Part of Obama’s grand tax compromise (aka Stimulus II, The Surprise) is that capital gains rates would remain unchanged. That means indefinite levies of 15% on investment profits, rather than the anticipated January 1 increase to 20%.
This reminds me of an argument that began making the rounds this time last year among bankers and private equity professionals: 2010 will see a massive rush of M&A activity, as owners and investors look to cash out before higher capital gains rates take hold. This would be particularly prevalent in the lower- and middle-markets, and among family-owned businesses.
It was a basic self-interest argument, and a corollary to the larger rationale for having a capital gains tax rate in the first place (i.e., it encourages investment).
But it doesn’t seem to have materialized.
Just take a look at some domestic private equity deal data, courtesy of Thomson Reuters. It shows that PE firms have announced and/or completed fewer sub-$1 billion deals so far in 2010 than they did during similar periods in either 2008 or 2009. Volume is off 2% from last year, and nearly 7% if you only include deals with values below $500 million. Aggregate disclosed deal value is higher, but this argument was about the masses rushing to the exits, not better grosses for the select few who chose to do so.
Thomson Reuters also provided data for all M&A of U.S. targets under $1 billion (i.e., not just PE sponsored), with similar results.
Anecdotally, mid-market bankers tell me that tax concerns only played around the margins.
“Capital gains was something of a red herring,” says Randy Schwimmer, senior managing director and head of capital markets at Churchill Financial. “It’s been fairly obvious since the November elections that a capital gains increase was probably off the table, but the amount of deal-flow we’re seeing has not diminished. In fact, the first-quarter calendar is looking as robust as the fourth-quarter calendar.”
Andrew Mabey a vice president with Sperry, Mitchell & Company, adds: “I would say that it was a consideration in some cases, but not an overriding factor. We were given a mandate to get a couple of deals done by 12/31, but some of those wanting to close this year are more concerned with acting while interest rates remain low and the economy remains relatively stable.”
I’m not going to argue against the general behavioral benefits of capital gains tax rate differentials, or that they don’t help stimulate economic expansion. But it does seem that the January 1 “capital cliff” was a mirage, even if it sounded good on paper.