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Covid-19 Diligence Briefing

Our briefing for Friday May 7, 2021:

  • In the United States, President Joe Biden reflected on the lower than expected job growth totals released on Friday noting it reveals the economy is still struggling to recover from the coronavirus pandemic. The Labor Department’s latest numbers for April revealed that 266,000 jobs were added with the unemployment rate rising to 6.1%. Dow Jones estimates before the numbers were released had been for close to one million jobs created and an unemployment rate of 5.8% “This month’s job numbers we are on the right track,” said President Biden. “But we still have a long way to go. My laser focus is on growing the nation’s economy and creating jobs. My laser focus is on vaccinating, and my laser focus is on one more thing: making sure that hard working people in this country are no longer left out in the cold.”  President Biden rejected the idea that federal unemployment benefits were removing the incentives for people to return to the labour force.
  • Bloomberg is reporting one of Canada’s largest airline carriers is calling on the federal government to lay out a plan for reopening its borders as vaccinations progress. Air Canada’s CEO Michael Rosseau said it’s now “essential” for officials to follow the United States in easing rules that have stopped most air travel. “Starting with replacing blanket restrictions with science-based testing and limited quarantine measures where appropriate, Canada can reopen and safely ease travel restrictions as vaccination programs rollout,” Rosseau said. Elsewhere in the country, Nova Scotia set another single day record with 227 new COVID-19 cases on Friday and the province’s chief medical officer noting there were “more than 200 other cases” that needed to be entered into the system. With now more than 1,400 active cases in a province of close to one million people, government is extending school closures, tightening border restrictions, changing isolation requirements for rotational workers and putting limits on shoppers.
  • In the United Kingdom, scientists believe people should still work from home if they can even after the coronavirus lockdown is lifted in June. Prime Minister Boris Johnson said the country remains on track to lift all legal limits on social contact by June 21st after a dramatic drop in cases in recent months thanks to lockdown measures and a ramped up vaccination program. Scientists' concern is that encouraging people back to work in office settings would risk a resurgence of the virus when many other countries in the world, such as India, are still battling dangerous levels of infections.
  • China’s Sinopharm vaccine became the first inoculation developed by a non-Western country to receive emergency approval from the World Health Organization (WHO). The Sinopharm vaccine has already been given to millions of Chinese citizens and elsewhere around the world, including the United Arab Emirates. The WHO had only granted emergency approval to vaccines made by Pfizer, AstraZeneca, Johnson & Johnson and Moderna. The green light from the WHO is a guideline for other national regulators that a vaccine is safe and effective and also means China’s vaccine can be used in the global Covax program, which aims to provide about two billion vaccines to developing countries.
  • Multiple media outlets are reporting the calls are getting louder in Japan to cancel the upcoming Tokyo Olympics as the government prepared to extend the state of emergency in the host city. A Change.org petition titled “Cancel the Tokyo Olympics to protect our lives” had gained more than 200,000 supporters by late Friday afternoon – Japan time. Prime Minister Yoshihide Suga and his government are determined to press ahead with the Olympics after cancelling last summer due to the pandemic and believes it would be a sign of victory over the virus. Not helping the matter this week is learning Pfizer will donate vaccinations to all incoming athletes while Japan has only vaccinated less than 2% of its total population.
  • Australia’s international borders might be closed longer than expected, according to their trade minister, which would be a further blow to the airline and tourism industries. Speaking with Sky News on Friday, Trade Minister Dan Tehan said his best guess when Australia’s borders might reopen would be the second half of 2022. The Australian government had hoped to have its vaccination drive of its citizens completed by October, but that timeline was pushed into early 2022 due to medical complications tied to the AstraZeneca inoculation. Australia’s borders have been closed since early in 2020 due to the pandemic and as noted in Thursday’s Castle Hall COVID-19 Diligence Briefing, had to halt its quarantine-free travel with New Zealand via New South Wales on news of a new COVID-19 case that was stumping local health officials.

Covid-19 – Due Diligence And Asset Management

Wall Street Giants Get Swept Up by India’s Brutal Covid Wave

Brief : About 8,300 miles east of Wall Street, on a stretch of Bangalore’s Outer Ring Road, sits what was once the heart of the global financial industry’s back office. Before the pandemic, this cluster of glass-and-steel towers housed thousands of employees at firms like Goldman Sachs Group Inc. and UBS Group AG who played critical roles in everything from risk management to customer service and compliance. Now the buildings are eerily empty. And with case counts soaring across Bangalore and much of India, work-from-home arrangements that have sustained Wall Street’s back-office operations for months are coming under intense strain. A growing number of employees are either sick or scrambling to find critical medical supplies such as oxygen for relatives or friends. Standard Chartered Plc said last week that about 800 of its 20,000 staffers in India were infected. As many as 25% of employees in some teams at UBS are absent, said an executive at the firm who spoke on condition of anonymity for fear of losing his job. At Wells Fargo & Co.’s offices in Bangalore and Hyderabad, work on co-branded cards, balance transfers and reward programs is running behind schedule, an executive said.

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Hedge Funds Boost Shorts on European Bonds to Cushion Rate Risks

Brief: Fears of rising interest rates and warnings over bond valuations have made junk- and investment-grade rated bonds a popular short bet among hedge funds. Speculators are predicting fresh pain for the bond market, especially for longer-dated bonds with sovereign yields being tipped to rise due to an increase in inflation forecasts. This comes amid warnings from market experts regarding the “over-extended” valuations of CCC-rated bonds, the riskiest class of debt. Global high-yield bonds worth as much as $55 billion are on loan to traders seeking to profit if prices drop, according to data from IHS Markit Ltd., by a narrow margin the largest balance since the fall of 2008. This compares with about $35 billion at the start of the year. In the euro-denominated investment-grade market, roughly $30 billion equivalent of bonds have been borrowed, the largest loan balance since early 2014. “I would expect that list to get bigger as spreads tighten and/or people get worried about rates rising,” said Tim Winstone, a portfolio manager at Janus Henderson, which oversees 294 billion pounds ($409 billion). “At these levels of valuations, I’m not surprised more people, such as hedge funds, are setting shorts.”

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Tech Sector M&A Activity Hit Record High in Q1

Brief: A new report from technology-focused investment bank ICON Corporate Finance, has revealed record-breaking tech deal activity in the first quarter of 2021, up 28 per cent on Q1 2020, with 268 deals announced.  Evidencing resilience within the sector and a huge appetite for Vertical and Enterprise Software organisations, ICON believes M&A activity is yet to see its peak, and could easily surpass the UK total of 711 tech M&A deals completed last year. Digital transformation, fast-tracked by lockdowns across the world, has created a plethora of new digital solution providers that are grabbing the attention of overseas PE backed acquirers. Among these, UK Vertical Software providers are proving flavour of the month as PE houses look to buy, build and eventually sell. Corporate acquirers too are playing their part in an effort to gain an edge over rivals or to provide new revenue streams. The result has been valuations rising to near record levels. ICON believes that Digital Transformation across all industry sectors, including Vertical and Enterprise Software will continue to accelerate, boosted in no small part by appetite from overseas investors. Last year a record-breaking 48% of all UK deals involved cross-border backing, a figure which could yet be surpassed in 2021. 

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Economy Lost 207,000 Jobs in April, Unemployment Rate Rises, Statistics Canada says

Brief: Canada's labour market lost 207,000 jobs last month as a spike in COVID-19 variant cases led to renewed public health restrictions and raised concerns about longer-term economic consequences from the pandemic. The unemployment rate rose to 8.1 per cent from 7.5 per cent in March, Statistics Canada reported. It would have been 10.5 per cent had it included in calculations Canadians who wanted to work but didn’t search for a job. Ontario led the way on losses regionally with a drop of 153,000, and British Columbia witnessed its first decrease in employment since a historic one-month plunge in the labour market in April 2020. Nationally, losses were heavier in full-time than part-time work, with retail and young workers hit hardest as a resurgence of the virus and its variants forced a new round of restrictions and lockdowns. With lockdowns continuing into May, CIBC senior economist Royce Mendes said more losses this month are possible. Leah Nord, senior director of workforce strategies with the Canadian Chamber of Commerce, said the latest setback in the labour market will carry a long-term impact on the workers and businesses affected, particularly in high-touch sectors that are falling further behind.

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Abu Dhabi’s Mubadala Posts Record Annual Income and Investment

Brief: Abu Dhabi state investor Mubadala's total income rose nearly 36% to a record high last year, driven by growth in its public equities portfolio and funds while it accelerated investment during the COVID-19 pandemic. Mubadala Investment Co posted total comprehensive income attributable to the owner of 72 billion dirhams ($19.60 billion), up from 53 billion dirhams a year earlier, it said in a statement. Comprehensive income includes net income and unrealised gains such as hedges on financial instruments or foreign currency transactions. Assets under management rose 4.8% to 894 billion dirhams. It also invested 108 billion dirhams of capital in 2020, the most it has invested in a single year. Deals included 4.3 billion dirhams in Reliance Industries-owned Jio, 2.7 billion dirhams in private equity investor Silver Lake and 7.5 billion dirhams through partnerships with CVC, Citadel, iSquared Capital and Apax Partners. "We navigated our portfolio through the dramatic macroeconomic decline of early 2020 and decided to accelerate the pace of our capital deployment, ending the year with record profit and growth," said Mubadala CEO Khaldoon al-Mubarak.

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The Pandemic Caused a ‘Major Step Back’ For Women in Financial Services

Brief: For women in the financial services industry, the Covid-19 pandemic exacerbated the challenges they face in their jobs, resulting in a significant exodus from the field.  In a survey conducted by Accenture, a global technology and business consulting firm, 29 percent of women working in financial services said they left their job either permanently or temporarily during the pandemic, while 34 percent of women who hadn’t left their jobs said they were considering leaving their current firms. Almost half of the women who were considering leaving their firms held entry-level positions, meaning they have fewer than five years of industry experience. In an already male-dominated sector, improving gender diversity is a priority for many firms, but current initiatives may not have been effective enough to combat the pandemic’s toll on non-male employees. Across all career levels — senior, supervisory, and entry-level — over half of the women in the survey said they faced “increased pressure” as the main caregivers in their households, a dynamic they attributed to the pandemic. Among the most affected by the pandemic were executive and senior management respondents, 59 percent of whom believed the pandemic had adversely affected their career progression. As Gema Zamarro, a professor at the University of Arkansas, senior economist at the University of Southern California Dornsife Center for Economic and Social Research, and mother of two kids, summed it up: “You’re doing three jobs: mom, teacher, and your own work.” 

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Thursday May 6, 2021:

  • In the United States, New York City Mayor Bill de Blasio announced the intention to offer the Johnson & Johnson COVID-19 vaccine to any tourist that visits in a bid to boost tourism upon reopening. Mayor de Blasio said the city needs state approval to vaccinate non-New Yorkers, but plan to begin the process as soon as if/when they are granted that approval. The plan would be to install mobile COVID-19 vaccination units in various tourist attractions across the city such as Times Square, Brooklyn Bridge Park and the Highline.

  • In Canada, health experts in Ontario believe the province won’t be able to break out of its stay-at-home order on May 20th as the case count is still too high. On Thursday, Ontario reported 3,424 new cases, although the number of patients in hospital and intensive care on ventilators dropped for the first time in weeks. Health experts say lessons need to be learned from previous lockdowns and dates shouldn’t be used for when specific orders should end, instead case count rates. For instance, one health expert said new COVID-19 cases need to drop significantly to below a rate of 20 per 100,000 per week. As of May 1st, Ontario’s rate was 166.6.

  • The Bank of England is looking extremely optimistic on the outlook of the United Kingdom economy – expecting the biggest surge in household spending since 1988. Central bank officials, led by Governor Andrew Bailey, said they expect consumers to use up 10% of the savings they incurred while in lockdown, double the pace of what was previously forecasted. The central bank also sees the UK’s economic output recouping their losses by year’s end, instead of sometime early in 2022. The success of the UK’s vaccination campaign has driven down case numbers and death rates to allow the government to stay on track with full reopening of the economy thus far, with the last stage set to take place in June.

  • In Germany, Chancellor Angela Merkel has pushed back against the United States and the Biden’s Administration’s proposal to waive patent protections for COVID-19 vaccines. A German government spokeswoman said Thursday via email that America’s plan would create “severe complications” for the productions of vaccines. “The limiting factor for the production of vaccines are manufacturing capacities and high quality standards, not patents, “said the German government spokeswoman. The United States, Germany and other countries will take up the debate via the World Trade Organization but given Germany’s stance it is looking unlikely the American proposal will be pushed through as all 164 WTO members must agree on the decision to waive patent protections.

  • The Associated Press is reporting the sales of Dubai’s upscale properties soared 230% in the first quarter of 2021, compared to the same period last year. A record-breaking 90 properties, worth at least 2.7 million USD each, changed hands in April, beating the 84 sales the month before. Only 54 such transactions occurred in 2020. “Tons of people are coming in and buying multimillion dollar properties on the spot, with no due diligence time whatsoever,” said Matthew Cooke, a partner at consultancy Knight Frank. Outside of a tourist influx surge in cases in January, the United Arab Emirates and Dubai have fared out relatively well with its young population and low mortality rates and has positioned itself as the world’s pandemic-friendly vacation spot.

  • Australia has reinstated COVID-19 restrictions in the Sydney area after a mysterious new case appeared. As mentioned in Castle Hall’s Wednesday COVID-19 briefing, a man in his 50s became the first reported local transmission case in New South Wales in more than a month. Further testing has determined the man was infected with the variant first discovered in India and genomic sequencing had linked the case to a returned traveller from the United States, but with no clear transmission path between the two people. The case has baffled local health officials. As a result of the new case, New Zealand has halted quarantine-free travel to and from New South Wales while authorities investigate further. The New Zealand-Australia travel bubble had opened less than a month ago.

Covid-19 – Due Diligence And Asset Management

Vendors Get Tough With U.S. Retailers After Big Losses

Brief : As U.S. retailers celebrate a boom lifting one of the pandemic’s hardest-hit sectors, scars left by a year of bankruptcies and delayed vendor payments could threaten to undermine their recovery -- just as the crucial back-to-school shopping season begins. After watching their receivables mount last year, vendors of apparel and other goods demanded change. In order to ship, many began requiring payment upon delivery of the goods or even in advance, according to people with knowledge of the demands, which were made of distressed and healthy clients alike. For merchants, that’s a big cash drain at a time of great uncertainty. The shift comes after retailers spent much of last year delaying payments to preserve cash. Such maneuvers have long been used by struggling chains, but amid the pandemic, even more stable merchants like Macy’s Inc. and Gap Inc. followed suit. An analysis of company financial data showed such buyers took at least two weeks longer to pay their suppliers than the same period the prior year. Vendors are “shell-shocked” after a string of Covid-era bankruptcies left them with large losses, and more concerned about guaranteeing they’ll be paid, said Perry Mandarino, head of restructuring and investment banking at B. Riley. “Late payments are not being tolerated,” Mandarino said.

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Covid, Cyber, Compliance and ESG Top Risk Concerns for Financial Services Sector, says New Allianz Report

Brief: Financial institutions and their directors have to navigate a rapidly changing world, marked by new and emerging risks driven by cyber exposures based on the sector’s reliance on technology, a growing burden of compliance, and the turbulence of Covid-19, according to a new report Financial Services Risk Trends: An Insurer’s Perspective from Allianz Global Corporate & Specialty (AGCS). At the same time, the behaviour and culture of financial institutions is under growing scrutiny from a wide range of stakeholders in areas such as sustainability, employment practices, diversity and inclusion and executive pay. “The financial services sector faces a period of heightened risks. Covid-19 has caused one of the largest ever shocks to the global economy, triggering unprecedented economic and fiscal stimulus and record levels of government debt,” says Paul Schiavone, Global Industry Solutions Director Financial Services at AGCS. “Despite an improved economic outlook, considerable uncertainty remains. The threat of economic and market volatility still lies ahead while the sector is also increasingly needing to focus on so-called ‘non-financial’ risks such as cyber resilience, management of third parties and supply chains, as well as the impact of climate change and other Environmental Social and Governance (ESG) trends.”

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‘Significant Pushback’ Expected as Biden Backs Suspending Patents on Covid Vaccines

Brief: Many are predicting a bright future for biotech firms involved in the production of Covid-19 vaccines as they are rolled out across the globe, but US President Joe Biden’s proposal that vaccine producers should temporarily waive patent protection has dampened this rosy outlook and is likely to result in significant pushback from firms in the sector. On Wednesday (5 May), Biden announced his support for waiving intellectual property rights for Covid-19 vaccines, bowing to increasingly pressure from within his own administration and other nations to help the rollout of the vaccine in less developed countries, such as India and South Africa. The news sent some pharmaceutical stocks plummeting. Moderna's stock was down 6.2% to $163 following the announcement while the Novavax share price fell 5% to $172, though Pfizer's stock price dropped only slightly. Healthcare shares in China were also affected by the news, with the CSI Health Care index falling nearly 4% to 15,727 points. Industry experts speculate that the decision was prompted in no small measure by Pfizer's Q1 earnings update, announced the same day, where it revealed it had recorded vaccine sales of $3.5bn in the first quarter of the year and expects full year sales of $26bn. As Jim Wood-Smith, CIO private clients & head of research at Hawksmoor Investment Management puts it, this situation raises "profound moral and financial problems".

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Sculptor Hedge Fund Rebounds With First Inflows Since 2014

Brief: Sculptor Capital Management’s flagship hedge fund is finally beginning to turn around. The firm’s multistrategy vehicle scored its first quarter of net inflows since 2014, marking the end of years of client withdrawals that totaled about $30 billion. The fund and its associated portfolios attracted a net $78 million of fresh cash, bringing total assets in those products to $10.9 billion as of March 31, the firm said in a statement Wednesday. The results, achieved in the last months of Chief Executive Officer Robert Shafir’s tenure, are a vindication of his promise and efforts to reverse the asset bleed. Last month, Chief Investment Officer Jimmy Levin succeeded him. Addressing the hedge fund inflows on Sculptor’s earnings call Thursday, Levin said that the new cash came from a broad range of investors. “It’s from all types of allocators all around the world: consultant-advised, non-consultant advised, institutional, non-institutional,” he said. “It’s been a bit of everything, which is why we described it as feeling healthy.”

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SEC Chair Gary Gensler Hones in on Trading Behemoth Citadel

Brief: Citadel Securities’ outsize role in the capital markers has gotten the attention of regulators. Gary Gensler, the new chairman of the Securities and Exchange Commission, honed in on Citadel in prepared remarks to be delivered to a Thursday hearing of the House Financial Services Committee, which is looking into the GameStop trading fracas in January. The GameStop debacle resulted in sharp price hikes in so-called meme stocks, leading to restrictions on trading by broker dealers and resulting in losses among hedge funds and retail investors alike. In the process, the trading frenzy also raised questions about market structure and those who benefit from it. Citadel Securities, a market maker, emerged as a key player in January’s market events because of its acknowledged role in buying order flow from Robinhood, a retail trading app, whose customers sent GameStop shares temporarily soaring from $20 to $480.   Payment for order flow is a controversial practice and has been banned in Canada and the U.K. In the U.S., Robinhood has already settled one SEC enforcement action on the practice.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Wednesday May 5, 2021:

  • The United States and President Biden’s administration have backed waiving intellectual property protections for COVID-19 vaccines as developing countries are struggling vaccinating their citizens. “This is a global health crisis, and the extraordinary circumstances of the COVID-19 pandemic call for extraordinary measures. The Administration believes strongly in intellectual property protections, but in service of ending this pandemic, supports the waiver of those protections for COVID-19 vaccines,” United States Trade Representative Katherine Tai wrote in a statement. The wavier, proposed by Africa and India, via the World Trade Organization (WTO), could remove obstacles for ramping up COVID-19 vaccine production in developing countries. WTO decisions are based on consensus, so all 164 members must agree to temporarily ease the rules protecting intellectual properties.
  • In Canada, the regulatory health body has given the green light to Pfizer’s COVID-19 vaccination for those over the age of 12 on Wednesday. After reviewing data submitted by Pfizer last month, Health Canada have determined the inoculation was safe to use on 12-to-15 year-olds after the previous recommendation was 16 years of age. Pfizer is the only vaccine in Canada to be authorized on people this young. As of right now, Health Canada has only recommended the AstraZeneca, Johnson & Johnson and Moderna vaccines for those over the age of 18. Shortly after the Health Canada announcement, Alberta Premier Jason Kenney was the first to make a move, saying the province will accelerate their vaccine rollout stating all Albertans aged 12 and above can be vaccinated against COVID-19 as of Monday. As noted earlier in the week in Castle Hall’s COVID-19 diligence briefing, Alberta has the highest number of COVID-19 cases per capita in the country, along with the United States.
  • In the United Kingdom, the entire Indian delegation at the G7 Summit being held in London have to self-isolate after two cases of COVID-19 were detected. India, although not part of the G7, were invited as guests. India was on the UK’s “red list” meaning travel from there is banned, but some jobs are exempt including representatives of a foreign country, which was the case here. India’s foreign minister Subrahmanyam Jaishankar had met with Home Secretary Priti Patel in person on Tuesday but has now pulled out of all face-to-face meetings. Elsewhere in the UK, Vaccines Minister Nadhim Zahawi announced the government has provided an extra £29.3 million in funding to help fast-track new vaccines that will help the country’s fight against new coronavirus variants.
  • The World Health Organization (WHO) has reported that India accounted for nearly half of the worldwide COVID-19 cases in the past week. In their weekly report, the WHO said India accounted for 46% of the global coronavirus case count and 25% of global deaths. Unfortunately, the death toll is only going to get worse for the country of over 1.3 billion people with some research models forecasting more than double the current levels. A model from the University of Washington suggests India could have over one million deaths due to COVID-19 by the end of July.
  • The Singapore-Hong Kong travel bubble is again up in the air. Bloomberg is reporting Singapore’s government is assessing any potential changes to the planned travel bubble, set to start on May 26th after a flareup of COVID-19 infections triggered fresh restrictions in the city-state. Singapore announced on Tuesday a three-week crackdown, which will see social gatherings limited to no more than five people and tightening of borders. The air travel corridor between two of South Asia’s economic hubs has been delayed several times since late 2020 due to infection outbreaks in both regions.
  • Australia’s largest state is scrambling and on alert after a man tested positive for COVID-19 on Wednesday. The state of New South Wales (NSW), home to the city of Sydney, said the man in his 50s had not recently returned from overseas, didn’t work in quarantine and had no contacts with the hospital system. On Wednesday evening, NSW Health revealed fragments of the coronavirus had been detected in an inner west sewer network, prompting a call for tens of thousands of Australians to monitor for symptoms. Australia is well known since their large outbreak in Melbourne last summer to implement strict circuit-breaker style lockdowns with only single digit cases in order to stop the spread of the virus.

Covid-19 – Due Diligence And Asset Management

Economic Uncertainties Top of Fund Managers’ Concerns, Finds Funds Europe Survey

Brief : Uncertainty about the speed and sustainability of the economic recovery are at the forefront of industry concerns, Funds Europe research shows. The finding comes at a time when firms are designing strategies for growth and innovation after the Covid-19 pandemic. The research, conducted in association with Caceis, ranges cross many themes in asset management.  We found that decision makers also feel challenged by the continuing pressure of adapting to regulations, for example rules to do with ESG.  Technology is also a pain point, with managers feeling a need to redesign technology ‘stacks’ and communication interfaces because they want to fulfil the digital needs of the funds industry for current and future generations. The survey had a total of 172 responses from investment fund professionals and was conducted online during February 2021. The report confirms that ESG and climate change is moving to the forefront of the regulatory and policy agenda in Europe. As a component of the European Commission’s Sustainable Finance Action Plan, the Sustainable Finance Disclosure Regulation (SFDR) requires fund managers, financial advisers, and some other categories of regulated firms with activities in the EU, to disclose information on ESG implications of their investment strategies to investors.

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FCA Data Breach Reports Down 30 Per Cent Despite UK Cyber Incidents Increasing by 56 Per Cent

Brief: Kroll, a provider of services and digital products related to governance, risk and transparency, has revealed the number of data breaches reported to the FCA fell by 30 per cent between 2019-2020. This is a direct contradiction to Kroll’s own data which, looking at all industries, showed a 56 per cent average rise in incidents over the same timeframe, with the financial services industry being slightly above that average.  Freedom of Information data obtained by Kroll from the FCA shows that the number of reportable cyber incidents where company or personal data was potentially compromised or breached dropped 30 per cent to 76 in 2020, compared to 108 during the same time period in 2019.  In reality, the number of data breaches is expected to be far higher, with Kroll’s proprietary data showing that during the same period the overall number of incidents impacting UK organisations rose 56 per cent, leading to an increase in consumer notifications of more than 41 per cent when compared to 2019.   This disparity between official FCA statistics and the reality of the current cyber threat landscape means the increase in the sophistication and volume of attacks is in danger of going unaddressed, and is likely to be linked with changes to data breach reporting as a result of GDPR.

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Small Businesses COVID-19 Relief Program Runs out of Money

Brief: The program, which has run out of cash and refunded by Congress twice before, was scheduled to expire May 31. It’s not yet known if lawmakers will approve another round of funding. The SBA said in a statement it will still fund applications that have been approved. New applications made through Community Financial Institutions, which are financial lenders that serve underserved communities, would also be funded. More than half the loans and nearly a third of the loan money were distributed this year. The average loan size was $46,000, less than half the $101,000 average loan in 2020. That is a sign that smaller companies unable to get loans last year were now getting funding. Companies have been drawn to the loans because they promised forgiveness if the money is used for payroll and other essentials. But, while the PPP helped save many companies devastated by the pandemic, the Biden administration has estimated that more than 400,000 U.S. businesses have permanently closed due to the virus.

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Fed’s Evans Says Risk of Upward Inflation Spiral is Remote

Brief: U.S. inflation is unlikely to get out of control despite the unprecedented government spending that’s been authorized in response to the coronavirus pandemic, Federal Reserve Bank of Chicago President Charles Evans said. “I think the risk of this scenario is remote,” Evans said Wednesday in remarks prepared for a virtual speech. The Chicago Fed chief, who has long been one of the central bank’s biggest worriers about inflation being too low, was responding to critics of the Biden administration’s fiscal programs, which include not only Republicans but also some economists associated with the Democratic party. Most of Evans’s colleagues at the Fed, including Chair Jerome Powell, have pushed back forcefully against such criticisms in recent months. Instead, they’ve highlighted the importance of the fiscal support in speeding the labor market back to full employment. “With these developments, my outlook for growth and unemployment is much more positive today than it was just a few months ago,” Evans said, referring to the measures.

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After a Lackluster Year, Bridgewater Gains Some Ground

Brief: Bridgewater Associates’ main strategies posted strong gains in April, putting them solidly in the black for the year. The strong monthly performance also capped a double-digit gain for the 12 months following the sharp losses Bridgewater suffered at the beginning of the pandemic. Bridgewater’s flagship Pure Alpha macro strategy, sometimes referred to as PA 18 Percent, was up 5.34 percent in April and 4 percent year-to-date, according to a person familiar with the results as well as a private database. PA 12 Percent, which takes on less risk than the main Pure Alpha strategy, was up 3.5 percent for the month and 2.8 percent for the year. Pure Alpha has now posted a 14.23 percent gain over the past 12 months. All Weather, the firm’s beta strategy, was up 4.38 percent in April and 1.35 percent year-to-date. It was also up 18.81 percent over the past 12 months. Bridgewater, the world’s largest hedge fund firm which is headed by Ray Dalio, generally points out that clients employ Pure Alpha as an overlay strategy, placing it on top of the benchmark of their choosing.  For example, in the 12 months through April 30, the S&P 500 was up 47.7 percent, while Pure Alpha was up an additional 14.23 percent.

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Worldwide Venture Investments Soared by 94 Per Cent in Q1 2021 to All-Time High of USD125bn

Brief: For the first time in history, global venture investments surpassed USD100 billion in Q1 2021. According to the research data analysed and published by Sijoitusrahastot, worldwide VC funding in Q1 2021 rose by 94 per cent YoY to USD125 billion. During the period, two unicorns on average were created daily, raising the quarterly total to 112. Based on a CNBC report citing Ernst & Young, VC funding in the US during the quarter hit USD64 billion. It was the highest quarterly figure on record, and it was equivalent to 43 per cent of total VC funding raised in 2020.  Late-stage funding dominated the global VC market accounting for 68 per cent of the total. The segment, together with technology growth, soared by 122 per cent to USD85.6 billion.  Some 79 per cent of the funds went into rounds worth at least USD100 million, up from 63 per cent in Q1 2021. Early-stage funding shot up by 63 per cent YoY to USD35.5 billion. Seed and angel investment held steady at USD4.1 billion while acquisitions rose by 44 per cent YoY to 631 deals worth USD57.1 billion.  In Europe, total funding rose by 130 per cent YoY from USD9.3 billion to a record USD21.4 billion. Late-stage and technology funding surged 202 per cent to USD14.3 billion. Early-stage funding rose by 62 per cent YoY to USD5.8 billion. There were a record 54 rounds worth at least USD100 million as well as two billion-dollar rounds by Klarna and Cazoo. 

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Tuesday May 4, 2021:

  • The United States’ Food and Drug Administration (FDA) is preparing to authorize the use of the Pfizer COVID-19 vaccine for adolescents between the ages of 12 to 15. The news was first reported by the New York Times on Monday, citing officials familiar with the FDA’s plans. Pfizer noted in March that the vaccine proved to be safe, effective, and produced robust antibody responses to those aged 12-15 in a clinical trial. The Pfizer vaccine has already been cleared in America for people aged 16 and above. Staying on the vaccine front, the White House administration has stated they need to add more flexibility to their current system and informed states on Tuesday they can no longer carry over unordered doses to their weekly COVID-19 vaccine allocations, and that unused doses will instead be shifted to states with greater demand.

  • In Canada, Prime Minister Justin Trudeau and his chief public health officer were kept busy during their Tuesday news briefing trying to defend/explain the National Advisory Committee on Immunization (NACI) latest recommendations. On Monday afternoon, NACI said vaccines such as the AstraZeneca and Johnson & Johnson were not the “preferred” products due to their efficacy and safety concerns compared to Moderna and Pfizer vaccines. NACI also said people might want to wait for the Moderna and Pfizer vaccines, when faced with a choice. Prime Minister Trudeau tried to get the vaccine train back on the tracks by noting “make sure you get your shot, when it’s your turn. We are continuing to recommend to everyone get vaccinated as quickly as possible so we can get through this.” The prime minister also noted he had no regrets taking the AstraZeneca COVID-19 vaccine a number of weeks ago to protect his family and those that work around him. 

  • In the United Kingdom, a leading epidemiologist has stated recent data and rates of infection are “very encouraging” and though a third wave of infections is possible in late summer/early autumn, it is unlikely to overwhelm the healthcare system. Speaking on BBC radio, Professor Neil Ferguson, of Imperial College London, and who advised the government during the beginning of the pandemic, said the concerns he and his team had about a late summer or early autumn COVID-19 wave were “diminishing”. Dr. Ferguson also noted it was essential the UK rolls out booster doses once they have finished vaccinating the entire adult population (expected to be finished late in the summer) to protect against variants of concern. 

  • In Germany, the government agreed on Tuesday to ease restrictions on people who are either fully vaccinated or have recovered from COVID-19. Under the new rules, those who are fully vaccinated or have recovered from COVID-19 will no longer have to have a negative test to go shopping, get a haircut or visit tourist attractions. They will also be exempt from a night-time curfew and be able to meet in private without restrictions. The decree must now be approved in the lower and upper houses of parliament and could be in effect as early as this weekend. The proposed law is risky with people believing giving special freedoms to some will lead to social tensions when not everyone has received the opportunity to be vaccinated. As of Tuesday, only 8% of Germany’s population has received two doses of the vaccine with around 28% receiving their first. 

  • Hong Kong authorities have paused their plans to make COVID-19 vaccines mandatory for foreign domestic workers after human rights groups criticized the move as being discriminatory. After a domestic worker from the Philippines tested positive for a COVID-19 variant last week, Hong Kong authorities made the move that all 370,000+ foreign domestic workers in the city would have to be tested before May 9th and that all workers would need to get vaccinated before renewing their employee contracts. Hong Kong leader Carrie Lam said the following on Tuesday: “I have asked the secretary for labour to review the whole policy, and to consult advisers and consulates for the countries where domestic workers primarily come from as to whether compulsory vaccinations can be done.” The government still plans to move forward with the mandatory testing by May 9th.

  • The Association of South East Asian Nations (ASEAN), along with China, Japan and South Korea vowed to strengthen regional and financial cooperation while providing continued support for countries hit hard by the COVID-19 pandemic. In a joint statement after a virtual meeting on Monday of finance ministers and central bank governors, the ministers pledged to achieve inclusive recovery, preserve long-term fiscal sustainability and maintain financial stability. “We expect a rebound in 2021 as the recovery gathers momentum and vaccine rollouts allow a gradual opening up of our economies,” a statement read. ASEAN nations include Thailand, Malaysia, Singapore and the Philippines, among others.

Covid-19 – Due Diligence And Asset Management

Citadel Sees Most U.S. Staff Returning to the Office by June 1

Brief : Ken Griffin’s Citadel expects to have most of its U.S. employees back in its offices in New York, Chicago and Greenwich, Connecticut, by June 1, according to a person familiar with the matter. The $38 billion hedge fund, Citadel, and market-maker Citadel Securities anticipate that regular in-office operations in those locales will resume by that date, said the person, who asked not to be identified. Operations in Texas, meanwhile, will get back to normal in mid-May. Citadel’s expectation for workers’ return is earlier than some of its hedge fund peers, with many employees expressing an eagerness to get back to their desks. Bridgewater Associates and Two Sigma Investments plan to have employees back in offices in September while still allowing them to work remotely a few days a week. Major financial firms are stepping up efforts to bring workers back as Covid-19 vaccines become more broadly available and in-person schooling resumes. Goldman Sachs Group Inc. plans to tell staff they should be prepared to work from offices by mid-June, and JPMorgan Chase & Co. told employees to expect a return in early July.

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Vanguard Moves to Hybrid Work Setup for Most of its Employees

Brief: Vanguard Group is adopting a hybrid work model for the majority of its staff, making it the latest company to rethink the primacy of offices in the aftermath of the pandemic. The world’s second-biggest asset manager plans to allow many employees to work remotely on Mondays and Fridays. With a staff of 17,300, Vanguard’s move represents a middle ground that other financial firms are seeking. “The pandemic has affected so many aspects of our lives, and how we work is one of them,” the company said in an emailed statement. “Vanguard will pursue a working model that will blend increased flexibility with the known benefits of in-person collaboration.” As Covid-19 vaccines become more readily available and cities reopen, U.S. companies are grappling with whether to bring employees back to offices full-time or embrace remote arrangements for the long haul. Vanguard, based in Valley Forge, Pennsylvania, joins money managers Two Sigma Investments and Bridgewater Associates in planning to allow employees to continue to work remotely at least part-time.

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Hedge Funds Can Combat Inflation Surge as Economies Begin to Unlock says K2 Advisors

Brief: As global economies prepare to unlock, potentially driving up inflation and interest rates, hedge funds’ low sensitivity to rate moves can help bolster investors’ portfolio performance, says K2 Advisors, the hedge fund investing unit of Franklin Templeton. With economic growth tipped to trend higher, fuelling inflation, hedge fund strategies can deliver a diversifier to certain fixed income assets that may face a squeeze during inflationary or rising rate environments, said Brooks Ritchey, K2’s co-head of investment research and management. Hedge funds and other alternative investment strategies have traditionally been seen to thrive against equities and fixed income in low interest rate environments. But falling Covid cases and an accelerating vaccine roll-out across developed markets may now send consumer and industrial demand soaring, pushing global inflation trends and interest rates higher – carrying a knock-on effect for bonds and equities. As a result, hedge funds now look “particularly interesting” as a fixed income diversifier, Ritchey explained. “These strategies help to diversify one’s portfolio in a rising rate environment given the resultant increase in performance dispersion across regions, sectors and asset classes,” Ritchey wrote in a note on Tuesday.

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Biggest Economies Bet Vaccine Passports Can Save Tourism

Brief: The world’s most powerful economies agreed to back plans for so-called vaccine passports in a bid to pull the travel and tourism industry out of a pandemic-fueled slump. Tourism ministers from the Group of 20 threw their weight behind the new certificates, stressing that a resumption of normal activity for the sector is crucial to global economic recovery, according to Italian Tourism Minister Massimo Garavaglia. A virtual gathering on Tuesday, the first such meeting under the Italian presidency of the forum, backed efforts for safe mobility, coordinating with initiatives including the European Union’s Digital Green Certificate. That document will show the bearer has been fully vaccinated, has immunity via recovery, or recently tested negative. Garavaglia told a press conference in Rome that he had requested, and obtained from European Union Commissioner Thierry Breton, a commitment to accelerate introduction of the EU green certificate as much as possible. “Tourism will be the key to recovery once the pandemic is defeated,” Garavaglia said. Travel and tourism has been one of the industries hit hardest by restrictions on activity to contain the coronavirus.

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G7 Foreign Ministers Meet Face-to-Face After Pandemic Pause

Brief: Foreign ministers from the Group of Seven wealthy industrialized nations gathered Tuesday in London for their first face-to-face meeting in more than two years, to grapple with how to respond to the military coup in Myanmar and whether to challenge or coax a surging China. Host nation Britain was keen to show that the rich countries' club still has clout in a fast-changing world, and has warned that the increasingly aggressive stances of Russia, China and Iran pose a challenge to democratic societies and the international rule of law. U.K. Foreign Secretary Dominic Raab said the meeting “demonstrates diplomacy is back.” The two days of talks involving top diplomats from the U.K., the United States, Canada, France, Germany, Italy and Japan also were to discuss the humanitarian crisis in Syria, the Tigray crisis in Ethiopia and the precarious situation in Afghanistan, where U.S. troops and their NATO allies are winding down a two-decade deployment. The U.K. Foreign Office said the group would also discuss “Russia’s ongoing malign activity,” including Moscow's earlier troop buildup on the border with Ukraine and the imprisonment of opposition politician Alexei Navalny.

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Value of Private Equity Deals by HNWs Jumps Six-Fold, From GBP132m to GBP958m During the Pandemic

Brief: The value of UK buyout deals by high-net worth investors (HNWs) shot up by 626 per cent in 2020, rising from GBP132 million in 2019 to GBP958 million, says Boodle Hatfield, the leading private wealth law firm. The increasing number of buyout deals led or co-funded by HNWs goes against the overall decline in deal value across the wider private equity market over the same period. Whilst many trade buyers and to a lesser extent PE firms have stepped back from making acquisitions during the worst of the Covid crisis, HNW investors have used the crisis to buy distressed businesses at a substantial discount. Private equity deals by HNWs increased from 26 deals in 2019 to 27 deals in 2020. In contrast, last year there was a 26 per cent decline in combined deal value for UK private equity deals, according to research from a KPMG report. Overall UK private equity deal volume hit its lowest level since the 2008 economic crisis, falling from 1,200 deals in 2019 to 899 in 2020.  Boodle Hatfield explains that HNWs have been increasingly interested in leading PE transactions themselves as a way to get access to the asset class without having to pay the management and performance fees that investing through a private equity fund would involve.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Monday May 3, 2021:

  • In the United States, Florida Governor Ron DeSantis signed an executive order on Monday, suspending all outstanding local COVID-19 emergency orders and related public health restrictions. While noting Florida wasn’t done with its fight against coronavirus, the Republican governor said they were no longer in a state of emergency and signing the order was the evidence-based thing to do. The country’s third largest state in terms of population, has the third most COVID-19 cases in the United States with 2.2 million since the pandemic began and the fourth highest death toll at more than 35,000, according to the latest data from Johns Hopkins University.
  • In Canada, the province of Alberta now has the unfortunate distinction of reporting the highest number of COVID-19 cases per capita in the country, along with the United States. CTV News is reporting Alberta has seen an average of 423.8 cases per million people in the last seven days and set a record for their province over the weekend with 2,433 new infections. Dr. Noel Gibney, co-chair of the Edmonton Zone Medical Staff Association’s pandemic committee, says the government’s mixed messaging is to blame, “I believe we’re here because our government hasn’t taken the necessary steps in the messaging (and) what we’ve received is mixed. One day the premier is suggesting that lockdowns don’t work and the next day, suggests that we’re going to have bring in new targeted public health restrictions,” said Dr. Gibney.
  • United Kingdom Prime Minister Boris Johnson gave his clearest signal on Monday that international travel will resume as of May 17th. During a campaign visit, the prime minister said the following: “We do want to do some opening on May 17, but I don’t think that the people of this country want to see an influx of disease from anywhere else.” The government is set to announce later in the week a small set of countries that will make the “green list” for travel, which means travellers returning to the country won’t need to quarantine upon arrival, but still required to take a PCR test. The list, once announced, will be reviewed every three weeks.
  • India reported more than 300,000 new COVID-19 cases for the 12th straight day with medical experts saying the actual numbers across the country of 1.35 billion people may be five to 10 times higher than the official tally. According to a mathematical model from a team of scientists advising the government, India’s coronavirus cases are expected to peak between Monday and Wednesday, a few days earlier than a previous estimate as the virus spread faster than expected. Medical experts have pleaded with the government to announce a national lockdown, but Prime Minister Narendra Modi has been reluctant to do so, concerned about the economic impact.
  • Bloomberg is reporting the United Arab Emirates (UAE) non-oil economy shrank 6.2% in 2020, the first such contraction since 2011. The overall GDP in the Middle East’s second largest economy contracted 6.1%, slightly more than the initial projections of a 6% downturn. “The UAE economy performed better than expected in 2020 despite the current global challenges brought about by the COVID-19 pandemic,” said Abdulla Bin Touq Al Marri, the country’s economy minister. The Ministry of the Economy and other government entities are looking to double the UAE’s economy over the next decade to 3 trillion dirhams ($816.8 billion USD).
  • In Australia, Prime Minister Scott Morrison’s government is defending its decision to ban Australian citizens returning from India and threatening to punish those that do with fines of roughly $50,000 and five years of imprisonment. Prime Minister Morrison appeared on Australian radio on Monday and said the move was made to protect the health interests of Australians and implemented the ban on advice from his health officials. The Australian Human Rights Commission spoke out against the government decision saying the “extraordinary” ban and threat of criminal sanctions raised serious concerns. Others also said the move was motivated by racism; a claim Foreign Affairs Minister Marise Payne quickly rebuked. The travel ban is set to last until at least May 15th.

Covid-19 – Due Diligence And Asset Management

The Pandemic Hit Public Pensions Hard – But Now They’re Better Funded Than They’ve Been in Years

Brief : The Covid-19 pandemic didn’t hit all U.S. public pensions funds equally. Funds that were in the best financial health at the start of the pandemic took the hardest hit to their funded statuses over the course of the past year — but they’ve also benefitted most from the speedy recovery over the past 12 months, according to Goldman Sachs Asset Management’s public pension fund report for the first quarter of 2021.  The report, which is based on a performance sample of 99 public plans representing approximately $3 trillion of assets under management, found that a majority of the pensions experienced funded status declines of 10.1 to 12.5 percent in March 2020. Retirement plans which were well funded to begin with — at over 90 percent funded — experienced the largest decline in funded statuses from December 2019 to March 2020. Meanwhile, pensions that started off the pandemic with funding ratios below 70 percent experienced a single-digit median decline in funded status. GSAM suggested that the trend in funded status declines was “likely influenced by varying allocations to fixed income.” Plans with the highest rates of decline in funded positions also allocated the lowest percentages of assets to fixed income.

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World’s Biggest Wealth Fund Won’t Demand Full Office Return

Brief: Norway’s sovereign wealth fund, the world’s biggest, will let its employees continue working from home a couple of days a week once the pandemic is over, Chief Executive Officer Nicolai Tangen said. Staff at the Oslo-based investor, which oversees $1.3 trillion in assets, will be allowed to spend “up to two days” a week working from home, Tangen told lawmakers in Norway’s parliament during a hearing on Monday. But there will also be “two set office days for everyone,” he said, so that “we can have the meetings we need to have in the office.” Tangen, a former London-based hedge-fund manager, is the latest prominent member of the financial industry to acknowledge that life won’t return to pre-pandemic norms even after the Covid crisis subsides. Barclays Plc CEO Jes Staley recently said he won’t force employees to return to the office, while Deutsche Bank AG is working on plans to let staff work from home up to three days a week. At Norway’s wealth fund, Tangen said he was considering requiring staff to be in the office on Tuesdays and Thursdays. He also said no one would ever be forced to work from home, but said he thinks granting employees the option on a voluntary basis “can be positive.”

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Corporate America Rides Wave of Inflation to Record Profits

Brief: Markets have been obsessed -- and sometimes roiled -- for months over whether higher inflation is coming. The latest batch of quarterly reports suggests it’s already here and helping corporate America. Faced with rising prices for everything from lumber to oil to labor and computer chips, chief executive officers have cut costs and boosted prices for their products. The strategy appears to be working, with first-quarter income from S&P 500 companies jumping five times as fast as sales, data compiled by Bloomberg Intelligence show. As a result, their net margin -- which measures how much profit companies are squeezing from their revenue -- has risen to a record high, according to Bank of America Corp. Executives mentioned “inflation” more than any time since 2011 during earnings conference calls last month, according to Bank of America. Warren Buffett joined the chorus two days ago, saying price increases are more intense “than people would have anticipated six months ago.” The billionaire added that as his Berkshire Hathaway Inc. boosted prices, customers have accepted them.

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Restaurant Survival Hopes Pick Up as $28.6B in Grants Begin

Brief: Thousands of restaurants and bars decimated by the COVID-19 outbreak have a better chance at survival as the government begins handing out $28.6 billion in grants ¬— money to help these small businesses stay afloat while they wait for customers to return. Laurie Thomas is applying for grants for her two San Francisco restaurants that have closed and reopened several times as coronavirus cases surged and declined; she’s still at just 50% of capacity. Rose’s Cafe and Terzo are operating at a loss but grant money will help them stay open. “This allows you to go back to February 2020 and apply these funds to help pay down debt, catch up on past due rent, etc.,” she says.  The Small Business Administration is accepting applications for grants from the Restaurant Revitalization Fund as of Monday. For the first three weeks only applications from restaurants that are majority-owned by women, veterans and “socially and economically disadvantaged” applicants will be processed and paid out, although any restaurant can apply. After that, grants will be funded in the order that they’ve been approved by the SBA.

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Airlines Push for U.S-U.K. Travel Deal by G-7 Meeting in June

Brief: A coalition of airline and travel groups urged the U.S. and the U.K. governments to lift travel restrictions between the two nations, citing the growth in vaccinations and other tools that limit the spread of Covid-19. Officials should announce reopening before the Group of Seven economic talks scheduled for June, the groups said Monday in joint letters to President Joe Biden and Prime Minister Boris Johnson. “We are confident that the right tools now exist to enable a safe and meaningful restart to transatlantic travel,” said the letter from 49 industry groups and unions on both sides of the Atlantic. “Safely reopening borders between the U.S. and U.K. is essential for both countries’ economic recovery from Covid-19.” Exports between the two countries and tourism represent have a significant impact on each nation’s economy, highlighting the importance of resuming more normal travel, the group said. Industry officials in the U.K. have been saying that travel could begin to reopen as soon as this month, but the White House has been mum on when that might happen or what steps are needed to trigger such a move.

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Despite Pandemic Fears, A Record-Breaking ‘Frenzy’ of M&A Activity is Underway

Brief: When a pandemic was declared last spring, Paul Aversano feared the worst.  Aversano leads the global transaction advisory group at Alvarez & Marsal, which works with dealmakers across the corporate world and private equity. As stock markets plunged, investors turned their attention away from new acquisitions and toward shoring up their existing portfolio companies. It seemed like the industry-wide pipeline of deals was in danger of drying up.  “I remember last year telling my CEOs, best estimate, I think our business will be down 50%, and I’d be thrilled if that was the case,” Aversano said.  Rarely has he been happier to be proven so wrong. Deal activity did tick down during the second quarter of last year. But sooner than anyone expected, the market began to recover. In the end, Aversano’s business actually increased in 2020. And in 2021, acquisition activity of every kind is soaring to unprecedented heights.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Friday April 30, 2021:

  • In the United States, one day after New York City announced their plans to fully reopen by July 1st, the Centers for Disease Control and Prevention (CDC) have cautiously seconded that plan, stating it’s a “reasonable target” given falling cases and rising vaccination rates. “We are focused on getting people vaccinated, decreasing the case rates,” CDC Director Dr. Rochelle Walensky said in a COVID-19 press briefing. “If we can continue at this pace, case rates are coming down, vaccinations going up, then I think July one would be a reasonable target.” The White House is likely to announce a vaccine milestone on Friday: 100 million adult Americans fully vaccinated.

  • Statistics Canada released their latest data on Friday announcing the economy expanded at a 6.5% pace in the first three months of 2021. The data puts Canada on track for healthy growth for the quarter as a whole and was on pace with the United States’ 6.4% growth announced on Thursday. The numbers caught some economists by surprise. “So, even with much more forceful restrictions, a slower vaccine roll-out, and without the help of the two mega U.S. stimulus packages at the start of the year, somehow the Canadian economy matched the U.S. step for step through the winter months. That is impressive,” said Bank of Montreal economist Doug Porter. 

  • In the United Kingdom, The Guardian is reporting the government is reducing funding to vital coronavirus research, including a project, tracking variants in India as much as 70%. UK academics were noting the cuts were removing funding from the existing projects that were helping to support sequencing in other parts of the world. A COVID-19 surveillance project in Brazil, which was tracking variants in that country was also affected by the cuts. The Guardian stated a report from the all-parliamentary group on COVID will call for a reversal of coronavirus-related aid cuts on Monday.

  • In France, President Emmanuel Macron outlined the phasing out of coronavirus restrictions for the country on Thursday. Similar to the UK, France will have four phases of their reopening with the first starting on May 3rd and the final phase, if all goes well, on June 30th. Some of the phases though will come with conditions. For instance, the reopening of borders to foreign tourists starting June 9th will only be possible with a health pass attesting that the holder has either been vaccinated, has recently tested negative for the virus, or has recently recovered from it. France has been under its third national lockdown since April 3rd with current restrictions including a 7 pm nighttime curfew, a ban on travelling further than 10 KM (6 miles approximately) away from home, and the closure of all non-essential businesses.

  • The government of Japan is busy doing some damage control after the European Union (EU) confirmed earlier in the week that the bloc approved the export of more than 50 million COVID-19 vaccines to the country; the most among nations the EU is shipping to. Japan’s vaccination rollout has been slow, and its citizens are growing frustrated, especially after government officials have cited supply bottlenecks as one of the reasons for the slow rollout. Being number one on the EU’s export list would seem to directly contradict this notion. Therefore, Vaccines Minister Taro Kono took to social media tweeting that the numbers the EU provided were wrong. There had only been 28 million Pfizer doses shipped from the EU, while Chief Cabinet Secretariat Katsunobu Kato said Moderna vaccines were included in the shipment, which hasn’t been approved for domestic use – but failed to give details on how many doses of Moderna were received.

  • The Australian government is considering on taking the extraordinary measure of making it a criminal offense for Australians who return home from COVID-19 hotspots overseas. Prime Minister Scott Morrison’s government is contemplating the move after media reported two Australian cricketers circumvented the direct flight ban from India, by flying from India to Qatar, and then flying home. Biosecurity regulations, invoked during the pandemic, have already given government authorities sweeping powers. For instance, as of right now, authorities can require an individual to provide contact details, regularly update an officer on their health status and restrict movement by remaining at an individual’s place of residence for a specified period, just to name a few.

Covid-19 – Due Diligence And Asset Management

Lazard CEO says He’s Looking to Hire New Hedge Fund Teams

Brief : Lazard Ltd. Chief Executive Officer Ken Jacobs is looking to take advantage of disruptions in the market by acquiring hedge fund teams and long-only investor groups. “We see a lot of opportunity there,” Jacobs said Friday in a telephone interview after his firm reported first-quarter results. The CEO said he sees a chance to gain in the alternatives business “by consolidating some of the smaller teams that are out there.” Lazard’s assets under management jumped 37% in the first quarter from a year earlier, to $265 billion, driven by a rebound in the markets, according to a statement. The firm generates about half its revenue from managing money and the rest from providing financial advice on mergers, acquisitions and restructurings. Jacobs said Lazard has been adding at least one investment group each quarter, while also actively hiring more M&A dealmakers at the senior level. Dealmaking is also rebounding, he said. As for large acquisitions in asset management, “we really like our position in our business today,” he said. “I’d never say never to anything, we’re inherently, at our core, dealmakers.” Lazard gained 9.8% this year through Thursday, compared with a 12% rise in the S&P 500.

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Europe’s Economy Shrinks in First Quarter as US Rolls Ahead

Brief: Europe's economy shrank 0.6% in the first three months of the year as slow vaccine rollouts and extended lockdowns delayed a hoped-for recovery - and underlined how the region is lagging other major economies in rebounding from the coronavirus pandemic. The fall in output for the 19 countries that use the euro currency was smaller than the 1% contraction expected by economists but still far short of the rebound underway in the United States and China, two other pillars of the global economy. Figures announced Thursday showed the U.S. economy grew 1.6% during the first quarter, with business supported by strong consumer demand. On an annualized basis, the U.S. grew 6.4%. In Europe, it was the second straight quarter of falling output, meaning the region fell back into a recession despite a rebound in growth from July to September of last year. The latest data covers the quarter that ended March 31 and economists say the economy is on the verge of an upswing. France showed unexpected growth of 0.4% compared to the quarter before, while the main negative surprise came in Germany, the continent's largest economy.

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Strong Economy Amid Pandemic Masked by 1-Point Hike in Funding

Brief: Despite a 71-basis-point drop in the average discount rate contributing to a 7.7% rise in aggregate liabilities, Pensions & Investments' annual analysis of SEC filings showed a 1-percentage-point increase in the average funding ratio of the 100 largest U.S. corporate defined benefit plans in 2020. "If you didn't know what happened in between, you wouldn't have seen too much change year-over-year from 2019 to 2020, with funded status ending right around where it started. But a lot did happen," said Tom Meyers, executive director and head of Americas client solutions at Aviva InvestorsAmericas LLC in Chicago. As of March 31, 2020, Wilshire Consulting estimated the aggregate funding level of S&P 500 company-sponsored pension plans at 79.2%, a 9.4-percentage-point decrease from the end of 2019. However, the aggregate funding ratio of P&I's universe was 88.4% as of Dec. 31, which Mr. Meyers said "reflects the magnitude of the capital markets recovery." The average funding ratio of the 100 largest plans was 92%, up from 91% the year before. As plans recovered from the drop in funded status and the market dislocations that followed the onset of the pandemic last spring, Mr. Meyers said well-positioned plans made opportunistic moves, such as selling Treasuries to increase corporate bond exposures at higher spreads and investing in alternative asset classes like commercial real estate, private credit or high yield that were under pressure during the crisis.

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Fueling Endless Rally is Raft of Real-Time Reopening Data

Brief: Amusement parks tickets. Business-class plane reservations. Drive-thru traffic at McDonald’s. Now more than ever, investors are leaning on real-time data to buttress their bullishness on the U.S. stock market. They’re sifting through an ever-widening array of snapshots at a time when some government figures are being distorted by year-ago comparisons to an economy hobbled by a recession. Of course, no one needs esoteric datasets to see that the U.S. -- once the epicenter of the pandemic -- is on the mend, notes Paul Hickey, co-founder of Bespoke Investment Group. Deaths are down, vaccinations are up and consumers are spending again. But with the snap-back recovery in the books and stocks perched at the highest valuations in two decades, the hunt is on for indicators to fine-tune the bull case -- or uncover an early warning signal to get out before being blindsided by a crash. The following is a rundown of what market pros say they’re watching.

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ASIC Review Finds Retail Managed Funds Responded Well to COVID-19 Challenges in 2020

Brief: An ASIC review of a targeted selection of retail managed funds found that they did not face serious investor liquidity challenges during the height of COVID-19 market disruption, and that their liquidity frameworks were generally adequate. While there was a significant drop in net investor cashflow in the first half of 2020, responsible entities of these funds did not tighten members’ ability to withdraw their investments. ASIC conducted the review between June and November 2020 to identify any potential liquidity issues faced by managed funds and respond to those if necessary. The review covered 14 registered funds across three different strategies (four mortgage, five direct property and five fixed income funds) with an aggregate of $1.7 billion in assets under management and approximately 8,500 investors. ASIC selected funds that it considered were at risk of facing liquidity issues due to a mismatch between investors’ expectations or potential desire to exit and the liquidity of the fund assets in a financially stressed market.

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US Equity and IPO Capital Markets Raise Record-Breaking USD125bn from 389 IPOs in Q1 2021

Brief: IPO activity in the US had the strongest first quarter in the year 2021, continuing the strong momentum seen in the second half of the year. According to the research data analysed and published by Finaria, 389 US-based IPOs raised a total of USD125 billion in Q1 2021, up from the 33 issuances that raised USD10 billion in Q1 2020. From this total, there were 298 SPAC deals raising a collective USD87 billion. That was higher than the amount raised in the whole of 2020. On the global landscape, proceeds from traditional IPOs set a five-year record. Based on a report by KPMG, 458 issuances raised USD96 billion in the period which ended on 24 March, 2021. That was up from 252 deals that raised USD30 billion in Q1 2020. US, Hong Kong and A-Share Markets Lead with USD61.4 Billion from Traditional IPOs, 63 per cent of Global Total In the US, the total number of SPACs in Q1 2021 was thrice the figure posted in Q3 2020, which was when the trend became popular. In Q1 2021, there were only 91 traditional IPOs in the country, raising USD38 billion. For the 24 SPACs that completed mergers during the quarter, there was a 27 per cent return. Traditional IPOs, on the other hand, had a 15 per cent return while key indices, S&P 500 and NASDAQ gained 6 per cent and 3 per cent, respectively.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Thursday April 29, 2021:

  • In the United States, the Big Apple is getting set for a big reopening with New York City Mayor Bill de Blasio targeting a July 1st “full reopening” just ahead of the July 4th long weekend. “We are ready for stores to open, for businesses to open, offices, theaters, full strength,” said de Blasio on Thursday. Wall Street should be back up and running by then too with JP Morgan CEO Jamie Dimon making the news earlier in the week that they will require their employees to return to the office by July. When asked if federal or state leaders could have a say in the reopening (Governor Andrew Cuomo has butted heads with the mayor of NYC in the past), de Blasio said federal and state governments “always have a say”. 
  • In Canada, Ontario was busy making news again on the COVID-19 front issuing their own, albeit temporary, paid sick leave and promising to expand vaccine eligibility to all adults by the end of May. The Doug Ford led-provincial Conservative government announced on Wednesday they would provide three paid sick days through a temporary program that would end in September. Critics were quick to point out three days would not cut it, but after a year of essential workers pleading for paid sick days, at this point three days is better than zero days. Elsewhere in the country, Conservative Leader Erin O’Toole said during a Thursday news conference the federal government needs to find more vaccines so that every adult in the country can get a COVID-19 vaccine dose by Victoria Day, which is May 24th. 
  • The United Kingdom government is being urged to adopt the furlough-style benefits system even after the pandemic is over. The Resolution Foundation, an independent British think tank, said the government should introduce a form of earnings insurance, where unemployment support is paid at 80% of previous pay for three months. Adopting the measure would cost £3.25 billion a year if the jobless rate was similar to the level in 2009 after the financial crisis and less than £1 billion if it were near 2019 levels. According to the Institute for Fiscal Studies, the UK welfare system is one of the least generous in the developed world. 
  • In Germany, officials are hoping a COVID-19 third wave has crested and that a record number of vaccinations should help turn the tide. Germany’s seven-day average of coronavirus cases per 100,000 people fell on Thursday for the third consecutive day to 155 – its lowest in two weeks. The country also vaccinated 1.1 million people on Wednesday – the most of any day so far. The justice ministry has proposed exempting people who have been fully vaccinated or recovered from COVID-19 from stricter limits that the federal government were granted last week through new legislation. According to a Reuters report, the cabinet is expected to discuss those plans next week. 
  • Philippines President Rodrigo Duterte said on Wednesday that the strict travel and public health restrictions will remain in Metro Manila and surrounding areas until mid-May. The restrictions have been in place since mid-April and have limited travel in-and-out of the capital, along with shutting down many non-essential businesses. President Duterte apologized for the extension of the lockdown, scolded people for violating health protocols, but ultimately said the government is to blame for the current situation the Philippines is in right now.
  • In India, the national health ministry says it has more than 12 million COVID-19 vaccines waiting to go, countering media reports of vaccine shortages in multiple cities and districts across the country. On Thursday, the Delhi health minister told local reporters that the national capital didn’t have any vaccines left and had issued a request for more. According to the national health ministry, Delhi had received 3.8 million vaccines to date and had 500,000 doses in storage. Maharashtra state has also issued an appeal for more vaccines after media reported Mumbai – the country’s financial hub – had announced the suspension of COVID-19 vaccinations for three days due to shortages.

Covid-19 – Due Diligence And Asset Management

US Recovery from Pandemic Recession is Showing Momentum

Brief : Powered by consumers and fueled by government aid, the U.S. economy is achieving a remarkably fast recovery from the recession that ripped through the nation last year on the heels of the coronavirus and cost tens of millions of Americans their jobs and businesses. The economy grew last quarter at a vigorous 6.4% annual rate, the government said Thursday, and expectations are that the current quarter will be even better. The number of people seeking unemployment aid — a rough reflection of layoffs — last week reached its lowest point since the pandemic struck. And the National Association of Realtors said Thursday that more Americans signed contracts to buy homes in March, reflecting a strong housing market as summer approaches. Economists say that widespread vaccinations and declining viral cases, the reopening of more businesses, a huge infusion of federal aid and healthy job gains should help sustain steady growth. For 2021 as a whole, they expect the economy to expand around 7%, which would mark the fastest calendar-year growth since 1984.

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100 Days of Biden: Investors Weigh Impact on US Economy, Markets and Climate

Brief: As Joe Biden’s presidency passes the 100-day mark, fund managers are considering what impact his inaugural period in office will have on financial markets. A mammoth USD1.9 trillion Covid-19 relief package has already passed through Congress, and further stimulus is expected amid plans to overhaul US infrastructure and update the energy system in line with the administration’s climate goals.  It is clear that Biden’s administration is taking a very different direction compared to the Trump government it replaced in January. Biden has called for a series of “once-in-a-generation investments in our nation’s future”, and planned spending so far amounts to USD6 trillion.  This includes the American Families Plan, announced to Congress on Wednesday, which sets out major spending and tax cuts for workers, families and children planned for the next 10 years.  Investment managers have given their views on the market impact of the increased Covid fiscal stimulus and infrastructure spend, as well as the trends they see arising over the coming years as a result of the new direction of the US. Matt Benkendorf, CIO of Vontobel Quality Growth, believes that markets could see more volatility later in the year, as inflationary spending plans take their course.

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PE Firms Make GBP10.1 Billion Carve-Out Deals as Pandemic sees Corporates Shed Business Units

Brief: PE firms made GBP10.1 billion of corporate carve-out acquisitions in the UK last year, up from just GBP765 million in 2019 as the Covid-19 pandemic drove more corporates to sell non-core business units, says Mayer Brown, the global law firm.  Mayer Brown says that the economic disruption of the past year has forced many large businesses to focus on their core operations to a much greater extent, leaving them much more open to sales of less strategically-important business units.  Private equity funds with significant capital to deploy have been a major beneficiary of corporates’ increased interest in divestments and have frequently been bidders in these auctions. This includes large US PE houses, who were involved in all four of the UK corporate carve-out deals worth more than GBP1 billion concluded by PE buyers in 2020…

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T. Rowe Price Plans to Bring Staff Back to Offices in September

Brief: T. Rowe Price Group Inc. Chief Executive Officer Bill Stromberg said the firm plans to bring its U.S. workers back to the office by Sept. 13 after more than a year of remote work. The money manager will allow employees in North America to return on a voluntary basis until that date, with social distancing measures in place, Stromberg said in an interview Thursday after the Baltimore-based company posted first-quarter results. “We’re coming back with a commitment to additional workplace flexibility, more than we’ve had in the past,” Stromberg said. “Some jobs really do function better in the office than others, and some can be more independent than others,” he added. “We’re in the process of working that out, job-by-job, right now.” Financial firms are stepping up efforts to bring workers back as Covid-19 vaccines become more broadly available and in-person schooling resumes. Many companies are deciding whether to bring everyone back full time or embrace more flexible schedules that would allow staff to work remotely for part of each week.

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Manulife CEO Embraces Flexible Schedules, Slow Return to Office

Brief: Manulife Financial Corp. Chief Executive Officer Roy Gori isn’t in a hurry to bring the insurer’s employees back to the office, and when he does, they’ll still have plenty of flexibility to work from home. The company hasn’t set a date to bring workers back, and it will continue to allow them to perform some portion of their jobs from home, Gori said. While the office is important for creativity and innovation, Manulife has managed to keep employees engaged and productive while working from home thanks to investments in technology and an emphasis on meeting workers’ needs, Gori said. “We’re not in a huge hurry to get people back,” Gori said in an interview Wednesday. “The current environment of having people work remotely is working incredibly effectively for us.” Financial firms’ plans to return workers to the office have been varied. JPMorgan Chase & Co. became the first major U.S. bank to mandate a return to offices for its whole U.S. workforce, telling staffers in a memo Tuesday that they’ll need to come back in about two months on a “consistent rotational schedule.” Citigroup Inc. plans to bring more workers back in July while Wells Fargo & Co. is seeking a more normal environment in September.

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Australia’s Wealth Fund Swells to Record A$179 Billion

Brief: Australia’s sovereign wealth fund grew to reach a record A$179 billion ($140 billion) as it notched up another quarter of solid returns. The Future Fund returned 4.5% in the three months to March 31, and posted the best yearly performance to March since 2017, it said in a statement Thursday. Global equities hit fresh records during the quarter as economies continued to rebound from the pandemic shock of 2020. “All funds have beaten their target returns across all timeframes,” Chairman Peter Costello said in the statement. “Markets have continued their recovery, driven by the deployment of vaccines, quantitative easing and fiscal stimulus around the world.” The Future Fund is keeping almost 19% of its portfolio in cash and maintained its equities holdings flat at about one-third of the fund last quarter. Total equity allocation is about 1.6 percentage points below the same time last year as Costello echoed Norway’s sovereign wealth fund in expecting more market volatility. “With interest rates at historically low levels, markets are very sensitive to any prospect of inflation and rising rates as a consequence,” he said. “The Board recognizes that the investment challenge ahead is significant and is continuing to assess and position the portfolio to generate mandated long-term returns while managing risk.”

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Wednesday April 28, 2021:

  • In the United States, CNN is reporting there is growing internal debate among Biden administration officials over COVID-19 vaccine sharing with other countries. World leaders have asked the White House administration to share excess vaccines and other emergency COVID-19 assistance for months. According to CNN, those on the side of sharing excess vaccines as quickly as possible have grown frustrated and are encouraging business groups and interest groups outside of the government to publicly push the administration. The White House coronavirus response coordinator’s team has taken the lead on this decision making and lean towards making sure first and foremost the United States need to be confident vaccine efforts are domestically taken care of.

  • In Canada, the province of Nova Scotia is taking no chances, moving the entire region into a two-week snap lockdown. The restrictions are to be in place until May 12th, calling for strict rules around gathering (almost none outside of the immediate household), sweeping closures to non-essential businesses and a shift to remote learning for schools. Nova Scotia made the move after reporting 96 new cases on Tuesday – a new single day record. The caseload dropped slightly on Wednesday to 75. Elsewhere in the country, the Ontario government has issued a new emergency order that will allow the transfer of patients waiting for a long-term care bed to any nursing home without their consent in an effort to free up space for COVID-19 patients in need of urgent care. Health Minister Christine Elliott said the transfers without consent will only be completed in the most urgent of situations.

  • The United Kingdom has purchased another 60 million doses of the Pfizer/BioNTech vaccine to support its booster program for the fall. “Our vaccination program is bringing back our freedom, but the biggest risk to that progress is the risk posed by the new variant,” Health Secretary Matt Hancock said in a statement. “We’re working on our plans for booster shots, which are the best way to keep us safe and free while we get this disease under control across the whole world.” Staying on the topic of vaccines, Hancock said the UK does not currently have any excess doses of COVID-19 vaccine to send to pandemic-stricken India.

  • France Prime Minister Jean Castex said on Wednesday that President Emmanuel Macron will outline how coronavirus restrictions will be progressively relaxed later in the week. President Macron will speak to the nation on Friday to give more details, but French media is reporting the government will replace the current state of emergency as of June 2nd with a “transition regime” that will run until October 31st. The “transition regime” will allow the government to react swiftly if health conditions were to deteriorate as France exits its lockdown. France is the European Union’s second largest economy and is currently in its third national lockdown since the pandemic began.

  • Bloomberg is reporting with India being crippled by the latest wave of the pandemic, China is stepping into fill the vaccine void with neighbouring nations. China’s Foreign Minister Wang Yi met with his counterparts from Afghanistan, Bangladesh, Nepal, Pakistan and Sri Lanka in a virtual meeting on Tuesday and said Beijing is willing to provide stable vaccine supplies through a multilateral framework. China has been trying hard to establish itself on the worldwide stage through vaccine diplomacy. India, home to the world’s largest vaccine industry, has had to pause export efforts to help its own people through their recent struggles.

  • In a joint statement with the International Olympic Committee (IOC), the government of Japan agreed on measures to ensure the safe organization of the Olympic Games, which are scheduled to begin in just under three months. The measures include all participants required to take two COVID-19 tests before their flight to Japan. Once in Japan, all athletes and those close to the athletes will be tested daily, and will have an activity plan that must be followed which includes minimizing contact within one metre of Japanese citizens. The timing of this “playbook” comes as Tokyo, Osaka and several prefectures are under a third state of emergency this week.

Covid-19 – Due Diligence And Asset Management

Fed Upgrades View of Economy While Keeping Rates Near Zero

Brief : Discover what’s driving the global economy and what it means for policy makers, businesses, investors and you with The New Economy Daily. Sign up here Federal Reserve officials strengthened their assessment of the economy on Wednesday and signaled that risks have diminished while leaving their key interest rate near zero and maintaining a $120 billion monthly pace of asset purchases. “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the Federal Open Market Committee said in a statement following the conclusion of its two-day policy meeting. “The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.” Marking a clear improvement since the pandemic took hold more than a year ago, the Fed said that “risks to the economic outlook remain,” softening previous language that referred to the virus posing “considerable risks.” The statement also noted that sectors hit hardest by the Covid-19 pandemic had “shown improvement.”

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China Private Equity Deals Surged in 2020 as Country Emerged from COVID-19 Crisis, Bain Survey Finds

Brief: China's private equity investors benefited from the country's swift action to contain the Covid-19 pandemic, enjoying a jump in investment value and deal numbers last year, according to global consultancy Bain & Co. But the fund managers face an uphill battle to conclude more lucrative deals this year amid escalating competition. "Higher selling prices of targeted firms are expected this year," said Lucia Li, a partner with Bain said. "High-growth companies are actively chased by many funds, hence they are raising their valuations and prices." Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team. In 2020, private equity funds in China sealed deals worth US$97 billion, up 40 per cent from a year earlier, Bain's survey found. The total number of transactions climbed 53 per cent to 857. Companies in the technology, media, telecoms and health care sectors with both solid earnings and high growth potential were the primary targets of the cash-rich investors.

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Airport Muni Bonds Rally with Vaccine Heralding Travel Rebound

Brief: Bonds backed by America’s airports are rallying back as the Covid vaccine rollout promises to revive the travel industry, marking a rebound for one of the corners of the municipal-debt market hardest hit by the pandemic. The rally has driven the yields on debt backed by airports down to about 1.2%, or about 30 basis points more than the market’s benchmark, according to an ICE Bank of America index tracking the sector. That marks a dramatic shift from early in the pandemic, when speculation about the deep financial toll of the nation’s shutdowns drove the index’s yield to more than 4% as investors dumped the securities in droves. The move eliminates what had been some of the rare bargains in the municipal securities market as valuations on top-rated bonds hover near record highs. Junk bonds have climbed, too, pushing the yields back toward the more than two-decade low hit before Covid-19 raced through the U.S. “During the pandemic, airlines and anything associated got absolutely crushed in terms of spread -- and they stayed wider for a longer period of time than some of the other sectors that were affected,” said Jason Appleson, a portfolio manager at PT Asset Management in Chicago. “In terms of buying opportunity, I’m not sure there is a lot left.”

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Battered U.S. Office Perks Up with Workers Trickling Back

Brief: After a number of false starts over the past year, corporate America is finally bringing workers back to the office. The widening availability of vaccines means that employers are setting plans for returns. Exxon Mobil Corp. said on Tuesday that its Houston-area workers would be back full-time in May. JPMorgan Chase & Co., meanwhile, is opening its U.S. offices next month, with its full staff expected back in July on a rotating basis. Already, offices are slowly starting to fill up across the country as social distancing-rules ease and vaccines accelerate, bringing optimism that more Americans will soon be able to resume their pre-pandemic daily life. About 26% of office workers in major cities were back at their desks as of April 21, the highest share in about five months, data from security company Kastle Systems show. Companies that postponed searches for space last year are back in market, looking to take advantage of cheaper rents and concessions from landlords eager to fill vacancies. National demand for offices jumped 28% in March from the prior month and is now just 9% below pre-pandemic levels, according to property-data firm VTS, which tracks office tours. “People are feeling really good about where we are in the world from the economy and getting Covid under control,” said Ryan Masiello, chief strategy officer at VTS. “That’s a big part of what’s driving people back into the market.”

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The Billionaire Who Pioneered Remote Work Has a New Plan to Turn His Workers into Algorithms

Brief: In March, the billionaire founder of Austin, Texas’ ESW Capital, Joe Liemandt, fired off a directive to managers of his army of 2,500 remote workers. The email’s subject line read: “White Collar Specialization- Worksmart Work Unit.” With the world embracing remote work as the new normal, Liemandt ordered his managers to design work units, specialized tasks that workers—mostly software engineers— could perform efficiently over and over, as if they were assembly line workers in an old-fashioned auto factory. “Most jobs are poorly thought out and poorly designed—a mishmash of skills and activities . . . poor job designs are also quickly exposed with a move to remote work,” Liemandt wrote.  The solution, Liemandt argued in his email, was for managers to observe remote workers and identify repeatable work patterns in order to create these work units. The idea was for managers to fragment white-collar work into small-scale tasks—the writing of specific code by a software engineer, a customer support agent solving a specific technical problem, or a targeted document analysis. Liemandt wanted his managers to create these units—lots of them.

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The Pandemic Didn’t Touch Private Equity Paychecks

Brief: Amid the market volatility and economic uncertainty of the pandemic, compensation for professionals in private equity and venture capital continued to rise. In Benchmark Compensation’s annual survey of industry professionals, 68 percent of respondents said they earned between $150,000 and $1 million last year, marking the highest percentage to report earning more than $150,000 since the company began publishing the annual report 14 years ago, the firm said in a press release Tuesday. The 2021 report also marks the seventh consecutive year of gains in private equity and venture capital compensation. Overall, the study found that respondents working in private equity earned more money than those working in venture capital, but respondents working in hybrid firms earned the highest levels of compensation as vice presidents and managing directors. The report was based on a survey of hundreds of workers, from partners to junior advisors, from October to November 2020. Participating firms included Goldman Sachs, KKR, Bain Capital, and BlackRock. “Overall, compensation is up, but more than half of those surveyed are dissatisfied with their pay,” David Kochanek, the publisher of the study, said in a statement. According to Benchmark Compensation, employees cited market conditions and employee expectations as the reasons why they were dissatisfied.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Tuesday April 27, 2021:

  • In the United States, the Centers for Disease Control and Prevention (CDC) have issued new guidance on outdoor mask use for fully vaccinated Americans on Tuesday. In their briefing, CDC Director Dr. Rochelle Walensky said fully vaccinated people can unmask outdoors, if they are walking, running, hiking, or biking alone or with members of their household. Fully vaccinated Americans can also go mask free while dining at an outdoor restaurant with friends from multiple households. However, Dr. Walensky cautioned those fully vaccinated that plan to attend medium sized, or large events like a live performance or sporting event should still wear a mask.
  • Canadian Prime Minister Justin Trudeau said the country will send $10 million through the Canadian Red Cross to the Indian Red Cross to help the country’s stretched health-care system through its deadliest wave of COVID-19. Prime Minister Trudeau said the money will go to fund ambulance services and the local purchasing of personal protective equipment. Relevant ministers are also in touch with their Indian counterparts about what more Canada can do to help. Elsewhere in the country, CBC is reporting the federal government has rejected a request by the Ontario provincial government to double the federal paid sick leave program to $1,000 a week with Ontario chipping in for the cost. Prime Minister Trudeau said during a Tuesday news briefing that Finance Minister Chrystia Freeland is working closely with the province to develop its own supports.
  • In the United Kingdom, the latest data shows close to 34 million have received at least their first inoculation of a COVID-19 vaccine. The latest numbers mean the vaccine rollout has already reached over half of the UK population with a first dose and a quarter of adults are now fully vaccinated with both shots. Health Minister Matt Hancock sent out a message via his social media announcing the next stage of the vaccination program with vaccines now being offered to those 42 years of age, or older and that all adults who want a COVID-19 vaccine can have one by the end of July.
  • The two largest European Union (EU) countries outlined their plans on pandemic recovery spending on Tuesday. Germany and France plan to use the EU’s pandemic recovery fund for fighting climate change and boosting the use of digital technology across the economy. Under the fund’s formula, France will receive €40 billion while Germany will receive €28 billion. France’s Finance Minister, Bruno Le Maire has called on the European Commission, the EU’s executive branch, to quickly evaluate the plans so that money can start flowing to member states as early as July. Le Maire said since the fund was approved, the bloc has lost too much time to large economies like the United States and China recovering faster and Europe must remain in the race.
  • The Associated Press is reporting coronavirus infections have surged past one million in the Philippines, which is causing officials to assess whether to extend a monthlong lockdown in the Manila region. The government is in a no-win situation as the reopening will undoubtably lead to a spike in cases but keeping it in place will continue to batter the economy while making their citizens suffer through joblessness and hunger. The Philippine Red Cross said surging infections have placed hospitals “under siege” and that it has set up field hospital tents and converted unused classrooms and buildings to quarantine patients. 
  • In Australia, the snap three-day lockdown in Perth and surrounding regions did its job with the lockdown ending as no new COVID-19 community cases were recorded. Premier Mark McGowan said that while people were free to leave their homes and return to work and schools, some interim restrictions would be in place for the remainder of the week, such as mandatory wearing of face masks in public. Elsewhere in the country, Prime Minister Scott Morrison has followed suit like many other countries throughout the world and has suspended all direct passenger flights from India until May 15th. The move will leave many Australians stuck or needing to find their own way out of India for the time being with Prime Minister Morrison saying no one will be prioritized, such as high-profile cricket players who play abroad in a professional league.

Covid-19 – Due Diligence And Asset Management

It’s Time to Return to the Office, Jamie Dimon Signals to Wall Street

Brief : Jamie Dimon is sending a message to his fellow Wall Street chiefs: It’s time to bring employees back to the office. JPMorgan Chase & Co. became the first major U.S. bank to mandate a return to offices for its entire U.S. workforce, with staffers being told they’ll need to come back in about two months. The lender’s top decision-making body, led by Chief Executive Officer Dimon, said in a memo to staff Tuesday that it “would fully expect that by early July, all U.S.-based employees will be in the office on a consistent rotational schedule.” Industry leaders have been preparing for an end to remote work since the earliest months of the pandemic last year. Dimon, who’s been going into the bank’s headquarters since June, said as far back as September that he expects economic and social damage to result from a longer stretch of working from home. David Solomon, Dimon’s counterpart at Goldman Sachs Group Inc., called the remote-working arrangement an “aberration” that needs to be corrected as quickly as possible. “This is fantastic news and the fact that it’s JPMorgan and Jamie Dimon — this will send a very positive message to other CEOs, not just in New York but around the country, to start making plans to on-board their employees,” Bill Rudin, chief executive officer of Manhattan office landlord Rudin Management Co., said in a phone interview.

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HSBC to Cut Office Space by 20% in 2021, Halves Business Travel

Brief: HSBC Holdings Plc expects to cut its office footprint by 20 per cent this year and is budgeting for half its previous business travel costs as the adoption of flexible working spurs changes to longstanding practices. The bank, which has already committed to a 40 per cent reduction in office space in the long term, expects to get halfway to its goal over the course of this year, Chief Financial Officer Ewen Stevenson said in an interview with Bloomberg Television Tuesday. “We do very much want to move to a hybrid working environment,” he said. HSBC’s pace highlights how quickly the pandemic has redrawn the office market as businesses debate the type and extent of space required for their newly-remote workforces. Vacancies have soared in financial centers such as London, and even Chief Executive Officer Noel Quinn and his senior team at HSBC are hot-desking to help reduce the bank’s footprint at its Canary Wharf headquarters. “Firms have told us that they remain committed to retaining a central London hub but how they operate will inevitably change to reflect post-pandemic trends, such as hybrid and flexible working,” Catherine McGuinness, chair of the policy and resources committee at the City of London Corporation, said in a statement Tuesday.

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Why the S&P 500 is Still Treading Water Despite Strong Company Results

Brief: By almost any measure, this has been an astonishing earnings season for US corporates. At the time of writing, around two-thirds of companies had beaten expectations – and not just by a little. Barclays analysts put average earnings per share growth at an impressive 63%. However, it doesn’t appear to be having much impact on share prices. Why? Tesla is a case in point: its earnings rose to 93 cents per share, against expectations of 79 cents with revenue up 79% year on year. Its share price dropped 3% in the immediate aftermath of the results. Overall, the S&P 500 has been treading water even as results have come through strongly. The strong macroeconomic picture is also not providing the support it should. The US economy is flying. Retail sales registered almost 10% growth year on year in March. The IMF is predicting GDP growth of 6.4% for 2021. Manufacturing is seeing huge expansion and jobs growth is buoyant. Steven Bell, chief economist at BMO Global Asset Management, says there is more to come. “The excellent vaccine rollout plan is unleashing a surge in spending as consumers emerge with bank accounts bursting with cash from a whole series of fiscal handouts,” he says.

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US Consumer Confidence Returns to Pre-Pandemic Levels

Brief: Consumer confidence rose sharply for a second straight month, hitting the highest level since the pandemic began, as the rapid rollout of vaccines and another round of U.S. financial support for Americans boosts optimism. The Conference Board reported Tuesday that its consumer confidence index advanced to a better-than-expected 121.7 in April, up from 109.0 in March. It was the strongest reading since the index stood at 132.6 in February 2020, right before the COVID-19 pandemic struck in the United States. The present situation index, based on consumers assessment of current business and labour market conditions sored from 110.1 to 139.5. The expectations index, based consumers' views of what conditions will be like over the next six months, posted a more moderate gain, rising from 108.3 last month to 109.8 in April. Economists believe that the rising consumer confidence will bolster overall economic growth as consumers, who account for 70% of economic activity, step up their spending as lockdown restrictions are eased.

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Goldman’s Digital Hedge-Fund Matchmaking Push Boosted by Lockdowns

Brief: Goldman Sachs’ long-planned online migration of some lucrative prime-brokerage businesses picked up steam during the pandemic as hedge funds and investors working from home were unable to meet in person, while other Wall Street banks are taking more measured steps. Last July, Goldman Sachs Group Inc launched Marquee Connect, offering online virtual introduction services for top clients. Other prime brokers told Reuters they were also moving to bring some prime broker services online, but one cautioned that clients may be getting “Zoom fatigue” with hopes to resume meeting in person once more people are vaccinated. Humans have long handled capital introduction services, in which third parties like banks attempt to matchmake investors with hedge funds. But as large swathes of other bank services have moved to virtual platforms, banks have been increasingly looking at how to move some of these services online too.

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Gundlach says Fed is Guessing that Inflation Will be Transitory

Brief: It is not clear that U.S. inflation will be “transitory” as the Federal Reserve economists are trying to convey, according to Jeffrey Gundlach. “I’m not sure why they think they know that it’s transitory,“ Gundlach of DoubleLine Capital LP said in an interview with BNN Bloomberg Tuesday. “How do they know that when there’s plenty of money printing that’s been going on and we’ve seen commodity prices going up really massively.” While the Fed does have a point in saying the year-over-year increase -- which Gundlach says could be as high as 4% -- is higher in part because of the low, pandemic-induced numbers from 2020, the central bank may also be underestimating the impact of its wide-open monetary policies. “There’s plenty of indicators that suggest that inflation is going to go higher, and not just on a transitory basis, for a couple of months. So we’ll see how the Fed is trying to paint the picture, but they’re guessing.“ Gundlach is chief executive and chief investment officer of Los Angeles-based DoubleLine Capital, which managed more than $136 billion as of Dec. 31. While bond yields remain very low, it’s hard to figure out who’s going to buy the massive bond market issuance, he said.

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Contact Castle Hall to discuss due diligence
 
Castle Hall has a range of due diligence solutions to support asset owners and managers as our industry collectively faces unheralded challenges. This is not a time for "gotcha" due diligence - rather this is a time where investors and asset managers can and should work together to share best practices and protect assets. Please contact us if you'd like to discuss any aspect of how Covid-19 may impact your business.

Our briefing for Monday April 26, 2021:

  • In the United States, the Associated Press is reporting the country will begin sharing its entire pipeline of vaccines from AstraZeneca once they clear federal safety reviews. The Associated Press said as many as 60 million doses are expected to be available for export in the coming months. The AstraZeneca COVID-19 vaccine has yet to be authorized by the Food and Drug Administration (FDA), but is widely used around the world, such as Canada, Mexico and now India, who are struggling with devastating surges of the coronavirus. The United States have vaccinated more than 53% of its population with at least one of dose of the Pfizer, Moderna and recently reactivated Johnson & Johnson vaccine and it expects to have enough supply for their entire population by early summer.

  • In Canada, Ontario has made a formal request to the Canadian Armed forces to help deal with a surge of critical care cases associated with the third wave of COVID-19. In a statement released Monday, the Doug Ford-led provincial government is asking for health human resources, along with logistical and operational support. The news comes days after the provincial government refused an offer by the federal government to send in extra personnel, via the Canadian Red Cross. Elsewhere in the country, Nova Scotia is now struggling with its worst wave of COVID-19 cases since the pandemic began. Dealing mostly with single digit cases for months, the province set daily records in back-to-back days on Sunday and Monday. Nova Scotia now has 323 active cases, the most since April 29th, 2020.

  • United Kingdom Prime Minister Boris Johnson was busy doing damage control, rebuffing a Daily Mail report on Monday that he would rather see bodies pile high in their thousands before ever agreeing to another lockdown. The comments were allegedly made during an October 2020 meeting at 10 Downing Street, just prior to England’s second national lockdown. Asked by reporters if he had ever made those comments, Prime Minister Johnson, simply said “no” and followed up that governments want to make sure lockdowns work, which they have, and thanked the people of Britain for getting the disease currently under control. 

  • The European Union (EU) has filed a lawsuit against AstraZeneca over vaccine delivery delays. An EU official said the main objective of the legal action is to obtain the contracted number of doses and was filed by the European Commission on its own behalf and on behalf of all 27 EU member states. AstraZeneca delivered just a quarter of the coronavirus vaccine doses that the EU was expecting in the first quarter. AstraZeneca released a statement of their own, saying they fully complied with the advance purchase agreement with the EU and believe any litigation is without merit.

  • India’s mounting coronavirus caseload is showing the difference between the haves and have nots in the country. Wealthy families and even not so wealthy are fleeing the country on private jets. “It’s not only the ultra-rich,” said Rajan Mehra, CEO of New Delhi-based private jet firm Club One Air. “Whoever can afford to take a private jet are taking private jets.” Over the last week, India has consistently set world records for daily case counts – on Monday the country reported 352,991 new infections – another record. The UK, Canada, Hong Kong and the United Arab Emirates are among more than a dozen countries/states that have imposed travel curbs from India, so finding a place to land those private jets might be increasingly difficult.

  • Brazil’s President Jair Bolsonaro has threatened using the army to restore order due to lockdown measures in the country. However, it isn’t for the reason you might be thinking. President Bolsonaro is actually threatening to use the army to open up states/cities that are in lockdown, not the other way around. “That lockdown policy, of quarantine, is absurd. If we have problems – we have a plan of how to act. I am the supreme head of the armed forces,” said Bolsonaro. The president said the army could be summoned to “re-establish Article 5 of the Constitution,” which mentions the right to freedoms of movement and of religion. According to data from the Brazilian health ministry, 195,848 deaths have been recorded due to the coronavirus from January 1st to April 25th, 2021, which exceeds the 194,949 deaths Latin America’s largest country suffered from March through December 31st of last year.

Covid-19 – Due Diligence And Asset Management

How COVID-19 Sank Quant Macro Hedge Fund Pioneer IPM

Brief : Long-running systematic macro hedge fund IPM says the Covid-19 pandemic “aggravated” an already challenging situation for the firm, leading to its decision to shut down the business. Stockholm-based systematic pioneer Informed Portfolio Management announced last week it was ending all investment activities. It said the recent investment environment has proved challenging for systematic macro as a strategy and IPM as a manager, which has suffered “lacklustre performance and significant outflows”. “The investment environment has been difficult in recent years for strategies focusing on economic fundamentals, with the Covid-19 pandemic aggravating the situation,” IPM chairman Lars Ericsson said in a statement. Founded in 1998 by Anders Lindell and Jonas Rinné, who had previously been at Swedish fixed income trading house JP Bank, the firm built considerable momentum in its early years, gaining more than 31 per cent in 2008 during the Global Financial Crisis using computer models to trade government bonds, currencies and equities futures. But the systematic hedge fund’s assets steadily eroded in recent times, from a high of some USD9 billion just a few years back to roughly USD1 billion in 2020.

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U.S. Private Equity Firm Bets on Boom in U.K. Labs

Brief: Harrison Street Real Estate Capital is betting on the growth of the U.K.’s bio-tech industry with a deal to combine the country’s largest science incubator with a portfolio of science parks. The company’s venture with Trinity Investment Management has agreed to acquire BioCity Group, according to a statement. BioCity helps startups through early stage venture capital investment and accelerator programs. Science parks have become one of the hottest real estate niches in the U.K. as international investors look to piggy-back on increased government funding for a sector that has been among the few beneficiaries of the coronavirus pandemic. The country has a shortage of purpose-built space for commercializing scientific research, despite boasting several of the world’s top academic institutions and pharmaceutical companies. The venture will acquire a portfolio of 12 facilities across five U.K. science parks for about 120 million pounds ($167 million), according to the statement. The new business will be called We Are Pioneer Group and will manage a portfolio spanning 2.6 million square feet.

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Why We Need to Reclaim the Finance Industry Like Fans did for Football

Brief: Last week we saw Europe’s rebel soccer league crumble within 72 hours from announcement to demise. One can only imagine what might have happened behind closed doors – frantic phone calls, secret meetings and very tense meetings. Outraged fans took to the streets to protest, players openly expressed their frustration, politicians weighed in and this rogue league made headlines around the world… The pandemic has both highlighted and exacerbated the inequalities that were already present. We have all spent the last year, and some of this year, making enforced sacrifices; some financial, some social. None of us want those sacrifices to have been made in vain. That means a more equitable share both of rewards and prospects for everyone. After the Global Financial Crisis of 2008/9, there was a widespread perception of financial greed and mistrust of the world’s bankers and financiers, none of whom were ever held to account for any misdemeanours, real or imaginary. A decade of austerity left the perception that ordinary citizens were left to suffer the pain and pick up the bill. The reaction to Covid-19 is different.

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Strategists See Opportunity for Rotation Trades Amid U.S. Vaccine Success

Brief: Early signs are emerging that the U.S. stock market rotation into cyclicals and out of big tech still has room to run. The reopening trade has lagged for weeks and it’s been the topic of fierce debate among equity strategists. Last week, smallcaps beat tech for the first time in about a month, and the trade looks sets to continue once again on Monday. Evercore ISI and Fundstrat Global Advisors LLC are urging clients to buy stocks tied to the economic recovery. It’s “time to re-engage cyclicals,” said Dennis DeBusschere, head of portfolio strategy at Evercore, in a note on Sunday. “The rapidly improving labor market is inconsistent with peak GDP fears and suggests the output gap will close quickly, putting upward pressure on inflation, bond yields, and cyclical assets.” The U.S. economy is reaping the rewards of a fast vaccine rollout, with about 42% of the population having had at least one dose. Economists have raised growth estimates, and there’s every sign that life is returning to normal for millions of Americans.

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British Airways CEO says ‘Great Opportunity’ for UK-U.S. Travel

Brief: The chief executive of British Airways said there was a "great opportunity" for Britain and the United States to open a travel corridor given their high vaccination rates, and said he was optimistic for European travel from June onwards. Airlines are readying their planes, pilots and crew for travel this summer, hoping for a bounce back after over a year of pandemic restrictions, although governments have yet to agree the details of how and when the restart will work. British Airways chief executive Sean Doyle, who took the helm of the IAG-owned airline in the middle of the COVID-19 crisis last October, said that travel between Britain and the United States should be restriction-free. "If you look at the progress of vaccinations that the UK and the US have made, they're almost neck and neck," he said, speaking to an online industry conference. I think the U.S. is a great opportunity to get up and running again. Travel between Europe and the United States is also on the cards.

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Value of Private Equity Club Deals Jumps to GBP19.7bn as Investors Look to Target Higher Value Acquisitions

Brief: The total value of UK private equity club deals hit GBP19.7 billion last year, a fourfold increase from the GBP4.5 billion last year, says Pinsent Masons, the multinational law firm. The number of these ‘club deals’ has reached a three-year high (see graph below) – there were 56 deals last year, up 30 per cent from 43 the year before. A ‘club deal’ is when two or more private equity or trade buyers jointly acquire a company. One of the biggest club deals of recent years was the GBP6.8 billion acquisition of ASDA, in October last year by the Issa brothers and TDR Capital.  Alasdair Weir, Partner at Pinsent Masons, says by pooling their fire power, club deals allow groups of investors to buy bigger targets and share risk. In some cases this can reduce the amount of leverage needed, allowing deals to be equity funded more quickly and with more certainty.  The impact of Covid-19 on the economy has caused some lenders to exercise more caution on leveraged buyouts in those sectors most affected by the lockdown. By increasing the equity slice, club deals allow buyers to use lower levels of debt financing.

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