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Here's Why Private Equity Stocks are Soaring on Early Results

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Since Wednesday, on early results of the U.S. Presidential election, shares of several private equity firms have been rallying. Some of the major private equity firms – Blackstone (BX - Free Report) , KKR & Co Inc (KKR - Free Report) , Carlyle Group (CG - Free Report) , Ares Management (ARES - Free Report) and Apollo Global Management (APO - Free Report) – are up 10.5%, 9.5%, 8.1%, 7% and 6.1%, respectively.

Even shares of major global mutual fund managers like BlackRock (BLK - Free Report) and T. Rowe Price (TROW - Free Report) have rallied 9.4% and 4%, respectively.

Reason Behind the Rally

Before discussing the reason for this rally, we will have to first understand what suddenly changed.

In the run-up to the Presidential election, former Vice President and Democratic candidate Joe Biden had a national lead over President Donald Trump. This, thus, led to the expectations of a “blue wave” sweeping over both the Senate and the House of Representatives.

Thus, Wall Street expected the proposals put forward by Biden to get implemented easily. He has proposed to raise capital gains tax rate from the current 20% to 39.6% for those earning more than $1 million annually and statutory corporate income tax rate from 21% to 28%.

This would put private equity firms, including their portfolio companies as well as large asset managers, at a disadvantageous position.

The increase in capital gain tax would have an adverse impact on fund returns and also weigh on advisory business. Moreover, raising corporate tax will not only hit private equity firms’ earnings, but also would hurt profits of portfolio companies as they will be taxed at a higher rate.

Nevertheless, the early election results point toward a divided Congress, with Republicans continuing to control the Senate and Democrats the House. Thus, this has made the prospects of tax hikes advocated by Biden less likely.

Now, even if Biden wins the election, it is unlikely that tax increases proposed by him will get passed by the Republican controlled Senate.

This is the primary reason why investors are bullish on the private equity firms, as they hope for better days ahead.

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