective from January 2022.
That timeline makes the execution of large private equity exits this year look propitious. Hellman & Friedman and Carlye Group sold PPD Inc. to Thermo Fisher Scientific for a cash consideration of $17.3 billion in a deal announced April 15th. Other largest exits by financial sponsors will test the tax window: S&P Global Market Intelligence estimates Sequoia Capital’s $6.4 billion sale of Medallia could straddle New Year’s, for instance.
Disposals announced as late as this quarter are racing the clock. To the extent tax treatment is a motivator for dealflow, that could mean more PE to PE deals between now and 2022. Funds eager to dispose of assets without lengthy regulatory reviews could increasingly bank on the perfunctory 30-day HSR waiting period more likely in deals without a strategic counterparty.
That said, it’s not clear the deal-cooling bill will pass at all. Lobbying efforts by industries accustomed to tax breaks are trained on reducing any capital gain increase, or at least delaying the effective date. Even then, a bill would need nearly unanimous Democratic support to pass. Should the bill fail either test, firms may feel less pressure to sell.
— Brandon Zero
