In four months, American voters will go to the polls, and for now, the candidates are set with Republican Donald Trump seeking to return to the White House, and current President Joe Biden, who must decide whether to continue in the race after doubts about his candidacy emerged following the debate on June 27.
In this context, American and global investors are increasingly focused on the various aspects surrounding these elections and what has happened in other electoral periods, especially concerning the markets and their indicators. Along these lines, an analysis by Neuberger Berman Group explores what happened during past electoral processes with private equity, in a report prepared by Ralph Eissler, Managing Director and Head of Private Markets Research, and Yiran Wang, Private Markets Advisor.
Among the most important conclusions of the analysis is that while there was some seasonality in private equity performance, on average – the fourth quarter of the year has seen stronger performance and more private equity fund distributions – this effect does not appear to be related to the election cycle.
Moreover, while there is superficial evidence that private equity performs better under Democratic presidents, it does not hold up to deeper analysis, as both the seasonality of private equity returns and its long-term cyclical nature are more attributable to the broader economic and market context.
In the context of the U.S. election season – which will likely have consequences in many ways – it is concluded that investors should continue to follow their strategic private market allocation plans.
Finally, Neuberger Berman Group states that there may be valid inferences and headwinds for certain sectors and industries based on the results of the November elections, but there is little historical evidence that they will have a predictable effect on overall market performance or the relative attractiveness of private equity as an asset class.
A Bit of History
The analysis starts from 1984 and includes a total of 10 election years and 30 non-election years. The first data point indicates that, on average, the performance or volatility of private equity in election and non-election years is very similar, with a rate of 17.8% versus 17.3%, respectively. However, the volatility itself appears to differ, as the annualized standard deviation of quarterly returns during the 10 election years since 1984 is 8.36% versus 6.34% in the 30 non-election years.
However, analysts point out that this is a figure that should not be considered highly relevant, as there has been some exceptional volatility since 2000 that increases the numbers. For example, in 2004 the electoral process went smoothly in terms of private equity returns, as did in 2012 despite the Eurozone debt crisis, and the same for 2016 despite Donald Trump’s unexpected rise as the Republican Party’s presidential candidate.
In contrast, volatility was associated with the year 2000, with a historic boom and bust in sectors heavily represented in private equity; in 2008, when one of the worst financial crises of all time hit; and in 2020, with the onset of the global COVID-19 pandemic.
Fourth Quarter, Clear Effect, But…
Another question the analysts who prepared the document ask is whether U.S. elections have affected private equity performance in the fourth quarter, considering that this process takes place during that period.
In this case, at first glance, there appears to be something: in five of the 10 years (1988, 2000, 2004, 2008, and 2020), fourth-quarter returns deviated significantly from the rest of the year’s performance. However, in three cases, there is a solid explanation: in the fourth quarter of 2000, the dot-com bubble began to deflate; in the fourth quarter of 2008, the consequences of the Lehman Brothers collapse were felt; and the fourth quarter of 2020 benefited from the rebound from the impact of COVID-19.
In the case of the 1988 and 2004 elections, the evidence suggests that the elections may have had an additional effect. In other words, there is specifically a fourth-quarter effect (as opposed to, say, a first-and-fourth-quarter effect, or a second-and-fourth-quarter effect). And most importantly, that fourth-quarter effect is clearly visible and of almost exactly the same magnitude, both in election years and non-election years.
Therefore, there appears to be something notable in fourth-quarter private equity returns, but it is evidently not related to U.S. presidential elections. Analysts point out that the fourth quarter is important regardless of whether it is an election year.
Long-Term Performance Effects
Due to the illiquid and long-term nature of private equity investments, it is also necessary to analyze what has happened over a broader time horizon. The firm’s experts analyze the 40 years from their baseline and define four categories: divided government led by a Democratic president, unified government led by a Democratic president, divided government led by a Republican president, and unified government led by a Republican president.
At first glance, there is no uniform picture of whether the stock markets in general perform better under a divided or unified regime. However, U.S. stock markets tend to perform better under Democratic presidents than under Republican presidents, despite the widespread belief that Republican policies are more business-friendly.
For example, unified Democratic governments were elected in 2008 and 2020, during the global financial crisis and COVID-19, and the immediate post-recovery years, 2009 and 2021, recorded an average annual return of 30.0% for the private sector and an average annual return of 27.6% for the S&P 500 index.
Meanwhile, unified Republican government coincided with more positive gains in the stock markets than a divided government under a Republican president. Under Democratic presidents, the markets performed better on average when the government was divided. Overall, the markets seem to have slightly preferred unified governments.
Still, they highlighted that ultimately, while politicians of all stripes may deserve some credit for supporting or at least not derailing economic cycles, it is the broader economic and market context that determines investment performance, rather than who runs the government or whether they are unified or divided.
