Dealmakers are enjoying a good year for M&A and anticipate the momentum will continue. Here’s a look at how the mid-term election results are playing out in the middle market, where deals top out at $1 billion. (This is an on-going story. Check back throughout the day for updates and dealmaker reactions.)
Private equity pros won some races. Mitt Romney (pictured), who is well known and well liked in the private equity world as the co-founder of Bain Capital, won a U.S. Senate seat in Utah, according to projections from the Associated Press. Romney, the 2012 Republican nominee for president, replaces retiring Senator Orrin Hatch. Democrat J.B. Pritzker, a billionaire and heir to the Hyatt hotel empire who won the Illinois governor’s race, beating incumbent Republican Bruce Rauner, according to projections. Pritzker poured more than $171 million of his own money into his campaign fund, setting a record for self-funding a race for U.S. governor. He defeated Rauner, the former private equity executive who is the “R” in Chicago firm GTCR, whose term had been defined by a partisan standoff with the Democrat-controlled legislature that left Illinois without a budget for a record two years, as Bloomberg News reports.
The private equity industry will focus on educating new lawmakers. “As an industry, we will work to educate the nearly 100 new members of Congress about private equity’s positive impact in their communities and their constituents’ lives,” Pam Hendrickson, the chief operating officer of middle-market private equity firm the Riverside Co., tells Mergers & Acquisitions in a Q&A. “We will be talking with them about jobs, investment, and retirement security. We need to make the personal case to each of the new members as well as top leadership in both the House and the Senate. As an example, the incoming chair of the Ways and Means committee Richie Neal is from the State of Massachusetts which had a 15.4 percent annualized return from its PE portfolio over 10 years.” Hendrickson is currently a member of the board of the American Investment Council and a member of the advisory board of the Kenan Institute for Ethics at Duke University. In the past, she has testified before Congress on behalf of the private equity industry. Read the full interview: Post-election priority for private equity: educating nearly 100 new members of Congress.
Momentum in the middle market is likely to continue. “The election result in of itself should not have any material impact on deal flow in the short to medium term with the result consistent with general expectations,” says Matthew O’Loughlin, partner and co-chair of the mergers and acquisitions practice with Manatt, Phelps & Phillips LLP, in an interview. “The bigger influences will continue to be whether the economy remains positive through 2019 and any substantial increases in the cost of capital if interest rates rise. The likelihood of a second round of tax cuts has become unlikely and pressure for tax increases will grow. That may cement decisions of some to proceed with a transaction in the nearer term or at least prior to the 2020 election if they see a risk of tax increases thereafter. Absent any major economic or financial markets disruptions, 2019 will likely be consistent with 2018 with a solid economy, strong appetite for deals and a reasonable cost of capital driving the activity.” U.S. middle-market dealmaking in the first three quarters of 2018 surpassed the same period in 2017, according to PitchBook. If the pace continues in the fourth quarter, middle-market deal value may surpass $400 billion for the first time ever.
Dealmakers expect little will get done in terms of legislation or regulation. “Not since the Reagan administration has a president served while each branch of Congress was led by opposing parties,” points out Gretchen Perkins, a partner with Detroit-based PE firm Huron Capital who chairs the Association for Corporate Growth’s global public policy committee. “The divided Congress will result in minimal legislative accomplishments for the balance of Trump’s term. It’s possible that there may be bipartisan appetite for an infrastructure bill, but the funding of such will be an issue, thus imperiling the likelihood of agreement here. Also, the Democratic House will make reconciliation — the process by which the Senate only needs 51 votes to pass legislation instead of the normal 2/3 requirement – impossible without a House to authorize it…. On the regulatory side of things – important for the private equity and investment banking industries – we can expect no changes as a result of the midterms.”
Observers agree there will be little change in regulatory or legislative policy for financial services companies, reports American Banker, published by SourceMedia, the owner of Mergers & Acquisitions. If the Republican party had held on to power in the U.S. House of Representatives, the industry could have hoped for more momentum on the regulation relief front. But the recent Senate law making targeted changes to the Dodd-Frank Act, which the president signed in May, may be the last major piece of financial services legislation for the foreseeable future. “I don’t think there’s going to be much legislation in a divided government situation,” said Aaron Klein, economic studies policy director at the Brookings Institution. “S 2155 represents the kind of high watermark of bank legislation under the Trump administration.” For more, see Divided Congress = gridlock for financial services policy.
Infrastructure investment and drug prices may represent areas in which Democrats and Republicans can “strike reasonable compromises,” writes the Wall Street Journal editorial board. And immigration reform, of particular interest to the tech industry, may benefit from more balance in power between the two parties. “The nation also desperately needs a resolution on immigration reform. That process should begin with hearings in the House, grounded in expertise and data. It should conclude with a bill, properly analyzed for cost and impact, that can be brought to the floor for a vote. Even if such legislation meets insurmountable obstacles in the Senate and White House, it can serve as a template for a national debate in 2020, and for successful legislation in the future.”
The payments and financial services industry has enjoyed an unprecedented wave of invention, but the fruits of that labor are threatened by an ideologically driven political climate that complicates the evolution of global interoperable mobile-driven commerce. The 2018 midterm elections split the U.S. legislature between Republicans and Democrats, creating an environment that will slow deregulation for payment processing rules, create an increased focus on consumer protections and a spark a change in committee leadership that’s sure to create more stalemates. Read the full story, Politics vs. innovation: How the midterms changed fintech.