02 Mar 2016

Retail to Wholesale: Super Tuesday heralds a very different phase in the US nomination contests

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Politics Insight


The American primary and caucus season has, with the elections conducted yesterday, moved in to a very different phase of the contests. Until now, in Iowa, New Hampshire, Nevada and South Carolina the competition has involved small states voting on different days and where the political objective has been less the acquisition of delegates to the nominating convention as such but the process of achieving electoral momentum.

This has been the period of so-called ‘retail politics’ in which it is possible for a candidate to secure support through a painstaking process of direct engagement with the voters in town hall meetings and individual solicitation. In Iowa, for example, Senator Ted Cruz’s ultimate victory was based on building an organisation with a team in every one of the 99 counties in that state and acquiring electoral backing through intense courtship with, in his case, Republicans who are strongly influenced by their evangelical Christian faith. In New Hampshire, the second place finish of Governor John Kasich was obtained by him holding more than 100 meetings (mostly small) across that state and relying on his performance in those events and word-of-mouth thereafter to win him backing. In states such as these, raising a large amount of money and spending it mostly on television advertising is a relatively ineffective strategy. The most striking example of this is the Jeb Bush campaign which spent a fortune in Iowa and New Hampshire but won precious few votes for it.

With Super Tuesday, the electoral dynamic moves from ‘retail’ to ‘wholesale’. It is not possible to engage in personal campaigning in eleven states simultaneously and the sheer number of town hall meetings that a candidate would need to engage in for a state the size of Texas to have any kind of serious impact is implausibly high. The results last night were shaped by two factors: ‘paid media’ (advertising) and ‘free media’ (winning the attention of those who decide on the news agenda). In other words, the race is largely fought on national television and played out in the states. Those who cannot raise the money to campaign effectively in these circumstances are very swiftly marginalised. This is how it will be for the remainder of the nominating contest, which is why a contender can be declared with some confidence to be the ‘inevitable’ nominee even though a majority of delegates in a majority of American states have not been selected and might not be for some months to come.

Has Super Tuesday rendered Hilary Clinton the ‘inevitable’ Democratic nominee?

The short answer is ‘yes’. The only qualification to that statement is if the legal difficulties that she has faced surrounding her use of a private email account to deal with material that should have only been dealt with through an official email account were to become much worse and offer the serious prospect that she might actually be charged with a felony.

Were such a meltdown to occur, which is rather unlikely but cannot be dismissed entirely, then it is unlikely that Senator Bernie Sanders, her current opponent, would be the beneficiary of her downfall. It is far more credible to imagine that Vice President Joe Biden would emerge as a ‘white knight’ for the Democrats and that those who would have served as Clinton delegates would transfer their support to him.

Putting that option to one side (although in this insane year for presidential politics one never knows what might occur), Super Tuesday has exercised disproportionate influence and has selected the Democratic nominee.

It has done so because Senator Sanders could not expand his political base beyond the young and highly educated, overwhelmingly white and almost universally very liberal, electorate that served him well in ‘retail’ states such as Iowa and New Hampshire (and to a lesser extent Nevada) but which was simply too small a constituency in much larger states with a more diverse Democratic vote.

Mrs Clinton has a virtual lock on the African-American and Hispanic Democratic electorate and does well among both centrist Democrats and older white citizens in that party as well. Put together, as that coalition was assembled in so many states last night, this strength in ‘wholesale’ politics was more than enough to ensure that she obtained an overwhelming victory. She lost only in Vermont, her rival’s home state, Colorado, Minnesota and, more surprisingly, in Oklahoma.

Senator Sanders probably has enough money in the bank to continue the contest through 15 March when another wave of states (including Florida) will vote but it would now be a huge surprise if Mrs Clinton did not do at least as well then as she did last night. For the Democrats (assuming no intervention by the FBI or the Department of Justice), the issue now is when not if she becomes the arithmetical nominee.

Has Super Tuesday ensured that Trump is the ‘inevitable’ Republican nominee?

The normal rules of politics do not appear to apply to ‘the Donald’. In the retail politics states of Iowa and New Hampshire he did not engage in one-on-one campaigning but instead relied on his name recognition to hold wholesale politics-style mass rallies instead. He also benefited from the division of the Anti-Trump vote between four remaining alternative contenders. The acid test of Super Tuesday for the Republicans was whether the sustained fire that the front-runner has come under would have any impact and whether he could continue to run a divide and rule campaign.

The answer would appear to be that the hostile attention of his opponents may have had an effect but it appears to have arrived too late and that, if anything, divide and rule is becoming entrenched. The Super Tuesday results were close to optimal for the populist billionaire. He won the most states. Better still, Senator Cruz prevailed in his home state of Texas and neighbouring Oklahoma and beat Senator Rubio for second place in the rest of the Deep South, while Senator Rubio recorded a win in the Minnesota caucuses and came very close to an upset victory in Virginia while arriving an albeit distant second to Mr Trump in the elections held outside of those most southern states. Governor Kasich obtained the very small consolation prize of a respectable showing in Vermont but otherwise had little to show for his efforts. He will come under considerable pressure to stand down before the next major wave of contests on 15 March 15 which could assist Senator Rubio a little but is unlikely to transform the competition. If both Senators Cruz and Rubio are still full participants in the battles to come in two weeks’ time then the chances are that Mr Trump will be strong enough to defeat them.

The demographics of the Republican nomination are becoming clearer. More affluent party voters who are motivated predominantly by economics favour Senator Rubio over Senator Cruz but with a sizeable minority willing to endorse Mr Trump. Socially conservative mainstream Republicans, by contrast, naturally align with Senator Cruz over Senator Rubio but with again a significant minority prepared to accept the Trump message.

Among those who may be described as anti-establishment, however, there is absolutely no contest whatsoever. This section is massively in favour of Mr Trump. His demographic is, with the sole exception that it is also white, the polar opposite of that which has been acquired by Senator Sanders on the Democratic side of this nomination process, in that it is relatively poor, has comparatively low levels of educational attainment, does not usually take an intense interest in politics and is much more likely to be aged in the 50s and 60s than 20s and 30s.

Mr Trump is not quite an ‘inevitable’ nominee to the degree that Mrs Clinton can be classified. The geography of the race will start moving in to less favourable terrain where if Senator Rubio could cast himself credibly as the sole plausible alternative to him then he could defeat him. But that does not seem to be occurring. There are few reasons for Senator Cruz simply to disappear. The next two weeks or so will be decisive. Unless something alters the dynamics of this nomination struggle then Mr Trump will be the Republican nominee, an outcome that was unimaginable 12 months ago.

Tim Hames, Director General, BVCA


Research Insight

Spotlight on LBO performance

Given recent Insight pieces on the performance of small and mid MBOs, it seems only right that we also consider the performance of large buyout funds (LMBOs), which for the purposes of the BVCA’s performance benchmarks we class as funds which focus on transactions of greater than £100 million of equity value.

In a similar way to the small MBO performance that we studied a few weeks ago, the total LMBO cohort has an extremely impressive pooled performance, standing at 14.3% to the end of 2014 on a since-inception basis.

One key difference between the performance of the two cohorts, however, is in terms of the spread of performance. The inter-decile range of LMBO performance stood at 33.5% to the end of 2014, nearly double that of the small MBOs. This does mean that the top decile performance is below that of both SMBOs and MMBOs – though a since-inception IRR of 34.2% is still highly impressive – but it also offers some measure of protection on the downside.

In fact, LMBOs are the only cohort in the BVCA’s performance benchmarks that have positive returns for the bottom decile of performers – even the funds that do least well in performance terms were still producing a net IRR of 0.7% to the end of 2014.

One thing that is worth pointing out about this cohort is that while it is relatively small in terms of number of funds (indeed, the BVCA has only 47 post-1996 LMBO funds in our performance data set), it is, as you might expect given the commensurately larger size of transactions, the dominant player in terms of capital raised. As of the end of 2014, total capital raised (for post-1996 funds) stood at £137,408 million out of a total of £205,407 million for all post-1996 funds. We should also note that this number will be an underestimate of the total capital raised – the BVCA only collects data from its members who are managing UK-based funds in the UK, and therefore some global funds which have significant UK presence and UK investment will not be included in our performance data.1

Of this capital raised, our figures show £110,651 million has been drawn down from investors, with £114,937 million having already been returned, giving a DPI multiple of 1.04. In addition to this, there is still a significant amount of residual value in these funds – nearly £60 billion – which gives a TVPI for these funds of 1.57. Given the weight of capital in these LMBO funds, it is unsurprising that they comprise the bulk of the residual value of all funds in the BVCA data set, as we can see below.

Going forward, we would expect this strong performance to continue. We are picking up signs that activity at the larger end of the market continued to be strong through 2015 – a trend that we believe will show when the BVCA publishes our next data analysis in May – and the potential for strong, consistent returns will continue.


1 Though they will be captured in our investment activity data.


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