Much ink has been spilled this campaign season about the influence of Wall Street on both major party U.S. presidential candidates.
The truth behind the headlines, however, is that the top executives in at least one powerful asset class have little loyalty to political parties, and are instead bifurcating their support between Hillary Clinton for president and several Republican contenders in fiercely competitive senate races.
With Election Day fast approaching, the Debtwire Investigations team dove deep into Federal Election Commission (FEC) documents to find out which candidates are recipients of campaign contributions from distressed fund managers. An analysis of the top 50 funds, ranked by Prequin based on assets under management, shows that the C-Suite of those distressed managers who aren’t sitting on the sidelines have overwhelmingly thrown their financial support behind Clinton.
Of the 50 top funds with leaders who actually made contributions to the presidential nominees, many of them wrote checks for Clinton, including Oaktree Co-Chairman Howard Marks, Avenue Capital CEO Marc Lasry, Avenue President Sonia Gardner, and Ares Capital President Michael Arougheti.
On the flip side, the Debtwire review uncovered just two contributors in the distressed world with FEC-tracked contributions to Donald Trump. Cerberus Capital Founder Stephen Feinberg, and Wilbur Ross, the president of his eponymous firm, are the lone backers of the Republican nominee in the group.
“Hedge funds are pinatas between the parties, getting hit back and forth,” one distressed investor commented.
While all of the funds on the list declined to comment for this story, Howard Marks surprised investors in August when he dedicated a memo to clients regarding his thoughts on politics. The billionaire investor ripped Donald Trump for several economic pronouncements which Marks’ deems to be unrealistic, including those related to trade policy, immigration, and renegotiating the federal debt.
“I think it’s fair to say that she hasn’t been anywhere near as guilty as Trump of defying economic reality on the campaign trail,” Marks wrote, noting that Clinton also has shortcomings as a candidate.
In the fight for Congress, distressed heavyweights have focused much more squarely on beating back the Democrats on their attempt to reclaim the majority. For the Democratic Party to take back the Senate, it needs to net four seats if Clinton wins (because Clinton’s running mate Virginia Senator Tim Kaine would serve as the tie-breaking vote in the senate if elected) and five seats if she loses. For the Dems to take back the House, they would need a miraculous gain of 30 total seats.
“The size of donations among hedge funds titans to senate races has been consistent over the past elections,” said one political consultant. “This year is no different. These guys practice their influence outside of the campaign process.”
In the 13 Senate races that are deemed competitive, in which RealClear Politics puts the polling average differential between the two candidates at less than 14%, the financiers under the microscope mostly pivot toward the Republican candidates fighting to retain their seats.
The Senate races in Pennsylvania, North Carolina, and New Hampshire are the tightest, featuring polling margins of less than 3%. Republican candidates in Nevada and Missouri are enjoying slim polling advantages in the low single digits. And in Florida, incumbent Republican Senator Marco Rubio is now polling 6.1% percentage points ahead of Democratic challenger Patrick Murphy.
Pennsylvania is one of the most closely watched contests. Incumbent Republican Senator Patrick Toomey, an outspoken proponent of financial deregulation, is facing off against Democratic challenger Katie McGinty, a known environmental advocate. McGinty has a miniscule polling lead of just 0.2% ahead of Toomey.
Toomey has raised USD 1.8m to date for this election cycle from the securities and investment industry, the classification used by OpenSecrets to encompass money from venture capital, compared with USD 215,000 for McGinty.
Toomey, who started his career at Chemical Bank as a banker involved in currency swaps in the ‘80s, has been a fierce advocate for the finance industry. While serving on the House Banking Committee as a Pennsylvania congressman, Toomey helped lead the repeal of certain aspects of the Glass-Steagall Act, a piece of legislation that regulated the separation of commercial and investment banking operations. He has also been a vocal supporter of policies to deregulate derivatives trading.
The list of Toomey supporters reads like a who’s who of top asset managers, including Blackstone Chairman, CEO, and Co-Founder Stephen Schwarzman, Apollo Global Management Co-Founder and Senior Managing Director Marc Rowan, Apollo Co-Founder and Senior Managing Director Josh Harris, and Chairman of PIMCO Funds Brent Harris. For her part, McGinty has received contributions from Mark Gallogly, co-founder and managing principal of Centerbridge Partners. Gallogly is also a member of President Obama’s Economic Recovery Advisory Board.
For those 13 competitive races in aggregate, the securities and investment industry has contributed a total of USD 10.6m to Republican candidates to date, compared with USD 3.9m for Democratic candidates, FEC data show.
Bucking the trend, incumbent Democratic senators like Michael Bennet of Colorado and Chuck Schumer of New York are favorites among finance stars. In keeping with tradition, Bennet has raised USD 1.65m from the likes of Angelo Gordon, Avenue, Blackrock, Centerbridge and Oaktree to help him fend off the long-shot campaign of Republican challenger Darryl Glenn.
“Bennet is viewed as a friend of Wall Street, given that he worked in the industry,” one PM said, referring to the politician’s stint at Anschutz Investment Company, where he was involved in a number of restructurings.
At the top of the ticket, the line is clear. Clinton has raised USD 47.5m from the securities and investment industry to date, while Trump has raised a microscopic USD 502,000 from the industry, according to the latest filings. Those figures demonstrate a complete reversal from 2012, when the Republican nominee Mitt Romney raised more than three times as much money from the finance sector as Obama did. The Bain Capital founder racked up USD 23m of Wall Street contributions, versus just USD 6.8m for the incumbent Democratic president, according to data from OpenSecrets.
Click here to view a chart and excel file of the candidates and which Wall Street firms support them.
Distressed investors are often pigeonholed – described as “vultures” who profit from corporate pain. But in practice, the job of buying heavily discounted equity and/or debt in vulnerable companies requires sensitivity to populist concerns. As such, financial reforms, defense spending, energy policy, the fate of for-profit education, and the future of healthcare are listed as top priorities by 14 distressed portfolio managers who agreed to share their views on background.
While Debtwire’s canvass can’t directly connect the data to the issues distressed players hope to influence through donations, interviews with more than a dozen portfolio managers show that healthcare policy is one of the significant concerns for those responsible for political investment strategies.
“US healthcare is the most vulnerable to the election cycle, given the seismic shifts that could impact the industry,” said a second portfolio manager.
Whether insurance carriers will continue to pull out of the health exchange marketplace created under the Affordable Care Act (ACA) is at the crux of those concerns. National insurers UnitedHealthCare Group and Aetna are among the firms that have curbed their participation in exchanges, citing their own financial pain.
Since its inception in 2010, ACA has been engulfed in controversy, with Republicans vowing to overturn the legislation from the onset. At stake to investors is whether the program will be repealed and if so, how that will impact the cost of healthcare for individuals. It should come as no surprise that Clinton and Trump weigh in as polar opposites. Clinton, a staunch supporter of ACA, wants to expand access to families, regardless of immigration status. She also wants to double the funding for primary-care services at community health centers over the next decade.
Trump on the other hand wants to overturn the legislation. “On day one of the Trump Administration, we will ask Congress to immediately deliver a full repeal of Obamacare,” he wrote on his website.
Besides repealing the program, the self-proclaimed billionaire’s proposals seek to eliminate the individual mandate, permit any vendor to offer insurance in any state, allow individuals to fully deduct health insurance premium payments from their tax returns, and remove barriers to entry into free markets for drug providers.
The debate is at the forefront in many tight Senate races. In Pennsylvania, has repeatedly attempted to repeal the law.Democratic challenger McGinty has come out in defense of the ACA, and fight to lower copays and deductibles.
Fiscal reforms, specifically the future of the Dodd-Frank Act, are also dear to the distressed agenda, given it will impact government oversight going forward and the way in which financial institutions can trade and record profits and/or losses.
Dodd-Frank, which was enacted in 2010, is a massive and often unruly piece of law aimed at regulating financial institutions in hopes of preventing another economic collapse and subsequent bailout. One of the act’s key components is the Volker Rule, which prevents banks from owning, investing or sponsoring proprietary trading operations for their own financial gain.
Under the rules, banks aren’t allowed to hold investments in covered funds (hedge funds or private equity funds) for profit. The banks have until July 2017 to divest these legacy holdings, but an extension will likely be granted. Dodd-Frank also requires that derivatives, including credit default swaps, be cleared through a clearing house. Since the beginning, Dodd Frank has been controversial piece of legislation.
Texas Rep. Jeb Hensarling, who is chairman of the House Financial Services Committee, introduced the recently approved bill that contemplates rolling back considerable pieces. The proposal also seeks to change the composition of the Consumer Financial Protection Bureau by giving Congress more oversight and recommends banning taxpayer bailouts of financial companies.
Hillary Clinton’s platform calls for big banks and financial companies to pay a fee based on their size and risk profile. Regarding Volker, Clinton wants to close the loopholes that still allow banks to invest billions through hedge funds, which are exempt from the rule. Trump has been vocal about his distaste for Dodd Frank, calling for a complete dismantling.
Given the prominent impact the sector has had on returns this year, energy is perhaps the biggest political issue at hand for vulture investors.
Volatile energy prices created havoc for distressed investors this year, and resulted in a slew of Chapter 11 filings in the space with 75 75 E&P/Oilfield services cases in the US and Canada so far this year, according to Debtwire data. The pain isn’t over with at least 135 oil companies labeled as restructuring candidates, the data show.
For her part, Clinton is calling for cuts in billions of tax subsidiaries for oil and gas companies and switching to natural gas from coal power generation. Trump, however, is pushing for more fossil fuel drilling and few environmental regulations. He also aims to resurrect the Keystone XL oil pipeline, and wants US tax payers to share in profits. In a 22 September speech, the candidate called for deregulation of naturalgas, oil and coal production.
Energy policy as it relates to renewables, fracking and climate change also forms the foundation of a core market of the capital markets. “Some distressed guys were really burned this year by lower energy prices,” a third PM concluded. “Jobs were lost because of bets gone bad.”