With the presidential election now over and calls for secession appearing in a good number of states, one might wonder: how would various secession scenarios affect the private equity industry?
Well, perhaps the best place to start is with the states that appear to have the strongest movement towards seceding from the Union – Texas and other southern and Midwestern states, and the states with largest count of private equity professionals – New York, California, and Illinois.
Starting first with California, New York, and Illinois; these big three have the “clustering” advantage, an advantage businesses in this industry have gained over the course of decades. The interesting thing is that a large portion of the business these firms do is located outside the borders of New York, California, and Illinois (really it’s New York City, Chicago, and Silicon Valley). How big? Maybe 70 to 80 percent. As a back of the envelope calculation, perhaps 50 to 60 percent of private equity deals are with businesses located in more business friendly states like Texas, the South, and Midwestern states.
The question then becomes: presuming the South and many Midwestern states succeeded in seceding, how much international business would continue to flow from the old United States (the west coast and northeast portions of today’s United States) to the newly formed Union (presuming the new Union includes all of the South and almost all of what is now middle America)? Well, not surprisingly, the answer to this one would depend on how open the new America would be to trade from the old America.
The new America would, no doubt, benefit from the expertise of the private equity industry of the old America, with the old America’s private equity businesses presumably owning a good amount of the new America’s businesses assets even before inception (and vice versa). From a policy perspective, policymakers in the new America would likely attempt to attract private equity professionals from the old world through incentives and lower tax rates.
Would the new America be a real threat the old America’s hold on the private equity business? Probably. Although economists and others argue that tax rates and incentives only matter up to a point, when all other things are equal, taxes matter, and they matter a lot.
Overall, although it’s just speculation, in a world of two America’s (Lincoln’s lost dream), private equity businesses would likely shift more of their business to the low tax/low cost public services nation, largely coming at the expense of the old world’s high tax/high cost public service nation.
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