Half Term Homework. Q: How many electorates does the UK have? A: Three

Politics Insight
Half term has become an unofficial element in the British political calendar. The House of Commons is in recess because of it. Many ministers will not be at their desks (or even in their constituencies). If it were not for the need to prepare for a critical EU summit this weekend then 10 Downing Street might also be operating at a lower level of activity. As it is, however, in less than a week it should be clear if the Prime Minister believes he is in a position to announce a ‘deal’ with his EU partners that he can start to sell to his colleagues and the country. We may even have a date for the referendum.
The three electorates
The first question that such a ballot might trigger is, surely, ‘who are the electorate?’ In the UK that was a question which for decades invited one answer, namely ‘almost all those deemed adults’. In the modern era, the most accurate response would now be more complicated and sophisticated. It almost matters enormously, as the ‘real electorate’ will ultimately decide the referendum result. And the age profile of the three electorates involves distinct, even sharp, differences in composition. This has been set out recently in a seminal paper by Craig Berry and Tom Hunt entitled The Rising Tide of Gerontocracy: How Young People Will Be Increasingly Outvoted (The Intergenerational Foundation).
The potential electorate
The overall electorate is steadily ageing. In 2015 the median age of all adults over 18 (the potential electorate) was 47 years old, up from 46 in 2010. Differential birth rates over the decades mean that the potential electorate is not distributed evenly. The average cohort size for those in their twenties in 2015 was 878,000. This fell to 846,000 for those in their thirties and then rose to highs of 925,000 for those aged 45-49 and 912,000 for those aged 50-54. Hence that median overall age of 47 years.
Even that number disguises some unexpected features. The difference between the high birth rates of the late 1940s (the first ‘baby boomers’) and the lows of the late 1970s and mid-1990s is such that in 2015 there were more potential voters aged 68 than any of the ages 18, 19 or 20 or any of the ages of 37, 38, 39 or 40 (whether anyone revealed this to the Miliband campaign is a mystery).
Despite this, differential death rates mean that the youngest elements of the potential electorate are still much more strongly represented than the oldest components. In 2015, the typical cohort size for those in their 20s and 30s, as noted above, was 878,000 and 846,000 respectively whereas for those aged 70-79 and 80-89 the numbers were 489,000 and 256,000 respectively. Put differently, of the potential electorate those in their 70s constituted 56% of those in their 20s and 58% of those in their 30s, while citizens in their 80s were 29% of those in their 20s and 30% of those in their 30s.
The registered electorate
Being a potential elector is not much use, nevertheless, unless your name appears on the electoral register. Until the very late 1980s there was virtually no difference between the potential and the registered electorate. There certainly is today. In part because of the introduction of individual registration by the Conservative/Liberal Democrat coalition, the median age of the registered voter in 2015 was 50 years old, not the 47 years of the median potential voter.
The most dramatic impact was among the youngest section of the electorate. The median size of the potential age cohort of those aged 20-29 was (you will recall) 878,000 voters. Yet the median size of the registered voters for the same age category was a mere 563,000 voters. The effect of differential registration in 2015 was such that there were more registered voters aged 68 than at any age up to 42 and more aged 72 than at any age up to 24. Another set of reforms to registration which the current Government has advocated will mean that by 2020 the median age of a registered voter will be at least 52 years old.
The participating electorate
Woody Allen once observed that “90% of life is showing up”. For elections that figure is 100%. There is no advantage in being a potential elector who is also a registered elector if you do not then vote. In 2015, the difference in participation rates between age categories and casting a ballot paper was fundamental. The overall median actual elector was 51 years old, not the 47 of the potential voter. The typical cohort size of the actual electors for those in their 20s and 30s was 426,000 and 497,000 respectively, easily surpassed by those in their 50s (632,000) and also those in their 60s (551,000).
The most seismic discovery, though, comes from comparing the participating electorates who are aged 20-29 and 30-39 with those aged 70-79 and 80-89. It was stated earlier that those aged 70-79 were in terms of the potential electorate just 56% of those in their 20s and 58% of those in their 30s while the 80-89 brigade were a mere 29% and 30% of those two younger segments.
In practice, the numerical generation gap is much smaller. At the 2015 election those in their 70s were 89% of the size of those in their 20s and 77% of those in their 30s, while those in their 80s were 47% of those in their 20s and 40% of those in their 30s. The combination of a changing age structure overall, the new regime for electoral registration and established participation rate trends means that by 2020 the 70-79 age cohort will outvote the 20-29 age cohort at the ballot box (despite being less than two-thirds of their size in the potential electorate) while the 80-89 age cohort will cast more than 50% of the vote of the 20-29 age set (despite being less than a third of its size in the potential electorate).
What does all this mean for electoral politics, especially the EU referendum?
In terms of national elections, the impact of the three electorates is already obvious. It produces a substantial bias in favour of the Conservative Party. In 2015, the Conservatives won 27% of the votes of those aged 18-24 which represented a 3% fall from 2010. Their performance in all age groups between 25 and 65 was broadly similar in 2015 as in 2010, if anything a little worse. Among those over the age of 65, by contrast, David Cameron secured 47% of the vote, up 3% on his 2010 performance.
That shift was magnified yet further by the difference between the potential electorate, registered electorate and the participating electorate. It explains his upset majority win not least because, as articulated in the BVCA Insight of 23 December 2015, the central failing of the opinion poll industry was that the younger people that it interviewed (particularly via the Internet) were atypically interested in politics and hence atypically willing not only to say that they would vote in the general election but actually did vote. The pollsters also struggled to find enough respondents aged in their 70s and their 80s and hence underweighted them compared with the actual electorate.
What is a blessing for the Prime Minister in terms of general elections may be a curse when it comes to the EU referendum. Enthusiasm for UK EU membership is inversely correlated with age. The latest ICM Tracker Poll on the issue, for instance, showed the overall vote a virtual tie (41% Remain, 42% Leave, 17% Don’t Know/Undecided). Among the 18-34 age segment Remain led by 57% to 27% but those aged 65 plus saw Leave ahead by 59% to 30%. The central strategic dilemma for those like the Prime Minister who support EU membership is whether to conduct an upbeat campaign on the case for membership in the hope of turning younger potential electors into registered and participating electors or, instead, to focus on a more sceptical, even cynical, case for membership that better fits the economic interests (and/or fears) of those in their early 50s whose votes may prove decisive.
Tim Hames, Director General, BVCA
Sector Insight
There will be blood: oil and gas industry faces unprecedented challenges
Although oil and gas production in Britain increased by around 8% in 2015 – the first rise in output in fifteen years – the industry faces notable challenges. Over the past few months oil prices have remained at levels not seen in over a decade, stubbornly hovering between US$30 and US$35 a barrel. The World Bank recently cut its forecast for oil prices to reflect this trend, from a US$51 per barrel prediction in October 2015 to only US$37 a barrel at the start of this year.
The impact of the slump in prices – exacerbated by the reluctance of OPEC states to reduce production – has been dramatic. A survey by research firm Company Watch has found that 90% of small London-listed oil and gas companies are making pre-tax losses, with the market value of the 104 companies questioned having fallen by 40% in the past year.
Business recovery specialists Begbies Traynor similarly found that 58% of companies were suffering “significant” financial distress, reflecting the thousands of subsequent job cuts witnessed across both exploration and production divisions. According to energy consultancy Wood Mackenzie, up to US$400 billion worth of spending on new oil and gas projects – equivalent to 27 billion barrels of oil reserves – has been cancelled or postponed due to the collapse in crude prices.
In response to this, Tony Durrant, chief executive of Premier Oil, recently argued that the industry’s regulator, the Oil & Gas Authority, should be given powers to force companies to invest in North Sea infrastructure and to intervene to protect expensive equipment in order to prevent the unintended decline of the North Sea industry. While such a policy proposal is unlikely to gain much traction, it does nevertheless indicate that the sector is in an increasingly fragile condition.
Full up
To compound the situation further, the lifting of international sanctions on Iran and the eventual return of its oil supply to the market could simply add to the global glut and continue to keep crude prices down. Indeed, senior officials in the Iranian oil industry admitted that the price of oil could fall to as low as US$25 a barrel by March once the country begins to increase output.
A renewed sense of optimism surrounding price recovery has also been dampened by the International Energy Agency’s January report, which warned that oil stocks were increasing faster than previously predicted and were likely to rise by 2 million barrels a day in the first quarter of this year. With storage exhausted in many places, the build-up of stocks could further suppress global prices and prolong the turbulence within the sector. Indeed, Goldman Sachs recently argued that once storage capacity is breached – and the IEA estimates there is already a record stockpile of 3 billion barrels – oil prices could even drop below US$20 a barrel.
Hitting the gas
However, as in most cases with sufficient foresight, investors can find opportunities where most see only disarray. With companies facing devaluation and having to deal with distressed assets as well as the supply chain being in need of considerable levels of investment, private equity firms could benefit from seeking acquisitions and taking advantage of the lower cost environment.
Investors have the resources to provide essential capital to a range of services within the sector, from funding new technologies that could improve efficiency and productivity, to investing in exploration projects and infrastructure, which could further underpin the UK industry’s viability. Given that many private equity firms have already raised billions of dollars to capitalise on opportunities that may arise from the current turbulence of the oil industry, the coming year could prove to be one of renewed activity in the mergers and acquisitions market.
This sentiment is already in evidence. A survey of more than 200 oil and gas industry professionals and private equity investors – conducted by law firm Pinsent Masons – found that 70% are considering an acquisition, while 86% expect a surge in deal activity over the next 12 months.
Furthermore, when one views the current state of the UK’s energy mix, it becomes apparent that the oil and gas industry simultaneously faces various threats to its very future at the same time as it becomes increasingly vital to keeping Britain’s lights on.
Given the Government has pledged to phase out the use of coal-fired power stations by 2025 and has dramatically scaled back subsidies for renewables, there is a profound need for reliable and long-term sources of energy, in theory now to be obtained from oil and gas as well as nuclear. The sector is in a volatile state, but the distressed nature of the situation may provide some opportunities for investment.
Research Insight
Preqin 2016 Global Private Equity and Venture Capital Report
Last month private equity data provider Preqin released its 2016 Global Private Equity and Venture Capital Report, reviewing the covering the key trends and developments of last year and looking ahead to what the coming 12 months may bring. In general, the outlook is positive. Whilst some bumps in the road are anticipated, the report predicts that 2016 will be a positive year for the industry as firms continue their strong exit activity and investor appetite for the asset class continues to grow.
European fundraising
Despite current economic weakness and increasing regulatory challenges, Preqin recorded that private capital* funds in Europe raised €104 billion in the first three quarters of 2015, compared to €87 billion over the same period in the previous year. Similarly, the data suggests that the European market is showing strong signs of recovery as Europe-focused funds closed in 2015 secured €128 billion – the highest level since 2007.
In terms of fundraising by stage, European buyout vehicles dominated, collecting €44 billion in 2015 (up 45% from the previous year), with venture capital securing a total of €5.5 billion (a 32% increase from 2014). Regionally, funds investing in Western Europe and those investing across multiple regions accounted for more than 92% of total fundraising in 2015.
Source: Private Equity Online
Exit environment
There were 1,620 private-equity backed buyout exits valued at an aggregate of US$416 billion last year, which, while lower than figures from 2014, represented the second highest year for the number of exits and aggregate value since 2006. According to Preqin, trade sales have dominated as the leading exit method for the last decade, representing approximately half of all exits. Sales to other GPs and exits via IPOs followed, as the graph below demonstrates, and have been steady over the last three years.
Source: Private Equity Online
Investor demand
As per previous years, Preqin noted a trend of private equity** distributions significantly surpassing capital calls, with US$189 billion returned to investors compared with US$117 billion in capital calls as of June 2015. This steady flow of capital back to investors has been a significant factor in driving demand for the asset class, particularly for LPs looking to maintain or increase their exposure.
It also helps to put into context the responses from Preqin’s latest investor interviews, where the firm interviewed 100 LPs globally to measure investor appetite for the industry. As the graph below demonstrates, 94% of investors surveyed felt that the performance of their private equity portfolios had met or exceeded expectations. It shows an encouraging trend whereby investors have become increasingly optimistic about their private equity allocations over the last five years, with the proportion of those whose expectations had been surpassed increasing fivefold during this period.
Source: Preqin Investor Interviews, December 2015
Valuation concerns
As of June 2015, Preqin recorded US$755billion in private equity dry powder – a 9% increase from 2014. The graph below displays the ratio of year-end private equity total dry powder levels to the total capital called in the previous year between 2001 and 2014. According to Preqin, as of December 2014, dry powder was 3.2x the capital called in 2013 – the highest ratio recorded since 2010. With an abundance of cheap debt and a growing amount of dry powder available, more private equity money pursuing the same deals has intensified competition, pushing valuations to record highs.
Source: Private Equity Online
Valuations and the possible impact on returns also appears to be of increasing importance for investors worried about overpaying for deals, with 70% of LPs interviewed by Preqin listing pricing and valuations as the biggest challenge for 2016. Closely related was fund performance, as the chart below shows, with 40% of investors listing it as one of the biggest challenges – almost double that of 2014 (21%). Deal flow was another concern that 34% of investors listed, particularly whether fund managers were able to find deals at attractive entry valuations, followed by their ability to manage a successful exit (24%).
Source: Preqin Investor Interviews, December 2015
Venture capital
Last year saw a record aggregate value of global venture capital deals from over 9,200 transactions, while US$47.4 billion was raised by 312 funds. The information technology sector continued to receive the most capital, accounting for 53% (US$25 billion) of all capital raised. The report indicates that a contributing factor to the rise of tech-focused fundraising has been the growing number of ‘unicorn’ companies – tech start-ups valued at US$1 billion or more. Geographically, Europe-focused VC funds continued to gain momentum, with fundraising growing steadily from US$3.5 billion in 2012 to US$6.1 billion in 2015.
Source: Private Equity Online
Outlook for 2016
The report concludes that while the outlook is bright for private equity in 2016, the year will not be without its challenges. As evidenced above, high distribution levels have meant that investor demand in the asset class will remain strong. This is a positive development for the fundraising environment and for fund managers who will want to take advantage of the liquidity within the investor community. However, a growing stockpile of dry powder and a lack of deals available will have stimulated strong competition and inflated asset prices, and will likely make it challenging for fund managers to be able to get the most for their money over the coming year.
*Note: As of 2016, Preqin has updated its terminology. Private capital refers to the broader spectrum of private closed-end funds, including private equity, private debt, private real estate, infrastructure and natural resources.
**Distributions figure refers to private equity funds as opposed to private capital. Private equity refers to the core asset class centred on the buyout and venture capital industry, together with other closely related strategies, including growth and turnaround.