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Covid-19 Diligence Briefing

Our briefing for Monday September 21, 2020:

  • The United States’ Centers for Disease Control (CDC) made its second bizarre move in a matter of weeks. On Monday, the federal public health agency said it had mistakenly issued guidance on airborne transmission of the coronavirus and that another update would be coming soon. In language that was posted Friday and now removed, the CDC said COVID-19 was most commonly spread through close contact with other people, but growing evidence showed droplets and airborne particles can remain suspended in the air and travel beyond distances of six feet such as in restaurants, fitness classes, choir practice, etc. Last week the CDC had updated its coronavirus testing guidance after a New York Times article stated CDC scientists didn’t write the original update back in August.
  • In Canada its two most populous provinces continue to see the largest increases of COVID-19 cases it has seen in months. In Quebec, 586 new cases were reported on Monday, the highest daily increase since May. Montreal and Quebec City, the province’s two largest cities had their COVID-19 alert level raised to orange, just one stage short of its highest level. Ontario reported 425 new cases on Monday, its highest total in three-and-a-half months. The new cases have remained consistent; happening mostly in the province’s high-density populated areas and close to 70% of those new cases are people under the age of 40. 
  • In the United Kingdom, the country’s chief medical officer and chief scientific adviser said it is in for a very challenging winter. In a televised address, the two said coronavirus cases could hit almost 50,000 a day within weeks on the current trajectory and deaths could top 200 a day by November unless action is taken. Therefore, it is numbers and projections such as these that are forcing Prime Minister Boris Johnson to make his next move on how the government plans to fight the pandemic, which he plans to do on Tuesday.
  • In Spain, the city of Madrid is displaying Europe’s highest rate of coronavirus infections. Therefore, as of Monday at midnight, the country has ordered 850,000 people not to leave their neighbourhoods. The new rules will apply for two weeks and people can only exit or enter the affected areas for work, education, health or similar reasons. The city has recorded more than 45,000 new cases in the past two weeks alone.
  • Germany will set-up pop-up clinics that will take patients with typical coronavirus or flu symptoms away from the general hospitals. The “fever clinics” as they are being called, are part of the government’s strategy for the expected rise in cases over the autumn and winter months. The country’s health minister said the clinics should be up and running in the autumn, while Germany also aims to step-up protection measures and testing for high-risk groups, such as nursing homes.
  • The Czech Republic’s health minister Adam Vojtech resigned on Monday after criticism of his handling of the COVID-19 pandemic, especially during this latest surge. Before the start of the summer, the government lifted almost all of its restrictions imposed during the first wave of the pandemic. Thanks to that move, the Czech Republic has seen the number of infections double in the last month and trail only Spain for Europe’s second fastest COVID-19 new case rate in recent weeks. Roman Prymula, a top epidemiologist who helped lead the country through its initial response back in the spring will be the new health minister, replacing Vojtech.

Covid-19 – Due Diligence And Asset Management

Bank Shares Slide on Report of Rampant Money Laundering

Brief: The financial sector was hit hard Monday following a report alleging that a number of banks, JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank and Bank of New York Mellon among them, have continued to profit from illicit dealings with disreputable people and criminal networks despite previous warnings from regulators. According to the International Consortium of Investigative Journalists, leaked government documents show that the banks continued moving illicit funds even after being warned of potential criminal prosecutions. The report compounded a massive sell-off across global markets because of gloom and doom over COVID-19 infections and the economic damage from the pandemic. The consortium reported that documents indicate that JPMorgan moved money for people and companies tied to the massive looting of public funds in Malaysia, Venezuela and the Ukraine. The bank also processed more than $50 million in payments over a decade for Paul Manafort, the former campaign manager for President Donald Trump, according to the documents, which are known as the FinCEN Files.

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Investors Brace for Months of Big Market Swings as Virus, Political Worries Loom

Brief: Investors are bracing for an extended period of market volatility, as worries over a potential resurgence in coronavirus cases and political uncertainty roil stocks. The Cboe Volatility Index, known as “Wall Street’s fear gauge,” hit its highest level in nearly two weeks as concerns over waning fiscal stimulus and the long-term economic consequences of the coronavirus pandemic took the S&P 500 down to a seven-week low on Monday. [.N] Market participants aren’t expecting the turbulence to die down any time soon. VIX futures show that investors are betting that market swings will persist beyond the Nov. 3 U.S. presidential election and into December, reflecting worries over the possibility of a contested election and concerns that a deeply divided government will fail to agree on providing more fiscal stimulus to support the U.S. economy. “It’s not just Election Day that matters to this market,” said Stacey Gilbert, portfolio manager for derivatives at Glenmede Investment Management. “It’s also ‘do we get fiscal stimulus or do we not?’” Those concerns, some investors say, have been sharpened by the death of Supreme Court Justice Ruth Bader Ginsburg, which observers expect to deepen partisan divides as it sets up what promises to be a fierce fight in the U.S. Senate over President Donald Trump’s eventual nominee to replace her.

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Carlyle to Acquire Data Company TriNetX in Health-Care Drive

Brief: Carlyle Group Inc., the alternative asset manager overseeing $221 billion, is buying a majority stake in clinical data company TriNetX Inc. Equity capital for the investment came from the $18.5 billion private equity fund, Carlyle Partners VII, the company said Monday, declining to comment on deal terms. Closely held TriNetX has built a global network of research hospitals and academic institutions, biotechnology and drug companies, contract research organizations and other specialty data partners. Carlyle’s investment will help the company, founded in 2013, bring more technologies such as artificial intelligence and machine learning to researchers, according to Gadi Lachman, chief executive officer of Cambridge, Massachusetts-based TriNetX…  The deal adds to Carlyle’s growth investments in the health-care industry. The firm said earlier this month it led a $175 million round for Grand Rounds. Carlyle also backed 1Life Healthcare Inc., the primary-care clinic chain that went public in January. Other deals have focused more broadly on technology…

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Hedge Funds See Opportunity in Battered New York, San Francisco Apartment Markets

Brief: In the wake of the COVID-19 outbreak, as businesses across the country urged employees to work from home, rents plunged in New York City, San Francisco and other densely-populated cities. Still, prominent hedge funds, including D1 Capital Partners and Long Pond Capital and mutual fund giants Capital Group and T. Rowe Price, purchased shares in the second quarter in companies that rent residential real estate in urban markets, buying in at beaten-down levels and possibly betting on a faster rebound than Wall Street forecast. Now, nearly three months later, shares of real estate trusts that specialize in urban apartment rentals are down more than the broader real estate sector and the benchmark S&P 500 stock index for the year-to-date and since the March market rout. Shares of Equity Residential, founded by billionaire Sam Zell, are up 7% since the March low, AvalonBay Communities, which owns the Avalon Morningside Park with views of Manhattan, and UDR are up 26% and 14%, respectively, while the S&P 500 is up 48%. “The next three to five years are going to be very challenging,” said Jonathan Litt, whose hedge fund Land & Buildings Investment Management concentrates on real estate. “The key is to stay alive until 2025 in these markets.”

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Hedge Funds Wanted After Investors Lose Complacency

Brief: Hedge fund managers that have successfully navigated their way through the first half of this year and are producing good returns are in demand by institutional investors that are adding more hedge fund exposure to their portfolios and/or are upgrading lackluster managers with better choices. "There's a sense of optimism from hedge fund managers, backed up by investors," said Thomas P. Kehoe, managing director and global head of research and communications for the London-based Alternative Investment Management Association. "More investors are interested in hedge funds, and are seeing a real tool they can latch on to in this difficult environment for preserving capital, managing volatility, mitigating risk and producing returns," Mr. Kehoe said. In fact, high volatility in the first quarter this year was the catalyst for investors to consider more investment in hedge funds, said Kenneth J. Heinz, president of index provider Hedge Fund Research Inc., Chicago. "A year ago, institutional investors were very complacent. They aren't anymore because of ultra-high equity valuations. They're building out their hedge fund portfolios by putting the unallocated portion of their hedge fund target to work," Mr. Heinz said.

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U.K. GDP Faces $14 Billion Impact from Closed U.S. Air Links

Brief: The closure of passenger air links between the U.S. and the U.K. will strip at least 11 billion pounds ($14.21 billion) off U.K. gross domestic product in 2020, according to a report commissioned by British Airways’ parent IAG SA, London’s Heathrow Airport, the Airlines U.K trade group and airport services firm Collinson Group. The authors called for the creation of city or state-based travel corridors between the U.S. and the U.K. as well as airport testing for Covid-19. Keeping the routes closed will cost the U.K. economy 32 million pounds a day by the beginning of October, according to the report. “Government inaction on aviation and its impact on Britain’s economy couldn’t be clearer,” British Airways Chief Executive Officer Alex Cruz said. “Ministers must reach agreement with their U.S. counterparts on a testing regime that minimizes quarantine and permits regional travel corridors to re-open the U.K.-U.S. market.” Airlines have been campaigning to lift restrictions on trans-Atlantic travel which have been in place since early March. New York to London is BA’s most profitable route, with business travel a key driver of demand. The route generated about 7 million seat sales last year. The U.S. is the single biggest source of visitors to the U.K., with almost 4 million people visiting annually, according to the report.

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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 September 18, 2020:

  • In the United States, a New York Times article is stating politics seem to be trumping science more and more when it comes to the coronavirus. The article points to a controversial move made by the Center for Disease Control and Prevention (CDC) last month which said people without COVID-19 symptoms didn’t need to be tested. The recommendation was not written by CDC scientists, but instead from the Department of Health and Human Services. The guidance came at a time when health experts were pushing for more testing, not less. On Friday, the CDC updated their guidelines yet again, rolling back the controversial changes saying testing should include asymptomatic persons, including close contacts of a person diagnosed with COVID-19. Other than the New York Times article, it is difficult to see what changed over the last month, which could lead to more confusion for Americans when it comes to testing.

  • In Canada, the premiers of Ontario, Quebec, Manitoba and Alberta have issued a joint call to the federal government and Prime Minister Justin Trudeau. The call comes days before the government’s throne speech and the premiers are looking for an increase to boost federal health transfers, which have become more urgent thanks to the COVID-19 pandemic. The four provincial leaders want the funding increased from $42 billion to $70 billion per year, with an additional demand to cover 35% of health-care costs going forward. The prime minister’s office indicated no date for the call, but it is expected to take place before September 23rd, which is when the throne speech was expected to take place.

  • In the United Kingdom, ministers on Friday announced plans to extend socializing restrictions to 3.3 million more in England. As of Tuesday, households will be prohibited from meeting indoors in Merseyside, Lancashire, excluding Blackpool, and parts of the Midlands and West Yorkshire. The new restrictions mean about 20% of the UK’s population or 13 million people, will be living under restrictions. Recent data has shown the number of new COVID-19 infections in the UK are growing up to 7% a day. Leading scientists are even suggesting to the government a nationwide lockdown for two weeks in October to help curb the spread, but Prime Minister Boris Johnson is said to be strongly against such a measure.

  • India’s doctors are accusing their leader Narendra Modi and his government of callous disregard for their lives as they battle the coronavirus pandemic. The Indian Medical Association (IMA) said that 382 doctors have died from COVID-19 since the pandemic started and the situation is only getting worse as frontline healthcare workers deal with daily infections that are approaching 100,000. The IMA have stated the Modi government has tried to conceal the number of causalities and that the rate of fatality for infected doctors were nearly four times greater than the general public. The government’s pushback has been they have established an insurance scheme for healthcare workers infected with the coronavirus, but the IMA complained the program didn’t work and benefits were not reaching the intended recipients.

  • The metropolitan government of Seoul, South Korea have stated they plan to seek $4.6 billion won, or close to $4 million USD in damages against a church for causing the spread of the coronavirus by disrupting tracing and testing efforts. Back in mid-August, a fresh wave of infections erupted at a church whose members attended a large protest in downtown Seoul. The outbreak has caused triple-digit increases in daily COVID-19 cases for more than a month.

  • In Australia, the country is set to increase the cap on the number of citizens allowed to return home from 4,000 to 6,000. The move was confirmed by Prime Minster Scott Morrison during a Friday news conference as there are more than 25,000 Australians abroad waiting to return home. All travellers who intend to come back home are required to spend 14 days in a quarantined hotel at their own cost. Prime Minister Morrison also noted during the news conference that he is working with New Zealand towards the first elements of a travel bubble between the two countries.

Covid-19 – Due Diligence And Asset Management

Bank of America’s CEO Says More Stimulus Needed to Help Last of Recovery

Brief: Bank of America Corp. Chief Executive Brian Moynihan called for another round of federal stimulus to help the U.S. reach a full economic recovery from the coronavirus pandemic. “You’re back up to where 95% of the economy is back,” Moynihan said Friday in an interview with David Westin in advance of next week’s Bloomberg Equality Summit, adding that more help is needed for restaurants, airlines, performing-arts venues and state and local governments so they can “cross that same bridge” as housing, health-care and other recovered industries. “We’ve got to help everybody else get across.” Moynihan said a year-over-year increase in consumer spending is a sign of the economy’s resilience. U.S. retail sales rose 0.6% last month, following a 0.9% gain in July, the Commerce Department reported earlier this week. Government support for small businesses is running dry with the Paycheck Protection Program having closed in early August, and a supplemental $600 a week in unemployment benefits having expired at the end of July. Some House Democrats are keeping pressure on Speaker Nancy Pelosi to bring a new coronavirus relief bill up for a vote next week as they look to signal that the party is pursuing a deal to bolster the economy. Pelosi has held firm that the White House should first agree on a $2.2 trillion plan Democrats have put on the table.

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Wall Street’s Return-to-Office Push Finds Virus Won’t Cooperate as Infections Hit Trading Floors

Brief: Wall Street leaders made the case this week for bringing more workers back to the office, while a rash of COVID-19 infections on trading floors showed how quickly they could be sent back home. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc all had to quarantine groups of traders after employees tested positive for the coronavirus. The setbacks threaten a ramp-up of return-to-office efforts that executives have said are necessary to preserve productivity and firm cultures… But ending the lockdowns will mean trying to head off new outbreaks. Goldman Sachs had to send some traders back home after at least one employee tested positive for COVID-19 at its Manhattan headquarters. The firm hasn’t seen any transmission of cases within its offices, according to a person monitoring the situation “Our people’s safety is our first priority, and we are taking appropriate precautions to make sure our workplaces remain safe for those who choose to return,” Leslie Shribman, a spokeswoman for Goldman Sachs, said in a statement Thursday.

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How Covid-19 Permanently Changed the Way Businesses Operate

Brief: Companies looking to return to the norms of January 2020 should rethink their expectations. The Covid-19 pandemic has permanently changed how businesses operate, according to a report from the Carlyle Group. The virus caused a sudden and swift shock to the U.S. economy. In March, U.S. businesses switched from all staff working in the office to many working from home in just days. The big surprise? Companies of all sizes were able to meet or exceed prepandemic business volumes, according to Jason Thomas, Carlyle’s managing director and head of global research, who wrote the report When the Future Arrives Early. Don’t expect any big changes to remote working once the economy recovers, which could take a few years, wrote Thomas, adding the virus broke the inertia of companies requiring staff to be in the office full time. “Some people may never go back,” Thomas wrote. “In the future, work arrangements will be optimized based on what works best for the employees and the business rather than expectations that had been inherited from a different time.”

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A “Psychological Placebo”: Why This Hedge Fund Manager is Betting Against Drug Companies in the Race for a Covid Vaccine

Brief: The frantic hunt for an effective vaccine against coronavirus could leave some pharmaceutical companies highly exposed in a fiercely competitive race – and UK hedge fund Argonaut Capital is weighing in with several key bets against the sector. Argonaut’s CEO and CIO Barry Norris, who runs the firm’s Argonaut Absolute Return equity long/short fund, is avoiding large blue-chip drug names such as AstraZeneca and Pfizer (“the vaccine doesn’t really move the dial for them,” he says) as well as small-cap stocks, where there is a liquidity risk. Instead, he has built short positions against the “five biggest pure plays” in the sector, including Moderna – which has a USD25 billion market cap – along with US-focused German companies BioNtec and CureVac, as well as Novavax. “None of them have ever brought a drug or a vaccine to market successfully,” Norris says of his targets, which he sees as being overvalued. “Between them they’ve got about USD500 million of revenues this year, but they’ve got a USD50 billion market cap. There’s a lot of hope and speculation in those share prices.”

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Investec Sees Profit Falling as Much as 68% on Virus Fallout

Brief: Investec Ltd. expects first-half profit to slump as much as 68% because of the economic slowdown caused by the coronavirus pandemic. Headline earnings including the bank’s demerged asset management unit will likely fall to between 7.3 pence and 9 pence in the six months through September, compared with 22.7 pence a year earlier, the Johannesburg-based lender said Friday. “The first half of the year has seen lower average interest rates, reduced client activity and a 22% depreciation of the average rand against pound sterling, compared to the prior period,” it said in a statement. “Capital and liquidity ratios remain robust and are expected to be stable.” The owner of banks and wealth-management businesses is restructuring its U.K. lending operations and planning as many as 210 job cuts -- about 13% of staff -- in order to remove redundant roles and save costs. Investec spun off its asset management unit in March to provide Ninety One Ltd. with more scope to scale-up, while creating a more focused banking unit. Investec Plans to Cut 210 Jobs at Its U.K. Banking Division In line with regulatory guidance in South Africa and the U.K., Investec doesn’t expect to declare an interim dividend, the bank said. In May, the lender scrapped its final dividend and doubled loan-loss provisions as it braced for further fallout from the pandemic.

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A $700 Million CMBS Portfolio Is on the Brink as Malls Collapse

Brief: Bond investors who wagered on a group of malls owned by Barry Sternlicht’s Starwood Capital Group are starting to take losses after the Covid-19 pandemic shuttered stores and wiped out emergency cash reserves that had been keeping interest payments flowing. The commercial-property bond, known as Starwood Retail Property Trust 2014-STAR, is backed by an almost $700 million defaulted loan. It’s cutting interest payouts to investors for a second time, after a reserve account dried up in June and a sharply lower property valuation led to the servicer holding back some funds. The bond’s performance shows how rapidly the pandemic is deepening losses in a sector that was already getting crushed by online shopping. Even the part of the bond deal that was once rated AAA -- meaning bond raters saw virtually no risk of taking losses just two months ago -- have now been cut deep into junk territory. “The experience of the mall CMBS from Starwood is certainly symptomatic of the larger narrative,” said Christopher Sullivan, chief investment officer of United Nations Federal Credit Union. Weakening mall asset fundamentals and fewer willing investors “will present ongoing financing problems.”

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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 September 17, 2020:

  • United States President Donald Trump is urging Senate Republicans to increase the size of the stimulus proposal. Ahead of the upcoming election, President Trump is trying to channel his dealmaker persona that was key to him winning the election the first time around and is keen to reach a deal with Democrats before November 3rd. In a tweet on Wednesday, Trump urged Republicans to “go for much higher numbers” than the $500 billion plan, which was blocked by Democrats last week. Earlier this week, a 50-member group of House Democrats and Republicans put together a $1.52 trillion stimulus plan.

  • In Canada, the new federal Conservative leader who is in self-isolation after being exposed to COVID-19, via a staff member, is blasting the leading Liberal government for the current state in testing. “The Trudeau Liberals have created this mess by refusing to approve other testing methods – despite all our allies having, for months, multiple tests including much faster and invasive methods,” said Erin O’Toole. The opposition leader and his family were turned away from an Ottawa testing site on Wednesday after waiting hours because of capacity issues.

  • In the United Kingdom, seven areas in Northeast England have been placed under strict pandemic restrictions amid a “concerning rise” in COVID-19 infection rates. The announcement was made by Health Secretary Matt Hancock on Thursday and affects 1.5 million people overall, including the cities of Newcastle, Sunderland and Durham. The restrictions will include a ban on socializing outside households, or support bubbles, and a mandated closing time of 10 PM for all bars, pubs, restaurants and leisure centres. The measures will come into effect as of midnight Friday morning.

  • France is following a similar plan as the UK, applying new restrictions soon to the cities of Lyon and Nice, while Marseille could face even tighter measures than those already in place, including the closures of bars and bans on public meetings. The new restriction call was made by Health Minister Olivier Veran and also said the pandemic course in other major cities such as Paris, Toulouse, Rennes and Lille are being watched with concern. “This is now a reality. The epidemic is once more very active in our country. We have to learn to live with the virus for several months,” said Veran.

  • India’s city of Mumbai, considered to be the commercial capital of the country, is set to see new enforced restrictions from its police department. As of midnight local time on Friday, and continuing until the end of September, Mumbai city residents’ movement across the city will be prohibited. The order will stunt any movement in containment zones – sections of the city deemed “hot” spots – except for essential activities. For the rest of the city, certain exemptions pertaining to the last order will be in place. A list issued by state government gives exemptions to government offices, service providers, banks, ports and essential service providers.

  • Ahead of an election next month, New Zealand’s finance minister was left trying to defend the government’s decision on one the world’s toughest COVID-19 lockdowns. The result to the economy was a 12.2% drop in GDP from April to June, compared to the previous three months. The contraction, similar to a lot of other countries in the world now has New Zealand in its first recession in a decade. However, the country’s finance minister, Grant Robertson is pointing to an outbreak in Auckland, the nation’s largest city last month. The situation was brought under control fairly quickly and according to Robertson, highlighted the benefits of sticking with a policy to eliminate, rather than suppress COVID-19.

Covid-19 – Due Diligence And Asset Management

Fink Laments Eroding Corporate Culture in Work-at-Home Era

Brief: BlackRock Inc. Chief Executive Officer Larry Fink said he worries that working remotely results in a lack of productivity and collaboration. “The most difficult issue for all of us is retention of a culture,” Fink said Thursday during a virtual conference hosted by Morningstar Inc. “Cultures were not meant to be done in a remote fashion.” Fink said that although he’s proud of how the New York-based company has performed through the Covid-19 pandemic, he’s concerned about 400 new young hires who joined in July, who have never been to the office. BlackRock, the world’s biggest asset manager, said last month that it would allow employees to work remotely for the rest of the year. While some big Wall Street firms are seeking to get staff back to the office, there are already signs of how challenging that could be. JPMorgan Chase & Co. sent some workers home this week after an employee in equities trading tested positive for Covid-19. JPMorgan CEO Jamie Dimon said this week that he sees prolonged remote work inflicting serious social and economic damage. “Going back to work is a good thing,” Dimon said in a panel discussion Tuesday.

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Nuveen CEO Says Staff Will Not Return to Offices Until 2021

Brief: Nuveen’s staff will not return to its offices until 2021, Chief Executive Officer Jose Minaya said. That decision was “heavily debated” and so far the company has found that its operations have fared well with staff working remotely, he said at the FT Future of Asset Management virtual conference Thursday. Chicago-based Nuveen is the investment arm of retirement savings giant TIAA. “The engagement with clients is the highest ever,” Minaya said. Minaya also said about 4% of Nuveen’s investment staff took voluntary buyouts and the company expects no layoffs for the foreseeable future. The rate is comparable to the company’s turnover for investment personnel in 2019, he said. In May, TIAA offered a voluntary separation program for most of its global workforce. The buyout offer went to 75% of the company’s 16,500 employees. Asset management firms have been closely scrutinizing expenses as investors have flocked to low-cost index funds. The move has cut into profit for some firms and made it difficult for smaller investment companies to compete against behemoths including BlackRock Inc.

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How to Launch a Hedge Fund in a Pandemic

Brief: New manager Hickory Lane Capital Management has launched a $100 million equity long-short fund with seed money from Investcorp-Tages, a joint venture formed in May, as well as capital from outside investors, including family offices and peer hedge fund managers. Investcorp and European asset manager Tages earlier this year consolidated their absolute return businesses to form a new venture that includes customized portfolios, a hedge fund seeding business, and multi-manager portfolios in private debt and other alternative investments. Prior to forming the joint venture, the two firms had deployed $2 billion in assets between them and seeded 42 emerging managers, mostly hedge funds. Hickory Lane founder and chief investment officer Joshua Pearl, who spent nine years investing in stocks as a partner at Brahman Capital, never expected that he’d build his first hedge fund firm in a pandemic. But shortly after leaving Brahman, the spread of Covid-19 shut down economies around the globe.

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The Richest Got $37 Billion Richer During COVID-19, While Millions Lost Their Jobs

Brief: As millions of Canadians lost their jobs during the COVID-19 pandemic and the economy collapsed, the country’s richest got richer — more proof that the economy and the stock market do not always move in lockstep. Canada’s 20 richest have collectively added $37 billion to their fortunes since March, according to a new report from the Canadian Centre for Policy Alternatives. None of them experienced a drop in net worth. David Thomson and family, who’s consistently at the top of the country’s richest lists with their media and publishing empire, led the way with a $8.8 billion increase in wealth. Shopify’s skyrocketing stock price gave founder and CEO Tobi Lutke a $6.6 billion increase. The continued rise in e-commerce helped Alibaba’s Joseph Tsai come in fourth place, with a $4.5 billion increase. Lululemon founder Chip Wilson was next with a nearly $3 billion gain — evidence that the pandemic has kept athleisure in vogue. And 92 year old James Irving, head of the J.D. Irving conglomerate, rounded out the top five by adding $2.1 billion. But as their wealth grew COVID-19 took a record toll on Canada’s economy and the unemployment rate hit an all-time high of 13.7 per cent in May, 1.1 million people are still out of work.  “At the same time as billionaires like Loblaws owner Galen Weston have seen their wealth balloon, front-line workers stocking shelves and scanning groceries at his stores have continued to risk their health and that of their loved ones by coming into work,” said Alex Hemingway and Michal Rozworski in the report.

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Fund Managers Confident of a Recovery in Next 12 Months, says Bank of America Survey

Brief: Following a historic rally from March lows, Bank of America Securities' latest Fund Manager Survey showed that a majority of the respondents believed a new bull market had started. The survey, conducted between September 3 and 10, involved 224 managers with assets worth $646 billion under management. Around 58% percent managers said that the market is bullish, compared to 25 percent in March. However, 29 percent were of the view that the market is still bearish. While 41 percent of those surveyed said that COVID-19 vaccine could trigger higher bond yields, 37 percent said that inflation would be responsible for higher bond yields. On recovery, 37 percent said that it would be U-shaped or W-shaped and 20 percent said that recovery charts would be V-shaped. Around 51 percent of fund managers preferred the balance sheet discipline, whereas 37 percent wanted increased capital expenditure as compared to 13 percent in April. While most managers believed that a vaccine announcement would be made in the first quarter of 2021, some 32 percent were optimistic of an announcement in the Q4 of 2020.Around 84 percent of the managers said they expected global growth to go up within the next 12 months.

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Vast Majority of Managers Still on Lockdown – Survey

Brief: The number of money management firms with employees working from home has barely budged over the summer, a Callan survey released Wednesday showed. Callan said 81% had not opened their offices as of Aug. 15, nearly the same as the 84% that had reported keeping their doors closed in June. The investment consultant's second "Coping with COVID-19" survey report said 44% of the 98 responding firms have not set a date for returning to the office. Of the remaining universe of managers surveyed in August, 36% said they don't expect to go back until 2021. Just 2% of firms picked that time frame in the June survey. A September opening date was named by 12% of August respondents vs. 25% in June; an October date was picked by 7% in the recent survey, compared to 1% in the previous survey; and just 1% of those recently surveyed cited November as the month they might reopen vs. zero in the June survey. By region, more managers — 38% each — in the U.K. and Southeastern U.S. now have staff in the office. The level of office openings was 20% on the U.S. West Coast, 12% in the Northeast and 9% in the center of the country. The offices for the two managers surveyed in the Mountain West are both closed.

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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 September 16, 2020:

  • The United States Centers for Disease Control and Prevention (CDC) said the country should have enough COVID-19 doses for Americans to return to “regular life” by around this time next year. The statement came from Dr. Robert Redfield, Director of the CDC on Wednesday appearing in front of a Senate panel. Dr. Redfield also claimed he expects vaccinations to begin in November or December, which seemed to echo claims made by United States President Donald Trump in a town hall discussion on Tuesday telling undecided voters a vaccine should be ready in four weeks. The CDC director noted the first batches will be limited and made available to those most in need, such as healthcare workers.
  • In Canada, multiple media sources are reporting the current agreement on the US-Canada border closure to non-essential travel will be extended into November. The current agreement is set to expire September 21st, but CTV News is citing sources the border will remain closed until it is felt that the COVID-19 pandemic is under control on both sides of the border. Elsewhere in the country, Ontario Premier Doug Ford will be pushing to rollback social gathering limits in high populated areas such as Toronto, Peel (Mississauga & Brampton) and Ottawa after 315 new cases were confirmed on Wednesday; most occurring in the regions mentioned. The current limit in the province on social gatherings is 50 people indoors and 100 outdoors.
  • In the United Kingdom, Prime Minister Boris Johnson admitted on Wednesday what most Britons already know: the country does not have the capacity to cope with the current demand for COVID-19 testing. “Demand has massively accelerated in the last two weeks. We don’t have enough testing capacity right now. In an ideal world I would like to test absolutely everybody who wants a test,” said Johnson to a committee of members of Parliament. Prime Minster Johnson blamed the surge in demand for virus tests on people trying to prove they didn’t have the disease so they could return to normal life but would like Britons to follow the guidance in place that states people should only be seeking a test when they have symptoms.
  • In Ireland, the government had a scare on Tuesday after Premier Micheal Martin and his entire cabinet were directed to restrict their movements for several hours after the health minister fell ill. The minister completed a COVID-19 test, which came back negative allowing the restrictions to be lifted late in the evening. The chaotic scene happened on the same day Martin and his government were setting out their plan to tackle the pandemic across Ireland as they see rising COVID-19 infections. 
  • Spain’s death total from COVID-19 has now moved past 30,000 – the most of any European country. Figures for hospitalizations and deaths are steadily rising in the country, but officials argue that detection rates are much higher and those infected are much younger than the initial first wave back in the spring. At its peak back in March and April, Spain was seeing close to 1,000 deaths per day. In the last 24 hours, there were 234 deaths and close to 12,000 active COVID-19 cases across the country.
  • Brazil’s epidemiologists are concerned the beaches and bars of Rio de Janeiro are reopening too early as the country heads into its summer season. World renowned for its coastline, which always attracts large crowds, the country’s second largest city could experience a second wave just as its dismantling much of its emergency healthcare capacity. The epidemiologists are saying that Rio is basing their decision to ease restrictions on incorrect data, which seemed to point to a decline in deaths. However, the deaths aren’t declining; instead they are sitting at a high plateau and the numbers that the decisions were based on were due to a bureaucratic delay in notifications. If Rio were deemed to be a country, they would have the worst mortality rate in the world due to COVID-19.

Covid-19 – Due Diligence And Asset Management

When to Stop Working From Home? How About Never, Workers Say

Brief: U.S. workers who are being shepherded back to the office would rather continue doing their jobs from home, at least a few days a week. It’s not that they hate the idea of returning, but more that they’ve grown to really like the work-from-home life. It’s becoming the big topic of conversation across virtual workplaces, as companies try to get employees to leave their makeshift desks in bedrooms, kitchen counters, porches or backyards for the once-familiar surroundings of the good old office. A Wells Fargo/Gallup survey released Wednesday found 42% of 1,094 workers surveyed in August had a positive view of working remotely, versus 14% who viewed it negatively. Almost a third of the 1,200 U.S. office workers surveyed by consultancy PricewaterhouseCoopers in June said they’d prefer to never go back to the office, while 72% said they’d like to work away from the office at least two days a week. Until recently, for those lucky enough to still have a job and to be able to do it from home, the question of whether they wanted to return to the office was theoretical. Now the prospect’s real. JPMorgan Chase & Co. has told its most senior sales and trading staff that they need to be in the office by Sept. 21. (There are exceptions for those with health or childcare issues.) At other firms, workers are being encouraged rather than commanded to come back, and employees are debating whether that means they have a choice to opt out of returning. A June survey of 1,000 professionals by management consulting firm Korn Ferry asked a simple question: “What are you most looking forward to when you return to the office?” About half pointed to camaraderie with colleagues, though 20% said they looked forward to nothing at all.

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London Firms Are Dumping Office Space as Workers Resist Return

Brief: London firms are dumping their unwanted office space as the pandemic forces tenants to review their real-estate needs. Excess space being offered for rent by companies in the capital has surged to the most in at least 15 years as businesses look to cut costs and shift more staff to long-term home working, according to research by real-estate data company CoStar Group Inc. More than 1 million square feet (92,900 square meters) has become available for sublet since June, the equivalent of two Gherkin skyscrapers. The trend is so far limited to London: the city’s second-hand space surged by 21% in the period, compared with just a 1% increase for the rest of the U.K…. Second-hand space poses a threat to developers building new offices, offering tenants seeking to move a cheaper alternative. While newly developed space that has yet to be leased in London remains relatively scarce, overall vacancy rates are increasing due to the buildings being offered up by companies that no longer need them. Banks including Credit Suisse Group AG, HSBC Holdings Plc and Nomura Holdings Inc. are among those companies currently trying to rent out excess space they no longer need, Bloomberg News reported.

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Antares Raises Over $3 Billion for Latest Private Credit Fund

Brief: Middle-market lender Antares Capital has raised just over $3 billion for its latest credit fund, which will focus on providing financing to mainly mid-sized private equity-backed companies. The vehicle, which held its final close this week, raised cash from sovereign wealth funds, public and private pensions, asset managers, banks and insurance companies, according to head of asset management Vivek Mathew. The fund, which attracted institutional investors from the U.S., Canada, Asia and the Middle East, exceeded its $1.5 billion target, Mathew said…  The vehicle’s close comes as fundraising in the $850 billion private credit universe rallied in the second quarter, buoyed in part by appetite for opportunistic and distressed strategies. Investors have also been lured by juicy yields in the rapidly growing market…  Mid-sized companies and their private equity backers are likely to find the flexibility of private credit even more appealing amid the uncertainty caused by the Covid-19 pandemic, according to John Graham. “At the end of the day, there is a large, scalable opportunity set there,” he said.

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Blackstone Warns of a ‘Lost Decade’ Where Stock Market Returns are ‘Anemic’

Brief: The coming years could be a “lost decade” for equity returns as companies struggle to grow their earnings, Blackstone’s Executive Vice Chairman, Tony James, told CNBC on Wednesday. James, who’s attending the virtual Singapore Summit, told CNBC’s “Squawk Box Asia” that stock prices may not rise further after becoming fully valued over a “five- to 10-year horizon.” “I think this could be a lost decade in terms of equity appreciation,” he said, referring to a term commonly used to describe a period in the 1990s when Japan experienced economic stagnation. He explained that current low interest rates may not dip further and may instead rise to more normal levels in the coming years.Higher interest rates, in many instances, tend to negatively affect corporate earnings and stock prices. High borrowing costs will eat into company profits and hurt share prices. In addition, companies will face “plenty of headwinds” that put pressure on earnings, he said. That include higher taxes, increase in operating costs, less efficient supply chains and “deglobalization” that will hurt productivity, explained James.  “All of that will be economic headwinds for companies. So I think you can have disappointing long term earnings growth with multiples coming in a little bit, and I can see anemic equity returns over the next five to 10 years,” he added.

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Singapore Family Offices Tackle Covid-19 Challenges

Brief: During times of disruption it can be expedient to be tactical and strategic. Crises can also provide a significant reminder on the need for good planning. And, family offices, unlike some other more cumbersome financial institutions, have the advantage of being dexterous and efficient, a key capability for investors in the turbulence of 2020. The Asset recently spoke with two Singapore-based family office groups – Golden Equator Wealth and Maitri Asset Management – about how they have managed their way through the Covid-19 pandemic, what they have learned, and which themes have emerged. Gary Tiernan, managing partner at Golden Equator Wealth, believes there is no doubt that well-run multi-family offices (MFOs) and single-family offices typically have clear decision-making processes and responsibilities that allow for quick decisions when required.  “From an investment perspective, the short lines of decision-making responsibility made it easier to execute buying decisions in March when volatility was so large that slow action could have had a high opportunity cost,” Tiernan says. “The sense of responsibility for client family wealth sharpens the focus on doing the right things to steward and grow that wealth.”

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Truth and Misconceptions Surrounding Private Equity, Dry Powder and Recovery

Brief: As the Coronavirus pandemic continues to cut through our lives, the urgency of robust public assistance for businesses remains a matter of vital economic importance. And yet, since the earliest days of the crisis, certain critics have taken exception to the role of private equity in the recovery. Much outrage has been directed at a perceived conflict between private investment firms who hold large quantities of dry powder (unused capital) and petitions to include their portfolio companies in public business stimulus packages such as the Paycheck Protection Program. Some critics might wonder why loans are given to those who don’t put their dry powder towards portfolio company support. But this stance not only over-simplifies and mischaracterises the role of dry powder, it is emblematic of much wider misconceptions about the significant contributions private equity makes both to portfolio companies and the economy as a whole. As governments around the globe consider additional stimulus spending in the face of COVID-19, it’s especially relevant to reconsider these misconceptions about the industry, recognise the value private equity provides during a downturn, and offer support instead of resistance. Regardless of what the critics think they know about private equity, the simple fact is that the industry supports 843,000 jobs and 4,300 businesses in the UK alone – and the US paints a similar picture. Negative attitudes about dry powder should not be permitted to overshadow such numbers.

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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 September 15, 2020:

  • In the United States, a 50-member group of House Democrats and Republicans have put together a $1.52 trillion stimulus plan. The dubbed “Problem Solvers Caucus” has been in development for weeks with the knowledge of the White House and leadership from both parties. However, this glimmer of hope for a solution doesn’t have a great track record as bipartisan groupings in the past haven’t been able to major broker major deals such as this. If this doesn’t work, American economists warn the US economic recovery is in danger of being weaker and more uneven as it tries to recover from the worst contraction since the second world war.

  • In Canada, the province of Quebec is moving their largest city, Montreal from a level one (Green) to a level two (Yellow) as COVID-19 cases increase. Under the new alert level, activities are still allowed to take place in compliance with health rules, but with added enforcement and potential fines to make sure they are followed. As of Tuesday, the province had recorded more than 200 cases for six days in a row. Elsewhere in the country, Canadians are in no hurry to open the land border with the United States. According to a poll conducted at the end of last month, a survey of 1,000 Canadians showed 90% agreed with the current Canada-United States border closure to non-essential traffic.

  • Last week, details were leaked about the United Kingdom’s plan for Operation Moonshot, a plan for mass coronavirus testing of up to ten million by early 2021. However, a group that represents hospitals in the country are complaining they can’t even keep up now due to a shortage of COVID-19 testing that could jeopardize efforts to stay ahead of a potential surge in the autumn. National Health Service providers said on Tuesday that inadequate testing is leading to increased absences in staff members as they are forced to self-isolate while they and their family members wait for test results. Home Secretary Priti Patel said this was “unacceptable” and “much more work needs to be undertaken with Public Health England.” 

  • Germany expects that no COVID-19 vaccine will be available for the wider population until at least the middle of 2021. The government’s research minister said safety must be the priority and that a vaccine will only be used on Germans when the benefit outweighs the risks. The German government has set aside £750 million to fund biotech firms working on COVID-19 vaccines, which will pay for clinical studies and preparation/distribution of vaccine inoculation.

  • With India closing in on five million confirmed coronavirus cases, a snapshot of its returning government shows what the country is dealing with. At least 17 members of the Indian parliament have tested positive for COVID-19 as the lawmakers were screened ahead of the re-opening of parliament on Monday. Twelve of the 17 infected members of parliament were from the ruling Bharatiya Janata Party. All other MP’s cleared by tests wore masks, occupied seats with glass enclosures and worked shortened hours.

  • Japan has named a new Prime Minister and his name is Yoshihide Suga. The 71-year old has served as the government’s chief cabinet secretary over the past eight years and will take over for Shinzo Abe, who is stepping down due to health reasons. Suga won in a landslide – taking 377 of the 534 votes (70.6%), which entitles him to serve out the remaining year of Abe’s three-year term. Suga could also decide to call a snap election to form a more durable administration and work on the recovery of the world’s third largest economy and help continue its battle against the COVID-19 pandemic.

Covid-19 – Due Diligence And Asset Management

JPMorgan Sends Some Traders Home After Worker Contracts Covid-19

Brief: JPMorgan Chase & Co. sent some of its Manhattan workers home this week after an employee in equities trading tested positive for Covid-19, according to a person with knowledge of the matter. News of the infection, on the fifth floor of the company’s 383 Madison Ave. building, was communicated to employees on Sept. 13, said the person, who asked not to be identified discussing information that isn’t public. That was less than a week after more workers began returning to offices after the Labor Day holiday, and just days after the biggest U.S. bank told senior traders they’d be required to return by Sept. 21. The case shows the challenges banks face as they try to bring more staff back to the office after months of remote work. JPMorgan has been among the boldest banks in calling workers back, and Chief Executive Officer Jamie Dimon spoke earlier Tuesday about his concerns that extended work-from-home could have its own consequences.

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Jamie Dimon Sees Long-Term Damage if People Don’t Get Back to Work

Brief: Jamie Dimon says it’s time to get people back to work. The JPMorgan Chase & Co. chief executive officer, who’s been going into the bank’s offices since June, said he sees economic and social damage from a longer stretch of working-from-home. Governments should be focused on cautiously reopening cities, learning from earlier mistakes made in hasty attempts. “Going back to work is a good thing,” Dimon said in a virtual panel discussion at the Singapore Summit. It makes sense to “carefully open up and see if we can get the economy growing for the sake of everybody.” Dimon told analysts at Keefe, Bruyette & Woods that the firm has noted productivity slipping from employees working at home, the analysts said in a Sept. 13 note to clients. That, along with worries that remote work is no substitute for in-person interaction, is part of why the biggest U.S. bank is urging more workers to return to offices over the coming weeks.

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Asia-Pacific’s Commercial Properties Battered as Investors Flee

Brief: Global investors have disproportionately reduced spending on commercial real estate in Asia Pacific compared with other regions amid the pandemic and the outlook remains challenging, according to a report. Total volume of commercial property acquisitions, including office, retail and hotels, was about 65% of the levels recorded in the last two years, the Switzerland-based Bank for International Settlements said in its quarterly review. By contrast, volumes in the Americas fell just 25% in the first half of the year, while those in Africa, Europe and the Middle East were little changed due to some large deals. “Cross-border investors may be particularly flighty when they face a large global shock such as the Covid-19 pandemic,” the BIS said. “It is then that their impact as marginal investors makes itself felt.”  A surge in cases following the virus outbreak forced countries like China and Singapore to impose stringent border controls and lockdowns in the early days of the pandemic, making it harder for investors to seal real estate deals. Even as they’ve reopened their economies, those countries are still cautious in easing travel restrictions amid a resurgence in global virus cases that threatens to derail containment efforts.

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Activist Hedge Funds Outshine the Competition, as Larger Managers Trail the Rest of the Industry

Brief: Activist-focused managers comfortably outperformed other strategy types last month, as the hedge fund industry continues to recover from the Covid-19 turmoil with solid August gains and positive year-to-date returns, new eVestment data shows. Activism-focused hedge funds rose 7.88 per cent in August. Known - and sometimes feared - for their often-combative approaches to investing, which include a range of tactics and methods to effect board level change and improve shareholder value, such funds have now made 3.25 per cent on average this year, eVestment said. That number is still down sharply from their 17.46 per cent gain last year, which itself represented a stellar comeback following a torrid 2018, when activists lost more than 10 per cent for the year. Overall, new eVestment metrics show that most hedge fund types and strategies are now in positive performance territory this year. Hedge funds added some 2.5 per cent on average in August, bringing their year-to-date returns to 2.21 per cent. That suggests the industry is broadly regaining its footing following a challenging few months amid the coronavirus crisis.

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Citigroup to Resume Cutting Jobs, Ending Pause During Pandemic

Brief: Citigroup Inc. will resume job cuts starting this week, joining rivals such as Wells Fargo & Co. in ending an earlier pledge to pause staff reductions during the coronavirus pandemic. The cuts will affect less than 1% of the bank’s global workforce, the bank said in a statement. With recent hiring, overall headcount probably won’t show any drops, the bank said. “The decision to eliminate even a single colleague role is very difficult, especially during these challenging times,” Citigroup said in the statement. “We will do our best to support each person, including offering the ability to apply for open roles in other parts of the firm and providing severance packages.” The bank said it has hired more than 26,000 people this year, and over one-third of those jobs were in the U.S. The lender had roughly 204,000 employees at the end of the second quarter. Banks have resumed job cuts in recent weeks after pledging, en masse, to pause such actions earlier this year. Many firms are pushing to cut costs as the pandemic has dragged on, threatening lenders with higher credit costs and crimping revenue growth.

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Largest Global Banks Lose USD635bn in Market Cap Amid Pandemic

Brief: New data from by Buy Shares indicates that 14 selected major global banks cumulatively lost USD635.33 billion in market capitalisation between December 2019 and August 2020, largely the main as a result of the coronavirus pandemic. Wells Fargo recorded the biggest slump with a percentage change in the market capitalisation at -56.26 per cent followed by Spain’s Banco Santander at -46.16 per cent. JP Morgan Chase’s change in market capitalisation was -30.16 per cent. During the period, Japan-based Mizuho Financial Group had the least change at -11.33 per cent. Intervention by central banks cushioned most facilities from a further slump.  “The drop in valuations for the selected banks could have been much worse if there was no intervention from central banks. The immediate measures taken by regulators to ease restrictions on liquidity and capital, banks have proved beneficial," says Buy Shares. "Although the measures put in place by authorities helped banks, they still face some immediate pressures on their capital and liquidity position, as the length and severity of the outbreak remain uncertain.” An overview of the individual market capitalisation shows that JP Morgan still holds a superior position at USD437.2 billion in December 2019 and USD305.44 billion as of August 2020. In December last year, Wells Fargo market cap stood at USD227.5 billion and in August it stood at USD99.5 billion.

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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 September 14, 2020:

  • In the United States, President Donald Trump is facing backlash from his first indoor campaign rally since June. President Trump held the rally in Nevada, which is a state run by a democratic governor and he wasn’t happy with the federal government’s defiance of his state restrictions on large events, which sits at no more than 50 people. Governor Steve Sisolak said the president, “blatantly disregarded the emergency directives and tough choices made to fight this pandemic… This is an insult to every Nevadan who has followed the directives, made sacrifices, and put their neighbours before themselves…” The government rejected the governor’s attacks stating, “if you can join tens of thousands protesting in the streets, gamble in a casino, or burn down small businesses in riots, you can gather peacefully under the first amendment to hear from the president.”
  • In Canada, Prime Minister Justin Trudeau is urging Canadians to be vigilant in following public health guidelines as COVID-19 cases continue to climb in its two most populous provinces. Speaking before a two-day cabinet retreat, Prime Minister Trudeau stated, “the last thing anyone wants is to go into this fall in a lockdown similar to this spring, and the way we do that is by remaining vigilant.” Ontario is reporting 313 news cases of COVID-19 on Monday – the highest daily count since early June. Meanwhile Quebec finds itself in a similar predicament seeing over 500 cases over the weekend, and its most in one day since the beginning of June. 
  • In the United Kingdom, after experiencing a setback in COVID-19 vaccine trials, the team of Oxford University and AstraZeneca are set to resume their work. A rapid review by the trial’s independent safety review committee and national regulators have concluded that is safe to resume inoculating new participants. So far, 18,000 individuals have taken part in the vaccine trials, which are taking place in the UK, United States, South Africa and Brazil.
  • Israel will be moving ahead with its second major lockdown after Prime Minister Benjamin Netanyahu made the announcement on Sunday. The timing isn’t the greatest either as starting this Friday, the beginning of the Jewish High Holiday season, schools, restaurants, malls and hotels will shut down. Israelis will also face restrictions on movement and gatherings. “Our goal is to stop the increase (in cases) and lower morbidity,” said Netanyahu in a national broadcast statement. “I know that these steps come at a difficult price for all of us. This is not the holiday we are used to.”
  • In the Middle East, Saudi Arabia will start easing coronavirus-imposed movement restrictions on Tuesday. The kingdom plans to end all restrictions on travel by land, air and sea by January 2021. For the time being, exempted groups including employees in the public sector, military personnel, diplomats and their families are some of those that can travel. In Dubai, government officials have closed several establishments for ignoring regulations as the area sees a surge in cases. Authorities have warned residents to follow regulations, such as wearing a face mask, as most infections have occurred through gathering. The United Arab Emirates reported a record 1,007 cases on Saturday.
  • The government in the Philippines are making a move to allow more passengers in public transport by gradually easing the one-metre social distancing rule. A group of medical frontline workers in the country have said it’s still too early to ease the distancing guidelines as the Philippines continue to have the highest number of infections in Southeast Asia with over 261,000 cases. Elsewhere in the country, President Rodrigo Duterte vowed to prioritize buying potential COVID-19 vaccines from Russia, or China, while also taking a shot at western nations. President Duterte said “the one good thing about China is you do not have to beg, you do not have to plead. One thing wrong about the western countries, it’s all profit, profit, profit.”

Covid-19 – Due Diligence And Asset Management

A Wall Street Giant Tapped $1.5 Billion in Federal Aid for its Hospitals

Brief: Like hospital chains across the U.S., LifePoint Health tapped federal relief money to blunt the cost of the Covid-19 pandemic. It was a potent lifeline, a total of $1.5 billion. But LifePoint is unusual in one respect, its owner: private equity firm Apollo Global Management, led by billionaire Leon Black. LifePoint was certainly eligible for the money. But the extent of the federal assistance could contribute to concern in Washington over whether private equity-backed hospitals should have been. In July, the U.S. House passed a bill that would require health-care companies to disclose any private equity backing when seeking short-term loans from the federal Medicare program. The reason for lawmakers’ concern: Private equity firms have ample access to cash. As recently as June, the Apollo fund that owns LifePoint had more than $2 billion to support its investments. Apollo, which manages $414 billion, recently told investors in an internal document that LifePoint was in such a strong market position that it was planning to make acquisitions of less fortunate hospitals.  The relief flowing to LifePoint illustrates a drawback of a government program designed to send out money quickly to every hospital, regardless of financial circumstances, according to Gerard Anderson, a health policy professor at Johns Hopkins University.

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At JPMorgan, Productivity Falls for Younger Employees at Home

Brief: A troubling pattern emerged as most of JPMorgan Chase & Co.’s employees worked from home to stem the spread of Covid-19: productivity slipped. Work output by younger employees was particularly affected on Mondays and Fridays, according to findings discussed by Chief Executive Office Jamie Dimon in a private meeting with Keefe, Bruyette & Woods analysts. That, along with worries that remote work is no substitute for organic interaction, are part of why the biggest U.S. bank is urging more workers to return to offices over the coming weeks. “The WFH lifestyle seems to have impacted younger employees, and overall productivity and ‘creative combustion’ has taken a hit,” KBW’s Brian Kleinhanzl wrote in a Sept. 13 note to clients, citing an earlier meeting with Dimon. A JPMorgan representative didn’t immediately respond to a request for comment. JPMorgan’s findings provide a data point in the debate over whether employees perform as well at the kitchen table as they do in the workplace, showing extended remote work may not be all it’s cracked up to be, at least for some job functions. While pre-pandemic studies found remote workers were just as efficient as those in offices, there were questions about how employees would perform under compulsory lockdowns.

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The Signals Coming From the Emerging Markets Petri Dish

Brief: Even though U.S. stocks are behaving like government stimulus will go on forever and Covid-19 will vanish shortly, emerging markets are giving investors a taste of what could happen when the world ultimately normalizes. One notable trend is that value stocks in emerging markets have finally stabilized. Value stocks have underperformed for years, setting off a frenzied debate on whether or not the investing style still works. “It seems that emerging markets are behaving defensively. Low vol is doing well and value stocks are not declining. Perhaps this is because emerging markets don't expect a big stimulus to artificially keep them going through a second Covid wave and therefore have to rely on normal market dynamics,” wrote Damian Handzy, Style Analytics’ head of research and chief commercial officer, in the firm’s most recent analysis of factor performance. In the paper published on Monday, the research firm found that August was the first month since the crash in March that Europe, the emerging markets, and the U.S. have diverged from one another. 

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Doomsday Real-Estate Bets Rejected by $40 Billion Swedish Fund

Brief: The woman running one of Sweden’s biggest pension funds says the Covid crisis has done less damage to property markets than some feared. That’s why Kristin Magnusson Bernard, the chief executive of Sweden’s $40 billion AP1 fund, is “heavily exposed” to prime real estate in city centers. Magnusson Bernard says she and her team in Stockholm “have thought a lot about what a world with less demand for office spaces would mean for us.” Though it’s clear “the sector will see some adjustments,” she said, “We don’t believe in any systemic meltdown in the real estate market. That is not our view.” At the end of June, AP1’s real estate exposure was close to $6 billion, or almost 15% of the total portfolio. The return over the first six months of the year was 1.1%, making real estate one of the better performing major asset classes that AP1 invests in. Overall, the fund lost 1.8% in the first half, after costs. A recent study by Norwegian bank DNB found that working from home is likely to be considerably more widespread after the Covid-19 crisis than it was before. The survey, which focused on Norway and Sweden, showed that 28% of office tenants expect to continue working from home, more than double the pre-crisis level. AP1 holds key stakes in some of the Nordic region’s biggest property managers and developers, such as Vasakronan AB. “We are heavily exposed to that type of prime locations in city centers,” Magnusson Bernard said.

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Bank of America Adopts AI, Finds ‘More Significant Credit Stresses’ From Covid-19

Brief: Bank of America Corp. has begun using artificial intelligence to predict the likelihood of companies defaulting on loans. “Today we present our inaugural work on applying the latest machine learning tools to analyzing the credit risk,” Bank of America credit strategists Oleg Melentyev and Eric Yu and head of predictive analytics Toby Wade said in a research note Friday. They have started using natural language processing to digest earnings-calls transcripts in order to estimate companies’ probability of default over the next 12 months.  In expanding their default model with the help of AI, the credit strategists seek to detect language used by chief executive officers and chief financial officers that signals a company’s high likelihood of default. Phrases that link to defaulting include cost cutting, asset sales, and cash burn, they said.  Natural language processing has pointed to “more significant credit stresses” in sectors exposed to Covid-19 than under Bank of America’s existing default framework, according to the note. For example, the machine-learning technology predicts default rates will be higher in energy, transportation, and media, and lower than estimated in the cable and health-care sectors.

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Africa’s Gathering Debt Storm

Brief: The Covid-19 crisis is pushing Africa to the financial brink. African governments are under pressure to continue servicing their external loans, leaving them with few resources to confront a historic pandemic and its economic fallout. Without external support – specifically, a comprehensive repayment freeze – some African economies will buckle under their debt burden. The resulting domino effect could imperil the entire continent’s development and harm richer countries, too. The international community’s response so far has been mixed. The most notable step so far – the G20’s Debt Service Suspension Initiative (DSSI) for the world’s poorest countries – covers only official bilateral debt. But 61% of African DSSI countries’ debt-service payments this year will go to private creditors, bondholders, and multilateral lenders like the World Bank. And, despite the G20’s assurances, some countries joining the DSSI were subsequently downgraded by global ratings agencies. The World Bank has played an unhelpful role here. Although its president, David Malpass, recently called for expanded debt relief and even raised the possibility of a write-off, he has also resisted calls for the Bank itself (a major lender to Africa) to freeze debt repayments. Instead, the US-dominated institution seems more interested in scoring political points by urging the China Development Bank to join the G20 initiative, even though doing so would really affect only one African country.

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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 September 11, 2020:

  • In the United States, Washington politicians continue to be in a stalemate over the next stage for coronavirus relief. Republicans in the Senate failed in their efforts to move a $500 billion stimulus package to the next level as Democrats voted to block the legislation because the package was deemed too small. In the procedural vote 52 Republicans were on board, but with 60 votes needed to move ahead and unable to secure any support across the aisle, the plan was dead on arrival. Congressional leaders and senior administration officials said they are open to negotiations, but with elections in November and federal lawmakers set to adjourn in early October to campaign for their districts, the likelihood of a deal isn’t looking good. 

  • In Canada as Ontario has seen its highest COVID-19 daily case totals in months, the premier is calling the quarantine system put in place by the federal government “broken”. Since the end of March, the Quarantine Act has been invoked which requires anyone travelling outside of Canada to quarantine for 14 days upon arrival, even if they aren’t experiencing COVID-19 symptoms. In a news conference earlier in the week, Premier Doug Ford says his province alone has uncovered 622 cases of people thumbing their nose at the quarantine rules. “The system is broken, said Ford. I need the help from the federal government to make an amendment or change it. Why have our police go around and checking to see if people are quarantining if they aren’t going to follow up with a charge?”

  • According to a survey published on Friday, the coronavirus is spreading much more quickly in England now than in previous weeks. Statistical analysis conducted by the Imperial College London and Ipsos Mori estimate the reproduction value, or the R number to be at 1.7. Government scientists have repeatedly stressed the R number needs to be kept at or below 1 in order to curb the spread of the virus. Amid these concerns, leaked documents have shown an ambitious plan by the Boris Johnson government to test up to 10 million per day by January. Dubbed “Operation Moonshot”, under the plan huge groups of the population would be regularly checked, either by using swab tests that could deliver results in 20 minutes, or self-administered saliva tests. However, the problem with “Operation Moonshot” is that the technology described for testing is still in its infant stages – existing only in prototypes and yet to be signed off anywhere in the world.

  • Even as infections surge, France announced on Friday they would be halving the time people infected with the coronavirus must self-isolate at home from two weeks to one. The change in tactics reflects the government acknowledging the isolation period may be longer than necessary and many people weren’t sticking to the two weeks anyway. French Prime Minister Jean Castex said, “it’s essential that everyone respects strictly this period of isolation, which will be monitored.” Nearly 10,000 new COVID-19 cases were reported on Thursday with over 5,000 patients currently in French hospitals with COVID-19 related illnesses.

  • Israel will be the first major country to head back into a full nationwide lockdown after ministers voted to do so on Thursday. Media reports are stating the full lockdown would be reinstituted likely by the middle of next week and lasting for two weeks. After that period, schools will remain closed for another two weeks. The reports note specifics have yet to be finalized as a full cabinet vote will likely be held on Sunday. Israel reported over 4,000 new cases in one day for the first time earlier in the week and with close to 34,000 active cases, the country’s health system is becoming overwhelmed by an influx of seriously ill patients.

  • Japan and Singapore have agreed to allow essential business between the two countries starting September 18th. This marks the first country Japan has formed such an agreement with as they have imposed strict rules on arrivals into their country in order to prevent the spread of COVID-19. Singapore has done the same when it comes to their borders but have already struck similar deals with arrivals from New Zealand and Brunei. Business travellers must undergo pre-departure and post-arrival testing as well as follow a “controlled itinerary” for the first 14 days.

Covid-19 – Due Diligence And Asset Management

Trump Praises JPMorgan for Telling Trading Staff to Return to the Office

Brief: President Trump on Friday lauded the nation's biggest bank for calling its top trading staff back to the office after months of remote work. "Congratulations to JPMorgan Chase for ordering everyone BACK TO OFFICE on September 21st," Trump tweeted. "Will always be better than working from home!" JPMorgan told senior employees of the sales and trading operation in London and New York that they and their teams must return to the office by Sept. 21, a person familiar with the matter told FOX Business. The Wall Street Journal first reported the news Thursday. Employees who have medical conditions that make them more vulnerable to COVID-19 complications, or who live with someone considered at increased risk of severe illness, can continue working from home. That exemption also applies to employees with child-care issues Companies that have permitted their employees to work virtually for the majority of the year face a challenge in calling them back. Colleges and universities that welcomed back thousands of students to their campuses are now beset by COVID-19 cases.

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BlackRock and Ares Are Selling CLOs at Prices Signaling Recovery

Brief: Money managers are selling collateralized loan obligations at yields that would have been unthinkably low just a few days ago, signaling that one of the more battered corners of the credit market may be healing amid the Federal Reserve’s unprecedented support for company debt. Ares Management Corp. is marketing a CLO that is expected to carry a risk premium, or spread, of just 1.28 percentage point more than the benchmark on its highest-rated portion, according to people with knowledge of the transaction. BlackRock Inc. sold a deal on Thursday with AAA notes yielding 1.27 percentage point more than the London interbank offered rate. Collateralized loan obligations, or bonds backed by portfolios of leveraged loans, have been one of the last areas of corporate debt market to recover after security prices broadly plunged in March. As the Covid-19 pandemic weighed on company revenues, ratings firms began downgrading leveraged loans, which in turn spooked investors in CLOs. Even as recently as earlier this week, the risk premiums on KKR & Co.’s AAA notes priced at 1.5 percentage point more than Libor. Spreads in Europe are similarly narrowing, with AAA risk premiums as much as 0.2 percentage point tighter than they were in August. For U.S. deals, the healing in recent weeks has come in part because asset managers have sold so few new CLOs, according to a Wells Fargo & Co. report dated September 9.

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Agile and Resilient – Alternative Investments Embrace the New Reality

Brief: It surely goes without saying that COVID-19 has disrupted businesses of all types. And the Alternative Investment sector has not been immune. KPMG International and AIMA (Alternative Investment Management Association) surveyed 144 hedge fund managers globally, representing an estimated US$840 billion in assets under management (AUM), more than one-quarter of the industry’s total. The research examines in detail the effects of the pandemic on the alternative investment industry. In addition, KPMG International and AIMA canvassed the views of the industry via one-to-one interviews with Hedge Funds, investors and key ecosystem players including technology companies, prime brokers, fund administrators and law firms to provide additional insights to the survey findings. Through the various discussions and survey results it highlighted that in times of market volatility and business uncertainty – alternative investments fulfil an important role in an investor’s portfolio. Throughout the pandemic, the Hedge Fund industry has proven its ability to manage risk and volatility while still producing above-market returns for investors. Significant uncertainty may remain, but in conversations with fund managers and the data suggests the industry remains agile and resilient and is taking prudent steps in order to embrace the new reality.

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73% of PE, VC Managers Expect Drop in Dealmaking Following COVID-19 Fallout

Brief: Just 27% of private equity and venture capital fund managers globally expect investment activity to remain flat or rise in the coming months, with the remaining 73% taking a more pessimistic view, as managers grapple with uncertainty following the spread of coronavirus, according to an S&P Global Market Intelligence survey. Of the 142 managers polled globally, 30% expect dealmaking to slow by between a quarter and a half, with 29% expecting a volume dip of one-quarter and 13% taking a more negative view, predicting a drop of over 50%. The largest proportion of North American and Latin American respondents expect activity to decrease by between 25% to 50% in their regions. There was more optimism from respondents in Europe, the Middle East and Africa, with the majority of respondents expecting activity to dip by less than 25%. Asia-Pacific respondents were particularly upbeat, with the largest proportion expecting investment activity to remain flat or decrease. But that does not mean managers expect their own investment pipelines to come to a halt. More than half — 58% — of respondents globally will focus on making new, selective investments over the coming months, with 23% indicating they will focus on stabilizing their portfolios.

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Ray Dalio, in Economic Club New York Address, Speaks of Threats Beyond the Pandemic

Brief: According to Ray Dalio, the coronavirus pandemic was a blow to the system. But in his view, Covid-19 isn’t the biggest game changer. Instead, the Bridgewater Associates founder said Thursday that he sees the convergence of monetary policy, social and economic gaps, and the rise of China as forces that could change the world. Dalio shared his views on these changes — and how history informs them — Thursday at a digital event held by the Economic Club of New York. “It was the shock,” Dalio said of the pandemic. He added that history has shown that these shocks — whether they’re natural disasters, pandemics, or other calamities — become stress tests for a country’s health, financial and otherwise. But when the pandemic recedes, Dalio said he believes that these issues will remain. “How do you pay the bills?” he asked. “Are we going to be at each other’s throats? And what do the five wars, the conflicts with China, look like?” According to Dalio, those conflicts could include a trade war, a technology war, a geopolitical war, a capital war, or a military war.

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This Hedge Fund Is ‘Reasonably Confident’ a Covid-19 Vaccine Will be Approved This Year

Brief: Asset manager MKP Capital Management has placed a 70 percent probability on a Covid-19 vaccine being approved in 2020, with a smaller chance of that happening before the U.S. presidential election. MKP Capital, an alternative asset manager focused on global macro and fixed-income relative value strategies, sees a 40 percent chance that a vaccine will be approved before the election on November 3, according to a report from the firm dated September 9. “It is now MKP’s strong base case that we will have at least one successful vaccine by the end of the year,” the firm said in the report. “A major question mark remains around whether a vaccine will be available ahead of this date and potentially provide a boost to President Trump’s campaign.” Stocks and bonds were initially rocked by the Covid-19 pandemic this year, tanking during the first quarter before the Federal Reserve stepped in with a series of emergency measures. While markets have rebounded as investors look beyond the economic recession prompted by the deadly disease, some companies and sectors remain battered by the downturn. While the world is beginning to “learn to live with the virus,” Covid-19 is still causing a significant break in economic activity, Michael Hume, MKP’s head of strategy and research, said Thursday in a phone interview.

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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 September 10, 2020:

  • The United States will end coronavirus screening for airline passengers arriving from such places as China, Iran, most of Europe and Brazil. The decision was made by America’s Centers for Disease Control and Prevention (CDC) and the new policy will go into effect on Monday for those arriving at 15 designated airports. “We now have a better understanding of COVID-19 transmission that indicates symptom-based screening has limited effectiveness because people with COVID-19 may have no symptoms or fever at the time of screening, or only mild symptoms,” said the CDC in a statement. According to the Bureau of Transportation Statistics there were just 1.1 million travellers on international flights in July, down a whopping 90% from the same month last year. 

  • In Canada, the province of Quebec unveiled a new colour-coded regional alert system for COVID-19. The system is intended to help people understand the current level of risk, along with what actions need to be taken in the event of serious outbreaks. The four levels range from green (lowest) to the red (highest). Currently there are four regions in the yellow tier, which is the second tier of the four, while the rest of the province, including its largest city, Montreal remain in the green. Premier Francois Legault says police will start handing out fines to anyone who isn’t wearing a mask when required according to public health guidelines, especially to those classified to be in the “yellow” regions.

  • In the United Kingdom, as of Thursday two companies will launch paid saliva-based tests for COVID-19 as more and more people are either returning to schools, or back to their offices. British tech company iAbra has developed a test that uses a mouth swab and delivers results within 20 seconds. The test has been trialed at London’s Heathrow airport as the company tries to line up more customers. The other firm is Halo, which says its saliva test provides results in 24 hours, has Exeter University as its first customer and are in talks with an unnamed hedge fund and a major international airline.

  • France is choosing to prolong temporary virus-related unemployment benefits until next summer in order to protect further job losses from the pandemic. The country’s Labour Minister said the government would continue paying up to 84% of salaries for employees in struggling companies. Prior to the announcement, the job scheme in place to help the most exposed sectors such as hotels, cafes and event-related work was to expire at the end of the year. France has already spent £30 million on its temporary unemployment system since the country imposed a strict lockdown back in the spring, which put many out of work.

  • With the United Kingdom’s AstraZeneca suffering a setback in its phase three COVID-19 vaccine trials, China has picked up the ball and tried to press ahead as the new front runner. China National Biotec Group Co. has said none of its recipients of its two coronavirus shots so far have reported an adverse reaction or infection. The vaccine developer, a subsidiary of a state-owned drugmaker Sinopharm Group Co. touted the results on its official WeChat account stating hundreds of thousands of people have received the COVID-19 treatment so far. The potential vaccine is also being tested in countries in the Middle East and South America and may be available to the public by the end of the year, if all continues to go well.

  • The United Nations is calling on the world’s countries to contribute $35 billion US more, including $15 billion US over the next three months to the World Health Organization’s (WHO) program to back vaccines, treatments and diagnostics against COVID-19. Only three billion has been contributed so far as countries or governments from the European Union, Japan and the United States reach bilateral deals for vaccines. “There is real urgency in these numbers. Without an infusion of $15 billion over the next three months, beginning immediately, we will lose the window of opportunity,” said UN Secretary General Antonio Guterres.

Covid-19 – Due Diligence And Asset Management

The Pandemic is Making Risks of Slavery in Global Supply Chains

Brief: The coronavirus pandemic is complicating the task of rooting out modern slavery by making it impossible for companies or investors to visit factory floors in many countries, adding to the challenges of addressing supply-chain risks. The economic shock caused by the coronavirus outbreak is also making people more vulnerable to exploitation, further compounding the problem, Mans Carlsson, the Sydney-based head of ESG research at Ausbil Investment Management, told the Bloomberg Inside Track webinar on Thursday. Australia has gone further than the U.K. and California with laws requiring companies and investors to have a detailed plan on how they will assess and tackle the risk of modern slavery in their supply chains. With more than 40 million people working in slave-like conditions even before the pandemic, more than any time in human history, it’s a complex issue to address, Carlsson says. The global nature of supply chains can make the issue overwhelming, said fellow panelist Danielle Welsh-Rose, ESG investment director for the Asia Pacific at Aberdeen Standard Investments.

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Hedge Funds Bought the Dip as Nasdaq Tumbled into a Correction

Brief: Hedge funds stepped up buying of technology shares during the Nasdaq 100’s first correction since March, once again warming up to the industry after trimming stakes. Professional managers that make both bullish and bearish equity bets scooped up internet and software companies on Friday and Tuesday at the fastest rate in five months, according to data compiled by Goldman Sachs Group Inc.’s prime-brokerage unit. Meanwhile, hedge-fund clients at Morgan Stanley increased their exposure to growth and momentum stocks, styles dominated by tech companies, the firm’s data showed. Having taken a more neutral stance on tech as retail traders piled into the FAANG names and stay-at-home darlings like Zoom Video Communications Inc. and Peloton Interactive Inc., hedge funds took advantage of the Nasdaq 100’s three-day, 11% slump that chopped valuations from levels last seen 20 years ago. “They’re just riding the wave and believe that with interest rates low and inflation non-existent and with the Fed saying, ‘We’ll let it run a little hot,’ there’s more room to run,” said Chris Gaffney, president of world markets at TIAA Bank. “Is it a bubble and do we continue to inflate that bubble? I think that it can continue to inflate.”

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New York Office Glut Signals Market Downturn as COVID Bites

Brief: New York is facing a glut of workspace as fear of COVID-19 has reduced the daily usage of office buildings to almost nothing, a devastating sign for a city already reeling from the highest unemployment rate among the largest U.S. cities. Manhattan’s density and sea of skyscrapers together hamper a return to the office on the island and that is unlikely to change until a vaccine allows the subway and elevators in office towers to run at full capacity. Just 8% of employees have returned to Manhattan offices as of mid-August, the Partnership for New York City, a non-profit of nearly 300 chief executives, found in a survey of major city employers. The real estate industry is the most aggressive in returning, with 53% already back, the partnership said. “The economy and people’s sense of their health go in lock step,” said Michael Cohen, president of the tri-state area at brokerage Colliers International Group Inc (CIGI.TO). “Until people feel safe enough to go back to the office, you can stand on one leg and spit nickels – they’re not going to revive this economy,” he said.

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‘Exceptionally Challenging’: How Top CEOs Are Confronting Covid-19

Brief: It’s been a tough year for executives across Europe, the Middle East, and Asia — especially for those in the healthcare sector. “To be completely honest, throughout the past six months most decisions have been exceptionally challenging,” said Dr. Ahmed Ezzeldin Mahmoud Abdelaal, chief executive of Cleopatra Hospitals Group, which operates six hospitals in the Cairo area in Egypt. In May, Dr. Ezzeldin was at the helm when the group converted two of its facilities into Covid-19 treatment and isolation centers. “The transition had to take place in a very short time frame and there was no room for error,” said Dr. Ezzeldin, who has been voted the No. 2 healthcare CEO in Institutional Investor’s 2020 Emerging EMEA Executive Team. First place in the healthcare sector went to MLP Care chief executive Muharrem Usta, who leads Turkey’s largest healthcare provider. Usta said the safety of his staff was a top priority at MLP, which has 30 hospitals in 16 Turkish cities and has been involved in the treatment and diagnosis of patients with Covid-19, as well as public health messaging.

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Goldman Sachs Sees Double-Digit Returns in Emerging Junk Market

Brief: Analysts at Goldman Sachs have forecast double-digit returns on high yield - also known as junk - emerging market bonds over next 12 months if the world gets over its coronavirus worries. “We continue to think EM HY sovereigns offer the best risk-adjusted total return opportunity: our 12m target of ~600bp for EM HY spreads (from ~730bp currently) implies double-digit total return potential,” Goldman said in a note on Thursday. The investment bank also forecast emerging market governments would issue at least $150 billion of dollar-denominated debt this year as they look to tackle the crisis, though it could be even higher.

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JPMorgan Dismisses Employees for Misuse of COVID-19 Relief Funds

Brief: JPMorgan Chase & Co (JPM.N) on Wednesday dismissed several employees who allegedly misused funds that were supposed to help businesses dealing with the COVID-19 pandemic, the Financial Times reported, citing a person familiar with the situation. Individuals who fraudulently obtained loans under the Economic Injury Disaster Loan (EIDL) program had not been acting as JPMorgan employees, the person said. However, breaking the law was a violation of the bank’s code of conduct and some people were fired as a result of their improper EIDL applications, the person added. The lender found that some of its own staff had deposited suspicious EIDL funds in their Chase checking accounts, according to the report. Those cases accounted for a “very small” percentage of the total suspicious activity uncovered by JPMorgan, the person said. Reuters reported on Tuesday that the lender was probing employees who may have been involved in the misuse of funds intended for COVID-19 relief, citing an internal memo.

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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 September 9, 2020:

  • In what AstraZeneca is calling a “routine action”, the drugmaker is temporarily suspending its phase three COVID-19 vaccine trial after a participant in the United Kingdom section of the study suffered a suspected serious adverse reaction. According to two people familiar with the trial, the sick participant fell ill with a rare inflammatory condition. AstraZeneca, along with vaccine partner, Oxford University said it is reviewing the event to ensure it wouldn’t result in a significant delay with the trials rumoured to be starting up again as early as next week. The UK drugmaker had been in the lead to become one of the first to deliver a COVID-19 vaccine with the United States rumoured to be considered fast-tracking the process for the vaccine before its November presidential elections.
  • In the United States, President Donald Trump continues to get battered by new books criticizing everything from his personality to his ability to run the country. The latest to hit the shelves is from Bob Woodard – no stranger to White House controversies from his work in uncovering the Watergate scandal in the 1970’s, and it isn’t very flattering for the President. Media have jumped on a series of audio recordings Woodward used for his book, titled Rage where President Trump admits to downplaying the seriousness of the coronavirus as he didn’t want to create panic. “This is deadly stuff”, Trump told Woodward in a February 7th meeting. In a series of interviews with Woodward, President Trump’s knowledge of the virus as a threat was known far earlier than he let on, adding the coronavirus was maybe five times “more deadly” than the flu. 
  • In Canada, two of its major provinces are trying to curtail COVID-19 spread as new cases trend upwards. In British Columbia (BC), the government is ordering nightclubs and stand-along banquet halls closed. They are also calling on restaurants to end the sale of liquor past 10 PM and to lower the volume of music to conversational levels. The changes come as BC has reported 429 new cases over the past four days. In Ontario, Premier Doug Ford and his government have paused its reopening plan for four weeks after seeing its COVID-19 cases spike. What this means Ontario won’t allow things like expanded social circles, gathering sizes or greater increases in the number of people allowed to attend sporting events. As of Tuesday, Canada’s most populous province had seen 13 straight days of new COVID-19 cases in the triple digits. 
  • As mentioned in Castle Hall’s Tuesday COVID-19 Diligence Briefing, the Financial Times is now reporting United Kingdom Prime Minister Boris Johnson plans to move ahead with tightening measures to reduce the spread of coronavirus in the country. The new measures will restrict how UK residents live and socialize, including a ban on most gatherings of more than six people. Under current rules the max gathering is 30 people and this new limit of six will be applied across England, whether you are indoors or outdoors and to all ages. There will be “reasonable exemptions” such as gatherings for work or school, along with weddings, funerals and organized sports if they are deemed “COVID-secure”. According to the Financial Times the new measures will be introduced on Monday.
  • In Germany, a domestic drugmaker and its US partner are negotiating a contract with the European Union (EU) to supply at least 200 million doses of their potential COVID-19 vaccine. Mainz-based BioNTech, along with Pfizer, said if an agreement is reached, deliveries could begin by the end of the year, as long as the product receives regulatory approval. The EU would have the option to buy a further 100 million doses of the vaccine, which will likely require two shots per person immunized. BioNTech has already reached agreements to supply Hong Kong, Canada and Japan, while also committing 600 million potential doses to the United States.
  • In China, researchers at the South China Agricultural University and Guangdong Academy of Agricultural Sciences released a report over the weekend of coronavirus lingering on food supplies such as fish. Chinese authorities have been looking into food as a potential source of infection since June and have been investigating imported meat, packaging and containers as potential COVID-19 sources. The report points to coronavirus lingering on chilled salmon for more than a week. The researchers found SARS-CoV-2, the virus that causes COVID-19 collected from salmon samples at four degrees Celsius (39 degrees Fahrenheit), which is roughly the temperature the fish were transported at.

Covid-19 – Due Diligence And Asset Management

U.K. Property Funds With $16 Billion Face Reopening Dilemma

Brief: The U.K.’s biggest property funds for mom-and-pop investors that were locked at the peak of the coronavirus market turmoil have been given the all-clear to reopen. They aren’t rushing for the keys. Funds holding almost 12 billion pounds ($15.6 billion) of commercial real estate halted trading in March, leaving investors to just watch as office and shopping mall values headed south. Now, they have a choice: reopen and risk a wave of redemptions or stay closed and invite the wrath of investors. “As soon as funds open, money will leave, that’s undoubted,” said Ben Yearsley, investment director at Shore Financial Planning. “Honestly, I think most won’t reopen.” As the pandemic froze real estate markets in March, fund managers including Aviva Plc and Standard Life Aberdeen Plc were thrown a lifeline. An industry committee said most properties couldn’t be accurately valued, prompting a slew of freezes that prevented investors heading for the door. On Wednesday, that group said the uncertainty had sufficiently eased, heaping pressure on managers to re-open. Now, any failure by funds to reopen following their next valuations could be a signal they don’t have enough cash if redemption requests have piled up since their freezing. That’s despite many having relatively healthy cash buffers prior to the coronavirus crisis upending markets.

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A New Front in Coronavirus Disinformation: Wall Street Research

Brief: Coronavirus misinformation is infecting the unlikeliest of places: Wall Street research that investors rely on to trade in the financial markets. In an early August note to clients, an analyst at a research firm called Fundstrat Global Advisors, which distributes widely-read reports and analysis to investors, cited a series of tweets by an ophthalmologist named James Todaro who painted a rosy picture of the US population's potential for developing herd immunity to coronavirus. In a research note sent to clients on August 11th, Fundstrat co-founder Thomas J. Lee included four tweets Todaro sent the previous day. One of Todaro's tweets cited "growing evidence that T cell immunity allows populations to reach herd immunity once 10-20% are infected with SARS CoV-2," the coronavirus that causes Covid-19. Todaro's claim is not supported by credible scientific research. In fact, Shane Crotty, an immunologist at the Center for Infectious Disease and Vaccine Research at the La Jolla Institute for Immunology, told CNN Business that Todaro's tweets are "dangerous" to public health. The presence of Todaro's tweets in a Wall Street research note suggests the campaign to downplay the virus championed by the president and his supporters is gaining traction. Todaro is one of the people who appeared in a viral video in July promoting hydroxychloroquine that Facebook and YouTube later removed because they said it was promoting misinformation.

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Druckenmiller Says Inflation Could Reach as High as 10%

Brief: The markets are in a “raging mania” and rising inflation is a big threat, investor Stan Druckenmiller said. Inflation could hit 5% to 10% in the next four to five years, Druckenmiller said Wednesday in a CNBC interview, adding that the Federal Reserve has created conditions that have sent valuations soaring. Deflation is also a risk, he said. “Everyone loves a party but inevitably after a big party there is a hangover,” he said. “We are in a raging mania.” Investors, however, in general don’t see much risk of higher inflation in the U.S., according to prices in the market for Treasury inflation-protected securities. The 10-year breakeven inflation rate derived from TIPS is just 1.7%, suggesting the risk that the Fed will miss its 2% inflation target over the next decade is higher than that of exceeding it. Periods of deflation have been preceded by asset bubbles, Druckenmiller said, and Fed Chair Jerome Powell “has created this massive asset bubble, so ironically he’s raised two tails” -- the risk of inflation and the risk of deflation. Druckenmiller said the odds of hitting the 2% target “have actually gone way down with the Fed activity.” U.S. stocks sold off in the last three trading days, with a drop in technology shares gathering speed as investors fled the names that fueled a historic five-month rally. Heading into Wednesday’s trading, the Nasdaq 100 Index was down 11% from its record high set last week. Traders have sought safety in haven assets, pushing Treasury yields lower and strengthening the dollar.

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SoftBank Unveils Headquarters Just as COVID-19 Forces Office Decemp

Brief: SoftBank Group Corp (9984.T) on Wednesday unveiled the building that will house its new WeWork-designed headquarters, in a long-planned move that comes just as the COVID-19 pandemic worldwide forces a shift away from office working. Tokyo Portcity Takeshiba’s biggest tenant will be SoftBank unit SoftBank Corp (9434.T), whose Chief Executive Ken Miyauchi told reporters at the unveiling that 60% to 70% of the wireless carrier’s employees are currently working remotely. Excess space can be opened up to other group companies, Miyauchi said. Some of these are currently renting space around Tokyo from office sharing firm WeWork, which SoftBank has taken control of globally following a series of missteps at the U.S. startup. The new development employs technology that supports social distancing, such as real time data on congestion at restaurants and SoftBank-developed robots for cleaning floors and making deliveries.

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Hedge Funds on a Roll With Strongest Five-Month Showing Since Early 2000

Brief: Hedge fund managers running a range of investment strategies rose again last month, with August’s gains capping the strongest five-month run for the industry in more than 20 years. The HFRI Fund Weighted Composite Index – an investable barometer of the broader hedge fund industry published by Hedge Fund Research – was up 2.67 per cent last month. In the five months since April, following Q1’s coronavirus meltdown, the index has surged 15.4 per cent - the strongest five-month total return for hedge funds since February 2000. That puts its index value to an all-time high of 15,093.  Year-to-date, the index is now up more than 2 per cent since the start of 2020. HFR president Kenneth Heinz said the impressive run – which is also the third-strongest five-month recovery return from a drawdown trough since HFR’s inception in 1990 – comes despite continued coronavirus concerns globally, ongoing economic and social upheaval in the US, and political uncertainty surround the US election, and underlines the industry’s fortitude. August’s gains were fuelled mainly by equity-focused hedge funds, which rose 4.25 per cent last month, and are now up 4.63 per cent year-to-date.

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Goldman Sachs says Wall Street’s Fear Gauge is Flashing a Warning Sign Unseen since the Dot-Com Crash in 2000

Brief:

Goldman Sachs said Wall Street's top fear gauge is flashing a warning signal not seen in about two decades since the dot-com bubble burst in early 2000. The CBOE Volatility Index, also known as the VIX, is the market's best indicator of expected volatility in the next 30 days. When the stock market rises, ordinarily the index declines, and vice versa. A market that is steadily rising or falling has low volatility, but one in which rapid rises and falls follow in quick succession shows high volatility. A reading below 20% for the VIX means that the market is operating in a low-risk environment, while above 20 shows fear is picking up. A reading above 30 reflects heightened volatility. Goldman said this trend has been upended as both the benchmark S&P 500 and VIX index have been moving in tandem. This means that since the dot-com crash, the volatility index is at the highest it has been at a time when the S&P 500 is also at a peak since March 2000. "US equity markets have shown a strong 'vol up, spot up' pattern driven by single stock markets but influencing the VIX," Goldman analysts Rocky Fishman, John Marshall, and Rohith Medarametla wrote in a September 3 note, when the VIX stood at 26.6. 

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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 September 8, 2020:

  • As politicians head back to Washington after their August recess, the United States don’t appear to be any closer to passing the next stage of coronavirus relief to Americans. The Senate will vote Thursday on a procedural motion to advance a scaled down version of a COVID-19 stimulus bill that will be $500 billion. The bill would need 60 votes to advance, but it is not expected to reach that number. Republicans would like to get at least 51 GOP votes, so they can show the American public it’s the Democrats who don’t want to compromise. From the Democratic side, they have called for a bill that is four times the size of the Republicans current offer – in the two trillion range. House Speaker Nancy Pelosi claimed the offer on the table is not even an attempt to do the right thing for Americans and is just an attempt to satisfy Republicans who don’t want to spend one more dollar on a stimulus package. 

  • In Canada, as the average number of cases rose by 40% in the past two weeks, that steady increase is a cause for concern in the mind of the country’s chief public health officer. In a news conference on Monday, Dr. Theresa Tam noted the country experienced an average of 545 new cases in the past week – up from 390 cases during the week of August 24th. “As we enter the fall, Canadians will need to be even more vigilant about following public health guidance, particularly as the cold weather shifts activities indoors,” said Tam. To add to the concern in the increase in numbers, several of Canada’s 10 provinces have reopened its school doors to students and teachers for the first time in months on Tuesday.

  • The United Kingdom is starting to experience a surge in new cases as well – with close to 6,000 in the past two days. Prime Minister Boris Johnson has warned against “complacency” and some government officials are concerned the UK are following the same path as France and Spain, where hospitalizations have begun to rise. In order to curb the spread, a Bloomberg report notes the prime minister’s team is looking at cutting the maximum number of people who are allowed to gather in a private home. Current guidelines in the UK suggest no more than six people should meet, but police can only take action against groups of more than 30. Options on the table include tougher police enforcements to break up groups that are too large. 

  • Over the weekend, India surpassed Brazil with the world’s second highest COVID-19 cases, trailing only the United States. India now has more than 4.2 million confirmed cases after recording 90,802 overnight on Sunday and more than 71,000 people have died from the virus – the third largest number of deaths. The country though continues to lessen restrictions as no other major economy suffered more than India in the last quarter, with its gross domestic product shrinking 23.9% compared to a year earlier.

  • Australia’s Victoria state didn’t exactly get the news they were hoping for over the weekend. The country’s government announced only a gradual easing of one of the world’s strictest current lockdowns. Key sectors of the economy such as retail, hospitality, tourism and entertainment will stay restricted and the five million residents of Melbourne will remain under stay-at-home orders until October 26th, or until there are fewer than five new COVID-19 cases a day. Victoria state Premier Daniel Andrews has also asked office staff to work from home until at least November 23rd. 

  • Nine drugmakers, considered to be the leaders in COVID-19 vaccine development, have signed an unprecedented pledge on Tuesday to ensure when/if a vaccine will be released to the public, it will be at its highest ethical and scientific standards. The pledge was signed by the CEO’s of American drugmakers Johnson & Johnson, Merck, Moderna, Novavax and Pfizer, along with European companies AstraZeneca, BioNTech, GlaxoSmithKline and Sanofi. The news comes as drugmakers try to boost public confidence in vaccines and amid concern that the United States Food and Drug Administration were considering pushing through a COVID-19 vaccine under its emergency measures next month due to political pressure.

Covid-19 – Due Diligence And Asset Management

JPMorgan Says Some Employees Have ‘Fallen Short’ as Bank Probes Abuses of Government Relief Funds

Brief: JPMorgan Chase welcomed employees back from a long holiday weekend with a troubling message in their inboxes: Some of them may have been involved in potentially illegal activity. The bank’s operating committee, led by CEO Jamie Dimon, sent an email Tuesday morning to 256,710 employees saying that while the pandemic has brought out the best in many workers, there have been instances where customers abused the government’s coronavirus relief programs. “Unfortunately, we’ve also seen conduct that does not live up to our business and ethical principles — and may even be illegal,” the bank’s committee said. “This includes instances of customers misusing Paycheck Protection Program loans, unemployment benefits and other government programs. Some employees have fallen short, too.” The government’s mammoth $2.2 trillion coronavirus relief package included the Paycheck Protection Program for small businesses, enhanced unemployment benefits for individuals and support for larger companies. 

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Don’t Bet Against the U.S. Market, it’s Likely Going Higher, BlackRock’s Rieder says

Brief: The U.S. stock market’s two-day tech-led fall last week has revived investor worries about a spiral of selling that could crash the broader market, but Rick Rieder, head of the BlackRock Global Allocation team, does not see stocks going off a cliff. Indeed, the $23.2 billion BlackRock Global Allocation Fund (MALOX.O) that Rieder runs currently has options trades that would benefit from a rebound in stocks. Last week’s pullback in U.S. stocks from record highs came after investors piled into big tech names such as Apple - particularly buying bullish call options. That has caused debate about whether shares are over-extended as investors, buoyed by central bank support, try to look beyond the coronavirus pandemic. “I think the market is going to keep going higher,” Rieder, said in a Reuters interview. The Global Allocation Fund has been selling calls against existing long positions in large-cap, high-flying tech stocks to benefit from gains if they shake off recent weakness. Rieder says investors’ concern that stock markets are overpriced is misplaced. While some stocks are grossly over-valued, the generic market is not, he said.

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Private Equity Giants to Unwind Remote Working Arrangements

Brief: After months working from home, employees of global private equity firms are now being encouraged to get back to the office. Blackstone has told staff worldwide to avoid public transportation in their commute and is offering to pay for its workers’ taxi fare, a person familiar with the matter confirmed to Private Equity News. Despite the push, “returning to the office remains purely voluntary”, the person said. Similarly, Advent International, which employs around 100 people in its London office, has introduced a new commute policy, which forbids the use of public transportation. And although the firm will pay employees’ taxi fares to attend business meetings or events, it refuses to pay for workers’ everyday commuting, a second person told PEN. Both firms are also implementing a new Covid-19 testing policy. Blackstone is asking its London office workforce to register on an app that they have no symptoms before any return. Advent is sending a testing kit to the homes of UK staff every 14 days so that they can be cleared to access the office…

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Managers Assess Portfolios After Shift to Suburbs

Brief: Before the pandemic, everyone wanted to invest in the largest coastal cities that were thriving, thanks to easy access to work and play — but things have changed. The open question that managers and investors are having to answer now, without the benefit of transaction data or across-the-board write-downs, is how to position real estate portfolios for the long term. At the moment, few real estate managers want a high rise in a big coastal city. Some are following millennials to the suburbs from the cities or grabbing smaller buildings, such as garden-style apartments and low-rise office buildings located adjacent to cities. The once-hot cities of San Francisco and New York are being replaced by less expensive cities such as Phoenix, Boston, Denver and Austin, Texas, where people and companies can get more space for their money as telework becomes normalized and social distancing, air filtration and other health requirements are incorporated into office design. These trends are driving investors to reconsider their core real estate portfolios.

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Gulf Asset Managers to Face Pressure Amid Twin Shock

Brief: Asset managers in most of the Gulf will face moderate-to-high pressure on their profitability over the next year to 18 months as a result of low oil prices and the coronavirus pandemic, rating agency Moody's said on Monday. The twin shocks of the oil price crash earlier this year coinciding with the spread of the coronavirus in the region have put pressure on the six-member Gulf Cooperation Council's (GCC) economies, leading most governments to cut spending and raise debt. "Current weak oil prices will hold back economic growth and public spending across the region, with negative consequences for asset managers," Moody's said. "Oil is also a key source of revenue for the sector's investor base, which consists largely of local high net worth individuals, family offices and government-related institutions, including sovereign wealth funds." But the ratings agency said GCC countries' plans to reduce their dependence on hydrocarbons, as well as privatisation efforts, "should contribute to medium-to-long-term growth, and encourage the development of capital markets". Though Moody's expects diversification to take time, it will eventually spur private investment, attract international investors and therefore support the asset management industry's growth.

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Hedge Fund’s Buying Spree During Credit Slump Fuels 36% Return

Brief: Distressed-assets specialist Alp Ercil went on a billion-dollar buying spree in March and April, bargain-hunting amid the indiscriminate selloff in credit markets, a person familiar with the matter said. Ercil’s Hong Kong-based Asia Research & Capital Management Ltd. deployed almost 80% of the $1.6 billion raised for his latest fund in the two months, having sat on the sidelines for most of 2019 waiting for more attractive opportunities, the person said. Most of the capital was channeled into dollar-denominated developed-market credit with a duration of 10 years or more, said the person, who asked not to be identified because the information is private. ARCM purchased mostly investment-grade names in the latest upheaval, the person said. The spree paid off, with the fund up 36% in the first eight months of the year, the person said. Most of the gains came between April and August when credit spreads tightened after blowing out during the March rout. Yusuf Haque, ARCM’s chief operating officer, declined to comment. ARCM raised its fourth and largest fund early last year, but deployed only 20% of the capital during 2019 as it waited for more favorable markets. Those materialized in March when the Covid-19 pandemic and Russia-Saudi Arabia oil price war sparked panic selling across all assets, including debt of fundamentally sound companies. Spreads have since tightened as central banks unleashed unprecedented stimulus to shore up their economies and investors chase yields amid low and negative rates.

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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.

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