A Unified Government Is Better for Private Equity Returns

Data contradicts the widespread belief that a party split between President and Congress is good for markets.

Ty Wright/Bloomberg

Ty Wright/Bloomberg

It may be wishful thinking that a party line split between the U.S. president and the Senate is good for investors.

In a January runoff election, two Georgia Senate seats are up for grabs, determining whether Democratic President-Elect Joe Biden will face a Republican or Democratic Senate. Many market experts have contended that a split — where one party holds the presidency and the other has control of either one or both houses of Congress — is positive for markets and investors because it maintains the status quo, making big changes to taxes or regulation unlikely.

But data from eFront shows otherwise, at least for one asset class.

“Government unity seems to be more important for private equity market outcomes,” the data firm said in a report published by on Friday. “A unified government coincides with 4.1 percent of the average quarterly IRR return, relative to 3.1 percent of the average IRR return over the quarters characterized by a divided government.”

The study used 20 years of industry-wide private equity cashflow transaction and performance data to analyze the relationship between political situations such as government unity and U.S. private equity returns.

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The BlackRock-owned private markets financial software and research company also found that there aren’t big differences in private equity performance — when measured by multiple — under a Democratic president versus a Republican leader.

But when eFront used the more common measure of internal rate of return, the results were slightly different. The average quarterly IRR return under a Republican president was 3.7 percent compared to 3.4 percent when the president was a Democrat.

The research firm stressed in the report, however, that the better record under Republicans was “due to its more frequent control of both houses of Congress.”

Unity is good. According to eFront, private equity returns under a Democratic president with “unified government” were 4.9 percent. But returns dropped to 3.2 percent in a divided government. The results were similar for a Republican president. With a unified government and a Republican president, private equity returns were 3.9 percent. When government was divided under a Republican president, those returns dropped to 3.1 percent.

The data firm reported that an agreeable political climate sets the stage for a healthy investment culture. Private equity firms are optimistic about investment opportunities and call more capital from investors during periods of unity than during periods marked by political divisions.

“On the other hand, the average level of distributions in the divided government quarters outweighs the average level of capital paid back to investors over the unified government quarters,” eFront said.