How the Election will Impact Acquisition Financing

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate. With a pro-business, entrepreneurial mindset in the White House, the business environment will become more growth oriented and business friendly. This is destined to have a positive influence on acquisition financing. Psychology is a key driver of business person optimism which in turn has a huge impact on the supply and demand of acquisition financing.

How Shifting Optimism and Deregulation Under a Pro-Business Administration Could Ignite Acquisition Financing

When businesses are optimistic about the future, they are more risk-seeking and more likely to lower their risk premium when calculating future returns. They envision a higher probability of future success which results in them being more likely to make the investment. Over the past several years, business optimism has been restrained due to high inflation and high interest rates.  With omnipresent clouds of market uncertainty, businesses have been cautious resulting in higher required rates of return on new investment. In the acquisition financing market, deal selectivity has been sky high and only the best deals have been getting funded as lenders increased their return targets due to risk sensitivity. As optimism returns to lenders, as it did during the first Trump administration, they will likely be more relaxed in their risk pricing leading to more acquisition financing supply in the market.

In addition to the beneficent effect of reduced levels of risk, reduced regulatory requirements has a positive impact on acquisition financing. Government regulatory overreach suppresses business activity and can make acquisitions or new investment prohibitively expensive. When a pro -business administration exercises prudent deregulation, economic activity perks up and acquisition financing takes off. The Biden administration was overzealous and inconsistent in its regulatory approach creating a shifting set of rules for business owners to abide by. When business owners and investors no longer have a clear set of rules, they tend to slow down and do less, which collectively suppresses acquisition financing market supply and demand. While overly zealous deregulation has its own set of downside risks, the new Trump administration will likely bring relief to lenders who have felt handcuffed by a wide range of regulations. They will worry less about unreasonable regulations and more about missing out on a good deal.