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Illustration: Aïda Amer/Axios

Private equity firms will rush the exits if they believe that a Democrat is likely to defeat President Trump, investors tell me.

The state of play: Each of the four leading Democratic candidates have pledged to eliminate beneficial tax treatment for capital gains among top earners.

Elizabeth Warren has proposed the most dramatic change, raising capital gains rates to all earners and requiring annual, mark-to-market taxes (i.e., not just when an asset is sold).

  • Bernie Sanders would eliminate the rate differential for households making $250,000 or more. Joe Biden would do it for those making $1 million or more. Pete Buttigieg also has proposed a cap gains rate hike and mark-to-market taxation for the top 1% of earners.
  • All four also plan to raise ordinary income rates on top earners so, for many private equity investors, this would be a double whammy.

What's happening: The result is that private equity investors are talking about clearing the portfolio decks this year, locking in profits under the current taxation scheme.

The big picture: This is different than the decades-long debate over carried interest, which was about if PE investment profits should be taxed as capital gains or as ordinary income. If you no longer have a difference between the two rates, it no longer matters how carried interest is classified.

  • But, but, but: Exits are a double-sided door., requiring both sellers and buyers. There could be a slowdown in sponsor-to-sponsor opportunities due to both the tax issue and a growing PE consensus that portfolio companies are overvalued.
  • On the other hand, many strategic buyers are flush with cash.
  • Private equity funds also must be careful not to run afoul of their fiduciary responsibilities, as most of its limited partners are nonprofits that don't pay federal taxes at all. If LPs believe that their general partners are selling for personal tax benefits, it could turn into a legal liability.

The bottom line: Pay greater attention this year to why a private equity firm says it sold a company, particularly if it's been a short hold period.

Go deeper: How private equity could disrupt the 2020 election

Go deeper

45 million Americans under winter storm watches near New England

Computer model projection showing the winds moving around the powerful East Coast storm on Saturday Jan. 29, 2022. Image: https://earth.nullschool.net

Nearly 45 million Americans are under winter weather alerts and warnings from North Carolina to northeastern Maine, as a major winter storm threatens the region.

Why it matters: It is predicted to be the biggest blizzard since 2018 to strike the Northeast with more than 2 feet of snow possible in parts of eastern Massachusetts, according to the National Weather Service.

3 hours ago - World

Australian PM pledges $700M for climate change-threatened Great Barrier reef

A green sea turtle is flourishing among the corals at Lady Elliot island in Australia's Great Barrier Reef. Photo: Jonas Gratzer/LightRocket via Getty Images

Australian Prime Minister Scott Morrison announced Friday a AU$1 billion ($703 million) investment plan for the Great Barrier Reef.

Why it matters: The nine-year plan for projects including water quality improvement, reef conservation and supporting some 64,000 tourism jobs comes months ahead of this year's federal election. It has been criticized by scientists and environmental groups for failing to tackle climate change.

Judge nixes Gulf of Mexico oil leases in climate-focused ruling

Tug boats prepare to tow the semi-submersible drilling platform Noble Danny Adkins through the Port Aransas Channel into the Gulf of Mexico on December 12, 2020 in Port Aransas, Texas. Photo: Tom Pennington/Getty Images

A federal judge on Thursday canceled the Biden administration's late 2021 sale of new oil-and-gas drilling leases in the Gulf of Mexico.

Why it matters: The ruling that the greenhouse gas emissions analysis by the Interior's Bureau of Ocean Energy Management (BOEM) was insufficient is a win for green groups that challenged the decision, as they seek to curb fossil fuel production.