The 2016 presidential election results were surprising and the aftermath is sure to bring more surprises. There appears to be premature celebration in many camps as business interprets the Trump victory in a most positive light. There are, however, a few bedrock changes coming that will set a business, legal and tax foundation for the next 20 years.
Effects on Private Equity
This election will have a positive effect on the PE asset class but may fall short of positive for its managers. The tsunami of regulation that occurred during President Obama’s last term was real and unprecedented. In our annual summit meeting last spring we brought in an expert on labor matters to speak to our portfolio company CEO’s and CFO’s. He painted a picture of Orwellian doom where the Department of Labor had become its own rule making body under the leadership of the ambitious Thomas Perez. Wage and hour rules including overtime pay and minimum wage were significant issues for our portfolio companies. The classification of workers as “employees” or “contractors” was also a significant risk to many business models that utilize part time or seasonal workers. An expansive “class action” right allowed workers, past and present, to jump into a single dispute and aggregate their grievances. In several cases a wage and hour dispute for less than $5,000.00 became magnified by contingent fee lawyers who earned 30% of their settlements for a class of workers who had nothing to do with the original dispute. In a few cases the settlements were 20x the original amount in controversy and covered hundreds of employees.
There appears to be a general consensus that President-Elect Donald Trump and U.S. Speaker Paul Ryan agree on rolling back government regulation, especially where there is a clear causal connection with small business. Maybe the “wolf pack” within DOL will stop taking down businessmen and capitalists in the name of protecting labor? Maybe harassing successful small business will no longer be the game.
Carried Interest at Risk
While our businesses may be able to breathe better and spend less time each day dealing with regulation and regulators, managers of PE firms may find Trump’s tax policies do not favor them. Both he and Hillary Clinton pledged to end the favorable taxation of carried interest. I have argued in the past about the PE asset class attracting talent because after-tax rewards on wealth creation are significantly greater than many other compensation regimes. For example, appreciated stock options, restricted stock, stock appreciation rights, deferred compensation and stock bonuses are almost always taxed as ordinary income while the gain sharing for PE managers is almost always a “capital transaction” with taxes at capital rather than ordinary income levels. The difference in taxes over a career is meaningful. I do not hear loud voices of protest from the leaders in our industry like Carlyle Partners, Blackstone or KKR. Maybe that is because they already converted their management fee and carried interest streams into a capital asset by going public over the last decade? Without an organized effort to protect our business model it is likely to change soon.
Losers Are Pretty Obvious
The biggest loser is the media. Their business model has changed in my lifetime from journalism based on fact finding (think Ben Bradlee and “All The President’s Men”) to sponsored political content based on celebrity status and inside access. I have noticed in the days after the Trump Trounce the media does not know what to do with itself. ABC, CBS, CNN, NBC news will all struggle for relevance and viewership as they are denied access to a Trump Whitehouse. With a press secretary like Laura Ingraham who is old school enough to expect the media to “do their work”, press conferences may be less like fraternity and sorority mixers and much more like a business of journalism. The big winner, of course, is FOX, especially if Laura Ingraham gets the top media job. Maybe the liberal media can rehabilitate itself with hard core journalism? I would take bet, however, that the taste of stardom and narcissistic fascination with their own reflection will make most of them bitter and mean and eventually cause them to drown in a pool of self-pity.
Reigned Out – It Is About Time
A trifecta is Hillary Clinton, Nancy Pelosi and Harry Reid all getting fired in the same year. There is a real good chance we will see this occur in the next 6 months. That ushers in Elizabeth Warren and Bernie Sanders as the opposition voice. I doubt incumbent Democrats will see their socialist ideas as currency for a reelection campaign. There are 10 more Senate seats up in 2018 and they are mostly in states that went for Donald Trump. One thing you can count on in politics is self-interest. Democratic incumbents are going to ride whatever train drops them off at Union Station and I doubt it will have a conductor or engineer named Warren or Sanders.
A close second in my lifetime wish list for personnel change is Ruth Baeder Ginsberg. She will never quit the Supreme Court but her influence as a jurist is done. I actually believe that the Supreme Court is guided by principle and legal precedent. As a former lawyer, I have immense respect for the Supreme Court as an institution. It conserves the rule of law. In a smothering political climate where huge political pressure imperils the Court as an institution, the Justices will make sure the institution survives even if there is some bad law created from time to time. Now there is a chance for open and free dialogue around the nuances of legal precedent without the threat from Pennsylvania Avenue. A Justice who has already declared herself has neither the objectivity nor the dexterity to remain relevant in a minority position where persuasion, intellectual fortitude and collegiality matter.
The least likely reign out will be James Comey. Trump may owe him a few years in office. However, like Loretta Lynch, the Clintons have soiled him and he cannot have any support from anyone inside the FBI who actually cares about the rule of law. He will go soon on his own.
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