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Covid-19 Diligence Briefing

Our briefing for Tuesday June 30, 2020:

  • In the United States as coronavirus cases spike in multiple states, lockdowns are now either on hold, or tightening for about 40% of the American population. A Financial Times article notes more than 25% of states have begun tightening restrictions, while at least 16 other states have postponed their further reopening indefinitely. During a Senate health committee meeting on Tuesday, CDC Director Robert Redfield called on Americans to start adopting and embracing the use of face coverings as a sign of personal responsibility, and to help slow the spread of COVID-19.

  • In Canada, the mayor of the country’s most populous city wants to make mask wearing mandatory in all indoor spaces. During a news briefing on Tuesday, Toronto Mayor John Tory, along with the medical officer of health want city council to adopt a temporary by-law. If the by-law is passed, mandatory face coverings in indoor spaces could go into effect as early as July 7th and remain in place until September where city council could extend the order if necessary. The Toronto mayor’s move is in contrast to Premier Doug Ford who earlier rejected a mandatory mask policy for the entire province when prompted by mayors throughout the Greater Toronto and Hamilton areas. These densely populated areas have been some of the hardest hit by the coronavirus in Canada.

  • United Kingdom Prime Minister Boris Johnson followed through on his promise of a plan to “build back better and to build back bolder” from the coronavirus pandemic. Prime Minister Johnson outlined the government’s most radical planning changes since World War II, which will include investments in road and rail projects, new homes and invest in towns that felt left behind with green buses and broadband internet. “We cannot continue simply to be prisoners of this crisis,” said Johnson. The announcement is juxtaposed with the mayor of Leicester urging residents to stay home and demanding  government help due to a revived COVID-19 outbreak.

  • The European Union announced their list of 14 countries that will be allowed into the EU’s 27 member states, along with four other nations as of July 1st. Those allowed entry include Canada, Australia, Japan, New Zealand and South Korea. Not making the first cut as noted on Monday, the United States, along with Russia, Brazil and India. Countries considered for the EU’s safe list are also expected to lift any bans those countries might have on European travellers. However, CBC is reporting Canada won’t be one of those countries; keeping their borders closed to foreign nationals for at least another month. The new list of permitted nations is to be updated every 14 days with either countries being added or dropped depending on how nations cope with their coronavirus cases.

  • India will begin administering a locally made COVID-19 vaccine starting in July. Hyderabad-based firm Bharat Biotech will have an unspecified number of people taking the vaccine after tests in animals suggested the drug named Covaxin was safe and triggered an effective immune response. Covaxin was developed from a strain of the virus that was isolated locally and weakened under laboratory conditions.

  • In Australia, Victoria State Premier Daniel Andrews has subjected more than 30 Melbourne neighbourhoods to a lockdown that will last until Wednesday July 29th. The areas locked down are home to 300,000 of the city’s five million residents. Residents in the restricted areas will be allowed to leave their homes only for work, school, exercise and to buy food, or other essential items. People from other locations will be prevented from entering the hardest hit areas with police on patrol conducting random checks. The southern state of Victoria has seen 233 recorded COVID-19 cases since Thursday, most of those in Melbourne.

Covid-19 – Due Diligence And Asset Management

Quarterly Hedge Fund Liquidations Rise to Highest Since 2015

Brief: Hedge fund liquidations in the first quarter jumped to the highest level in more than four years as the coronavirus pandemic triggered sharp losses across global markets. About 304 funds shuttered in the first three months of the year, the most since the fourth quarter of 2015, according to a Hedge Fund Research Inc. report released Tuesday. That represents an increase of more than 50% from the 198 liquidations in the last quarter of 2019. Meanwhile, about 84 hedge funds opened in the three-month period, the lowest quarterly estimate since the financial crisis, when startups totaled 56 in the fourth quarter of 2008. Closures have exceeded launches for seven consecutive quarters, according to HFR. Hedge funds have faced a tough money-raising environment for much of the last decade as investors revolted over high fees and lackluster returns. Now startups are dealing with the turmoil caused by lockdown restrictions and social distancing efforts designed to combat the Covid-19 crisis. But things may be turning around as institutional investors gear up for a return to choppy markets. A Credit Suisse Group AG report issued this week found that net demand for hedge funds was at its highest in at least five years going into the second half of 2020.

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Goldman Sachs Says a National Mask Mandate Could Slash Infections and Save Economy from a 5% Hit

Brief: A federal face mask mandate would not only cut the daily growth rate of new confirmed cases of Covid-19, but could also save the U.S. economy from taking a 5% GDP hit in lieu of additional lockdowns, according to Goldman Sachs. Jan Hatzius, Goldman’s chief economist, said his team investigated the link between face masks and Covid-19 health and economic outcomes and found that facial coverings are associated with sizable and statistically significant results. “We find that face masks are associated with significantly better coronavirus outcomes,” Hatzius wrote in a note to clients. “Our baseline estimate is that a national mandate could raise the percentage of people who wear masks by 15 [percentage points] and cut the daily growth rate of confirmed cases by 1.0 [percentage point] to 0.6%... He first focused on to what extent, if at all, the actual use of face masks reduces the infection rate of Covid-19 by looking at differences in population behavior by state. For example, Hatizus found only about 40% of respondents in Arizona say they “always” wear face masks in public, compared with nearly 80% in Massachusetts.

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Investors Pick Hedge Funds to Lead Them Through Choppy Markets

Brief: Hedge funds are back in demand as institutional investors including pensions and endowments gear up for a return to choppy markets. Investors are favoring hedge funds heading into the second half of the year, with the industry garnering the most interest among 10 major asset classes, according to a Credit Suisse Group AG report released this week. Net demand, or the percentage of respondents increasing allocations minus the proportion decreasing them, is the highest in at least five years at 32%, the data show. “Given manager performance and the wider return dispersion we’re seeing, this is an environment where hedge funds can shine and separate themselves from the pack,” Joseph Gasparro, who helps hedge funds build capital as head of Americas capital services content at Credit Suisse, said in a telephone interview. “The incredible run-up in equities from late March to early June, the ‘easy money’ if you will, is likely not going to repeat. The environment going forward will include more uncertainties, with investors relying on hedge funds to help navigate.” Hedge funds have largely held their own as the spread of the coronavirus pandemic halted the global economy, ending Wall Street’s longest-ever bull market and seizing up credit markets…

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Jefferies CEO Says ‘No One is Under Pressure to Come Back’

Brief: Jefferies Financial Group Inc. Chief Executive Officer Richard Handler, fresh off the firm’s record quarterly revenue from trading bonds despite the challenges of working remotely, is taking pressure off his traders and bankers to return to the office anytime soon. “I am in awe of how our people became a virtual firm within days of learning about Covid,” Handler said in a phone interview Monday after posting results for the fiscal second quarter. “Our people will work from home until they feel safe coming back.” Handler is emphasizing flexibility a week after larger rivals including JPMorgan Chase & Co. and Goldman Sachs Group Inc. began recalling the first waves of employees to their towers. His New York-based investment bank lost its longtime chief financial officer, Peg Broadbent, from coronavirus complications in the early weeks of shutdown that forced much of the industry to work at home. “While we all want to come back,” Handler said, “no one is under pressure to come back immediately.” The firm’s fixed-income and equity traders brought in $730 million in the three months ended May 31, almost double the amount a year earlier.

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Pandemic Puts Direct Lending in Danger Zone

Brief: Players in the direct lending market are sharpening their focus on portfolios, as companies battered by the coronavirus pandemic call on their creditors for help and concerns over deal structures intensify. The pandemic hit following years of growth in the direct lending asset class. A May report by Preqin said the asset class has been "the success story of the decade" in North America, with assets growing to $222 billion as of June 2019, compared with $85 billion at the end of 2007. The COVID-19 pandemic, however, could lead to the asset class falling "out of favor," with opportunities set to be focused on distressed debt and other strategies. "Direct lending is likely to become more attractive during a recovery period, as companies seek financing to get back on their feet," the report said. In Europe, direct lending deal volumes are expected to be less healthy than last year, Deloitte LLP said in its Deloitte Alternative Lender Deal Tracker Spring 2020 report. Deals totaled 484 in 2019, a 13.1% increase on 2018 numbers. European direct lenders raised the equivalent of $32.8 billion in capital to deploy, topping the previous record of $27 billion in 2017.

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Wall Street Theories on Billions Sloshing Through Schwab Funds

Brief: More than $8 billion is on the move in Charles Schwab Corp.’s exchange-traded funds, stirring speculation the firm could be adjusting the packaged strategies it offers clients as markets gyrate amid the pandemic. Over the past seven trading days, $4.6 billion has exited from a group of four ETFs including Schwab’s fundamental equity and intermediate-maturity Treasury funds. The firm’s emerging-market equity and inflation-focused bond offerings were among four products to rake in $3.9 billion at the same time. Schwab is the biggest holder of all of the funds, according to the latest available filings. The size of the flows -- more than half of the funds posted at least one record daily flow in the period -- and the broad range of ETFs involved is stirring speculation that Schwab is shifting exposure in its model portfolios. Such prefabricated packages of ETFs offer a one-stop solution to a client’s investment needs. Instead of spending time selecting individual funds, investors can pick a portfolio aligned with their goals and risk tolerance. It’s unclear how much cash follows such models, but it’s thought that when one makes a strategic shift, billions of dollars can move between ETFs.

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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 June 29, 2020:

  • As the global coronavirus infection count has now surpassed 10 million worldwide, New York state governor Andrew Cuomo is calling on United States President Donald Trump to issue an executive order requiring everyone to wear masks. Once the epicenter of the coronavirus pandemic, governor Cuomo had to use a slow and steady approach to help bend the curve, while other states fast-tracked their reopening, and are now experiencing similar numbers to what New York state felt a few months ago.

  • North of the border, as Canadians see what Americans are going through, Prime Minister Justin Trudeau is in no hurry to reopen the land border with the United States. Referring to the travel restrictions that are set to expire next month, Prime Minister Trudeau said he would continue working with America on what steps need to be taken into the month of August. Canada’s chief public health officer said on Monday the coronavirus is largely under control in the country but warned lifting pandemic measures too soon without a proper system of contact tracing and isolation would likely lead to relapses.

  • United Kingdom Prime Minister Boris Johnson referred to the coronavirus pandemic as an outright disaster and nightmare for the country while being interviewed on Times Radio Monday. The Johnson government is set to roll out its next phase of economic response this week, which will emphasize the ability to “build, build, build” its way out of the crisis. Prime Minister Johnson said now was not the time for a full inquiry into his government’s response to the coronavirus as the 43,000 deaths suffered only trails the United States and Brazil, according to statistics from Johns Hopkins University.

  • The European Union (EU) will issue a list of 15 non-EU states that will be allowed to travel into the block on Tuesday. The first phase of travel partners must show data they are handling the pandemic at least as well as the EU. That list right now includes China, where the virus first originated, as long as China reciprocates and allows EU nations to travel into their country as well. Not expected to be on the EU’s initial list of 15 countries; the United States.

  • The World Health Organization (WHO) announced during a Monday news briefing they will be sending a team of officials into China to better understand how the coronavirus originated. WHO leaders hope the visit will help better prepare them for the future. Elsewhere in China, CanSino Biologics have produced a vaccine that has received approval to be used on the Chinese military. The news comes after CanSino’s vaccine had undergone successfully phase one and phase two trials in the country.

  • Drug maker AstraZeneca has struck a $127M deal with Brazil for the production of its potential COVID-19 vaccine. Under the agreement, Brazil will start to locally manufacture AstraZeneca’s experimental vaccine. The country’s health official said they will look to produce 30 million doses of the vaccine with half of it being ready by December and the other half to arrive a month later. Brazil trails only the United States for coronavirus cases (1.2 million) and deaths (55,000+).

  • In yet another potential sign of how easy the coronavirus travels, Australian officials have concluded the formerly innocent act of sharing a cigarette lighter may be to blame for the country’s latest outbreak. The Victoria Premier revealed over the weekend one of the cases has been traced back to a Melbourne hotel, which was also acting as a quarantine space for returning travellers. While no new cases were linked to travellers, virus spread may have occurred when hotel workers shared the cigarette lighter. Victoria state recorded its largest daily outbreak since April 11th on Monday and is seriously considering reimposing social distancing restrictions to help curb ongoing spread.

Covid-19 – Due Diligence And Asset Management

BlackRock Sees Big Risk of U.S. Easing Pandemic Support Too Soon

There is a significant risk that the policy response to the coronavirus crisis in the United States could be scaled back too soon, BlackRock Investment Institute’s global chief investment strategist Mike Pyle said on Monday. Pyle said that although there had been a strong U.S. fiscal and monetary policy response to COVID-19, there were concerns about the outlook. “There are significant risks around the U.S. retrenching (policy support) too soon,” he said during a presentation on the BlackRock Investment Institute’s mid-year outlook. Pyle said the firm was cautious on emerging markets because of a reduced capacity on the policy front to respond to the coronavirus shock compared with more developed economies, as well as a challenging public health dimension, especially in Latin America. Scott Thiel, chief fixed income strategist at the BII, said emerging markets also faced a greater risk of a policy mistake.

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Hedge Fund Score Big Gains on Dividend Trades That Burned Banks

Brief:One of the largest financial market dislocations of the Covid-19 era has generated big gains for hedge funds that bet the turmoil would prove short-lived. The winning trades involved dividend futures, which derive their value from shareholder payouts by companies in benchmark stock indexes. Historically among the most stable of equity-linked investments, the securities have swung even more wildly than share prices over the past three months. One of the most heavily traded contracts in Europe tumbled almost 60% in March as a spate of dividend cuts spooked investors and banks dumped futures to hedge exposures at their structured product units. While firms including BNP Paribas SA, Societe Generale SA and Natixis SA lost money on their positions in the first quarter, the sell-off created buying opportunities for a clutch of bargain hunters. Ovata Capital Management, Oasis Management Co., York Capital Management and AM Squared Ltd. all scored double-digit returns on dividend futures as the securities snapped back from the March rout, buoyed by unprecedented government stimulus. The bets have helped the funds post year-to-date gains, bucking a 5% slump through May for the Bloomberg All Hedge Fund Index.

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Asset Owners Take a Break From Virus-Ravaged Market

Brief: Real estate consultants and some investors are considering pressing pause on certain investments as the COVID-19 health-care crisis and recession batter the asset class. One Los Angeles-based pension fund has paused some real estate investments in part due to concerns around the valuation of properties. On June 23, the Los Angeles City Employees' Retirement System's board adopted a fiscal year 2021 real estate plan. Recommended by its consultant, Townsend Group, the plan said that whenever possible the $18 billion pension fund should halt new commitments to open- and closed-end funds with pre-specified portfolios as well as pause in funding recent open-end investment commitments because these assets' carrying value may not reflect current, lower market values.  LACERS has a 7% target allocation to real estate and $777 million invested in that asset class. The pandemic has already rocked the real estate industry. Open-end fund redemption queues are elevated at roughly $14.4 billion, doubled since Dec. 31, the Townsend report to LACERS said.

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Hedge Funds Are Rushing to Get Out of Bearish U.S. Stock Bets

Brief: Fast-money hedge funds are rushing to cover their bearish U.S. stock bets even as the equity rally threatens to break down. Speculative investors bought a net 206,227 S&P 500 Index E-mini contracts in the week to June 23, the most since 2007, according to the latest Commodity Futures Trading Commission data. Net short positions in the contracts were at their highest in almost a decade as the U.S. equity rebound pushed the benchmark back toward record territory. The surge in short-covering comes as traders wrestle with what to do after a pause in one of the most unloved rallies in recent financial history. The S&P 500 had climbed more that 40% from its late-March low to early June, despite concerns that investors were over-optimistic about the pace of the U.S. economic recovery. U.S. stocks fell almost 3% last week as the coronavirus spread showed no signs of slowing down. Other measures of trader positioning also point to an increase in short-covering activity. Short interest as a percentage of shares outstanding in the $266 billion SPDR S&P 500 ETF Trust had fallen to 4.9% Friday from 6.7% at the end of May, according to data from IHS Markit.

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Knighthead, Certares Plan $1 Billion Fund for Travel Industry

Brief: Knighthead Capital Management and private equity firm Certares Management are raising $1 billion for a new fund that would seek to capitalize on a rebound in travel businesses disrupted by the Covid-19 pandemic, according to people with knowledge of the plan. Knighthead, the investment company led by co-founder Tom Wagner, will be equal partners with Certares in the venture, said the people, who asked not to be named because the plans aren’t public. The fund would take about 10 to 15 debt and equity positions over a five-year period. Representatives for Knighthead and Certares, both based in New York, declined to comment. Knighthead is one of several funds seeking to take advantage of market distortions caused by the pandemic, which caused governments worldwide to suspend travel and order residents to stay at home to fight the virus. The amount of travel-related debt trading at distressed levels swelled amid the lockdowns. For companies in the Americas alone, distressed debt issued by airlines, hotels and leisure and transportation businesses has increased more than five-fold to $28 billion since early March, data compiled by Bloomberg show. Knighthead, which has around $4.1 billion in assets under management, specializes in event-driven distressed credit and special situations across a broad array of industries.

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It’s Gotten Harder to Divorce Your GP

Brief: As established managers and mega funds increasingly dominate the private capital industry, certain investor protections may be becoming less common. This includes no-fault divorce clauses, according to Preqin’s 2020 report on private capital fund terms. These provisions allow limited partners to remove and replace their general partner or terminate their limited partner agreement, even if the situation is not covered in the terms of the agreement. Such clauses are considered “critical” by many limited partners, according to a recent survey by the Institutional Limited Partners Association. “While only 25 percent of respondents have experienced a GP removal within the last five years, ILPA members consider no-fault removal provisions to be an essential investor protection worth fighting for,” the group said in a report on the findings. “Whereas for-cause removal provisions can only be triggered by an unattainably high bar, no-fault provisions are more straightforward to execute and serve as a guaranteed forcing mechanism in cases of egregious mismanagement or behavior.” According to the ILPA survey, 62 percent of group members had these provisions in place for at least half of the funds they invested with last year, while 37 percent had no-divorce clauses in more than 75 percent of the funds they allocated to.

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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 June 26, 2020:

  • The United States has reached a new daily high for COVID-19 infections at 40,000 surpassing a record set at the height of the pandemic in April. Areas of the Southwest have been hit especially hard with states like Texas and Arizona going back on reopening measures. The high numbers of confirmed cases are believed to be in part due to increased testing, but experts are suggesting the virus is seeing a second surge. According to John Hopkins University, the previous daily record was set on April 24th with 36,400 confirmed cases.

  • In Canada, the total number of confirmed cases has reached 102,600, with Quebec and Ontario continuing to have the highest number of infections. However, Canada has begun to show signs of improvement with new confirmed cases dwindling to numbers not seen since the beginning of the pandemic in March. Experts foresee a second wave in Canada to be more sporadic than the first, with outbreaks being isolated compared to widespread infections seen at the height of the pandemic. Dr. Isaac Bogoch, an infectious disease physician and scientist with Toronto General Hospital says, “It’s going to be a game of whack-a-mole.”

  • Deaths from COVID-19 in the United Kingdom have surpassed 43,000, one of the highest in the world. However, with infections on the decline, Parliament has begun to clarify regulations for re-opening businesses. New legislation will allow pubs and restaurants to serve patrons outside to insure social distancing. As of next Monday, U.K. residents will be allowed to travel for holidays without the need to self-quarantine upon return. The countries on the approved holiday list include France, Spain and Italy, while trips to the U.S. will be on hold until at least December.

  • Brazil is second behind only the United States for deaths relating to COVID-19 accumulating a toll of over 50,000. With over a million confirmed cases, Brazil is still without a health minister after the previous two ministers were fired for disagreements with President Jair Bolsonaro. The president has also been criticized for refusing to wear a protective face mask in public, calling social distancing “a job-killing measure” and promoting the anti-malarial drug hydroxychloroquine despite strong evidence against its use for treating COVID-19.

  • Also setting a new daily record, India confirmed an additional 17,296 cases of COVID-19 in the last 24 hours. However, according to the Union Healthy Ministry figures, over 58 per cent of those previously infected have recovered. In the last five days the country has seen the third highest amount of new cases globally and has reported the fourth highest amount of deaths. Makeshift hospitals have been set up in city centers with doctors tending to cardboard beds numbering in the tens of thousands. Lockdowns have been put in place across the country with most districts seeing curfews of 7 P.M.

  • The United Arab Emirates and China have launched a Phase 3 clinical trial for a COVID-19 vaccine according to state media in the two countries. An agreement was signed on Wednesday by an artificial intelligence company in the U.A.E and a leading pharmaceutical company in China. Their efforts to create a vaccine have surpassed the first two phases which see small groups of people inoculated with the third phase of the process typically involving tens of thousands test subjects. The World Health Organization says there are currently sixteen candidate vaccines in clinical trial worldwide. 

Covid-19 – Due Diligence And Asset Management

Wall Street falls as Fed action weighs on bank stocks, virus cases surge

Wall Street’s major indexes dropped on Friday as the United States set a new record for a one-day increase in coronavirus cases and bank stocks fell following the Federal Reserve’s move to cap shareholder payouts. The S&P 500 banks sub-index declined 3.9% after the Fed limited dividend payments and barred share repurchases until at least the fourth quarter following its annual stress test. In the previous session, banks stocks had powered Wall Street’s main indexes higher, helping them offset investor fears due to rising virus infections in several U.S. states, including Texas, Oregon and Utah. Cases rose across the United States by at least 39,818 on Thursday. Texas, which has been at the forefront of easing restrictions, paused its reopening plans after the state recorded its one of the biggest jumps in new infections. The uptick in cases has also threatened to derail a strong rally for Wall Street that brought the S&P 500 within 9% of its February all-time high on the back of record government stimulus measures.

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Investors see 'king of distress' Apollo having its best ever crisis

Brief: A credit crunch is hitting many indebted companies, and Apollo Global Management Inc never had it so good. The private equity firm’s shares hit an all-time high earlier this month, outperforming its peers, as investors bet it can invest its $40 billion of unspent capital in cash-strapped companies that are struggling in the aftermath of the COVID-19 pandemic. Central banks and governments around the world have unveiled a raft of credit support and economic programs to help businesses. However, aid is often limited for companies with weak credit ratings, driving many of them into the arms of Apollo and other private equity firms. Since the onset of the crisis, Apollo has invested $1.2 billion alongside Silver Lake Partners in Expedia Group Inc, whose online booking business was hit hard by the coronavirus-induced stay-at-home orders and travel bans. Apollo also provided $250 million to U.S. pipeline operator NGL Energy Partners LP to refinance existing loan facilities. While other private equity firms, such as Blackstone Group Inc and Ares Management Corp, are also very active in this space and have seen their shares rally, Apollo’s stock has outperformed because of the New York-based firm’s record of capitalizing on such opportunities, analysts and investors have said.

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Wall Street-owned loans tricky for hoteliers in virus era

Hotel owner and developer Danny Gaekwad survived steep drops in business after the 9/11 attacks and the recession of the late 2000s, but nothing prepared him for the revenue tailspin that followed lockdowns and travel restrictions in March to stop the spread of the new coronavirus. At one hotel, a Holiday Inn in Ocala, Florida’s horse country, revenue last April was $38,000, a drop of almost 90% from the previous April. His problems were compounded by the type of loan he took out for the hotel — a $13 million loan that was bought by Wall Street investors. Commercial mortgage-backed securities loans like the one Gaekwad has for the Holiday Inn are packaged in a trust. Investors then purchase bonds from the trust using properties like a hotel as collateral. The loans are attractive to borrowers because they typically offer lower rates and longer terms. About 20% of hotels across the U.S. use these loans and they represent close to a third of all debt in the hotel industry, according to the American Hotel and Lodging Association. Unlike banks, which have been more flexible in renegotiating loan terms to help them through the tough times, hotel owners like Gaekwad say it has been much more difficult to get any forbearance from representatives of bondholders, and they worry that their businesses may not survive because of the lack of relief.

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‘Black Swan’ author says if investors don’t use a ‘tail hedge,’ he recommends ‘not being in the market’—‘We’re facing a huge amount of uncertainty

That’s “Black Swan: The Impact of the Highly Improbable” author Nassim Nicholas Taleb offering his view on the risks swirling in the market and a growing lack of clarity about the future in the era of a deadly pandemic that has created a public-health and economic crisis. Speaking during an interview on CNBC on Friday, the popular author, shared the notion that investors should be hedged against so-called “tail risk,” which refers to extreme events that have a low probability of happening in a distribution of outcomes. Taleb has spent his career chronicling so-called “tail risk” events, which have a tiny probability of occurrence, but nonetheless take place more often than one would guess, and therefore often are underestimated by the broader investment community. Taleb said the current market landscape, perhaps, has amplified uncertainties, even if the stock market has been mostly rising, despite signs of a spreading COVID-19 pandemic that is re-intensifying in places and threatening to de-rail projections for a “V-shaped,” or quick, economic recovery. “We are printing money like there’s no tomorrow,” Taleb said, referencing the Federal Reserve’s efforts to ease the financial pain of the epidemic by delivering trillions of stimulus to the market. The Fed also cut interest rates to a super low range of 0% and 0.25% back in March, and may not have a lot of room to further ease the economic pain of the viral outbreak and other problems that could arise amid this crisis. “And COVID seems to be there even if the pandemic…dies down, you will still have people cautious enough that it will impact a lot of industries,” he said.

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Elizabeth Warren demands answers from private equity industry on coronavirus response, lobbying

Sen. Elizabeth Warren has written to the CEO of private equity lobbying group the American Investment Council demanding more information about the organization’s efforts related to the federal government’s multitrillion-dollar coronavirus relief law. In a letter to Andrew Maloney, which was delivered Wednesday and obtained by CNBC, Warren demanded information about the group’s communication with the Treasury Department and White House officials, including Jared Kushner, whose family real estate business has financial ties to private equity firm Apollo Global Management. She also questioned how the industry plans to protect the employees of the companies in which they invest. “I am particularly concerned that the private equity industry you represent may exploit this crisis to continue extracting value out of struggling companies, lining the pockets of wealthy firms at the expense of workers and communities struggling to respond to this pandemic across the country,” wrote the Massachusetts Democrat. In a statement given to CNBC through a spokesperson, Maloney said, “Senator Warren’s home state of Massachusetts is a booming private equity success story.” “Our industry employs over 240 [thousand] workers there, invested over $31 billion in 2019 alone, and recently delivered over 18% returns for the local pension program,” he noted.

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Hedge Funds Cling to High Fees — Even in a Pandemic

Very few hedge funds are offering investors fee discounts during the coronavirus pandemic, according to a new survey by Seward & Kissel. The law firm, which polled alternative investment firms about the impacts of Covid-19 on fundraising and remote work, found that less than 10 percent had granted investor-friendly concessions on fees, liquidity, or reporting terms. Roughly three-quarters of respondents managed hedge funds, while the rest ran closed-end vehicles such as private equity or real estate funds. Steve Nadel, partner at Seward & Kissel, suggested that managers may be “more reticent” to grant concessions given how quickly markets have bounced back. High demand for opportunistic strategies may also contribute to why managers don’t currently feel the need to lure investors with discounts and other perks. “With opportunistic structures, because they are bespoke and because they are limited capacity, it evens the playing field in favor of managers, because demand for a particular product is often going to exceed supply,” he said.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Thursday June 25, 2020:

  • Three American states have set new records for daily infection rates. Florida, Texas and California have all seen major increases in infections as new cases have surged across the country. Texas and Florida reported over 5,000 new cases in the last day, while California shattered its own daily infection record with over 7,000 new confirmed cases. Twenty-nine states have seen rates of infection increase over the last the week. If the current trajectory continues, Houston will become the city with the most confirmed cases, rivalling the numbers in Brazil. 

  • A report by the Canadian Institute for Health Information showed just how much the country failed its citizens in long-term care homes. The new study showed that the amount of Canadian COVID-19 deaths that occurred in long-term care homes was about twice the average of rates in other developed countries. As of May 25th, long-term care residents accounted for 81% of Canadian COVID-19 deaths, compared to an average of 42% for the other 16 countries in the study.
  • United Kingdom data released on Thursday showed 73% of citizens who contracted the virus had volunteered information about their recent contacts to the government’s test-and-trace in the first three weeks of service. UK health officials are surprised and worried though there are still one-in-four people who tested positive and could not be reached by contact tracers. This could become problematic as the country continues to emerge from its lockdown with pubs and restaurants set to open late next week. 
  • In France, one of the world’s most iconic structures has been reopened to the public. Starting Thursday, the Eiffel Tower was open to visitors, but for the first week people can only use the stairs. Visitors can go up the east side of the structure, down the west side, and anyone over 11 years of age are required to wear a mask. The top floor of the Eiffel Tower will open later in the summer, depending on how the situation evolves officials said as the iconic structure celebrates its 130th anniversary. 
  • As confirmed cases of COVID-19 in India have reached nearly 200,000, the capital city of Delhi has surpassed Mumbai as the country’s hardest-hit city. Hospitals in the region are struggling to cope with the influx of new patients. With cases numbering over 70,000, three private hospitals have turned away patients for lack of unoccupied beds. Government-run hospitals are now refusing entry to all but those with severe symptoms, despite laws requiring them to admit anyone seeking medical attention. 

  • Once essentially free of the coronavirus, Australia is now sending 1,000 army personnel into the south-eastern state of Victoria to help contain an outbreak. Melbourne, the state capital has been the only source of community transmission of the coronavirus in the country for weeks. More than 1,300 officials are going door-to-door in the hopes of testing 100,000 people over the next 10 days. Australia has reported just over 7,400 cases and 104 deaths in a country of over 25 million people, far fewer cases than many other nations.

Covid-19 – Due Diligence And Asset Management

‘A Last Resort’: WestJet Lays off 3,333 Employees in Face of COVID-19 Downturn

Brief: WestJet Airlines will permanently lay off more than 3,000 employees across the country as a result of the COVID-19 pandemic’s devastating effect on air travel demand.In avideo messageWednesday, CEO Ed Sims announced major organizational changes at the Calgary-based airline, including the consolidation of call centre activity in Calgary and the restructuring of office and management staff. In addition, airport operations at all domestic airports except Calgary, Edmonton, Vancouver and Toronto will be contracted out.The restructuring will result in 3,333 permanent job losses, including 430 call centre positions (72 in Calgary, 73 in Vancouver, 35 in Halifax, and 250 in Moncton, N.B.), as well as 2,300 airport operations staff, including customer service agents and baggage handlers. Sims said he is hopeful that whatever company WestJet ends up contracting out its airport operations to will ultimately be able to rehire many of the laid-off airport employees… For WestJet, which was acquired last year by Toronto-based Onex Corp. in a $5-billion friendly takeover deal, these are the most challenging circumstances it’s faced since the airline was founded in 1996, said Calgary-based aviation consultant Rick Erickson. Leisure travel has been squashed, although the public’s appetite for flying will return when the “fear factor” of catching the virus declines, he said.

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Bridgewater’s Bob Prince Says Virus Impact Could Last Two Years

Brief: Bob Prince, co-chief investment officer of the world’s biggest hedge fund at Bridgewater Associates, said the impact of the coronavirus pandemic could last 18 to 24 months, complicating monetary and fiscal policy efforts to bolster the economy. “There’s a huge amount of uncertainty,” Prince, who helps manage the firm’s investment process alongside co-CIOs Ray Dalio and Greg Jensen, said Wednesday in an interview during the Bloomberg Invest Global virtual event. Bridgewater’s hedge fund has suffered losses this year amid the market chaos surrounding the coronavirus pandemic. The firm’s flagship Pure Alpha II fund fell 20% in 2020 through May. Bridgewater got hit by the crisis at “the worst possible moment,” when its portfolios were positioned to profit from rising markets, Dalio wrote in mid-March. The Westport, Connecticut-based firm saw a 15% drop in assets during March and April, declining to $138 billion. Bridgewater wasn’t alone in getting caught on the wrong side of a sell-off that began in late February. Several prominent names have stumbled as the spread of the pandemic halted the economy and put an end to Wall Street’s longest-ever bull run. But U.S. stocks have since defied initial gloomy expectations, rallying 37% since the March low, with stimulus from the Federal Reserve and the easing of lockdowns fueling hopes for a fast recovery.

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Companies Could Face Stress Testing Post Pandemic, CEO of Man Group Says

Brief: Man Group chief executive Luke Ellis said that corporates could face stress testing after the Covid-19 pandemic, similar to those imposed on banks after the 2008 financial crisis. “There will be a drive to some form of stress testing of businesses, to make sure they have less operational gearing so that they are able to withstand things,” said the CEO of the world’s largest listed hedge funds company. Man Group manages $104.2bn as of March 31. Ellis was speaking at the Bloomberg Invest Global online forum. When asked what regulation might emerge from the current crisis, Ellis said that it would be “similar to what banks have, but not just around financial constraints”. Businesses could be required to limit the amounts of financial leverage — or debt — they can have, for instance. He also said that “just-in-time manufacturing” would have to be rethought: “It started as a good idea, reducing inventories, but got to a place where major manufacturers... had one hour of spare parts and supplies [...] which meant they couldn’t withstand any sort of shock at all.” “What we’ve seen that in the 10 years since the last crisis, [is that] an awful lot of the corporate community has moved to maximum leverage that they can possibly get onto their balance sheet — so maximum financial leverage but also maximum operational gearing and minimal resilience,” Ellis said during the webinar, which was focused on how funds, such as those managed by Man Group, can outperform in the age of Covid-19.

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Brookfield Says Office Demand Has Increased as Workers Return

Brief: Brookfield Asset Management Inc., one of the world’s biggest real estate investors, is seeing higher demand for office space as workers return to socially-distanced buildings. Rather than ditching their skyscraper offices after the pandemic, companies are keen to return to the workplace after spending as long as three months in lockdown, Bruce Flatt, chief executive officer of Brookfield, said at the Bloomberg Invest Global virtual conference on Wednesday. “Today we’re leasing greater amounts of space to people than they had before,” Flatt said. “They want to accommodate their people and get them back quickly. They’re increasing their footprints versus taking less.” Most companies that Brookfield leases offices to are bringing workers back, said Flatt. The only reason some weren’t was a lack of social distancing space. Brookfield has reopened nearly all of its global offices, he said, with about 70 per cent of London workers returning and around 30 per cent of New York employees. Brookfield is well-positioned to weather the pandemic. Flatt last month said the company had US$46 billion in client commitments for new investments and US$15 billion in cash, other financial assets and long-dated credit facilities across its various businesses that remain largely undrawn.

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Virtual Meetings Prove Effective For  Managers Amid Pandemic – Survey

Brief: Most asset managers have found video conferencing an effective alternative to interacting with clients now that the coronavirus pandemic has severely hampered the ability to meet with clients face-to-face, according to results of a survey by Cerulli Associates.  While almost all (95%) of managers surveyed by Cerulli in April said that in-person meetings are the most effective way to interact with clients, travel restrictions brought about by the COVID-19 pandemic have prevented such interaction. So, with face-to-face meetings not being an option for most managers, 75% find conference calls or video conferences with clients a highly effective alternative method of communication since the outbreak of COVID-19, while 17% find them somewhat effective. "The amount of people that said video calls are effective could be a sign of a more long-term trend," said Cerulli analyst Christopher Swansey in a phone interview, noting that face-to-face meetings are still crucial for due diligence. "I don't think they'll be replaced, but I think you'll see a lot more meetings conducted virtually in the future…

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Goldman Sachs CEO David Solomon Sees V-Shaped Recovery Into 2021 Before Comeback Slows

Brief: Goldman Sachs CEO David Solomon still sees a V-shaped recovery ahead even as coronavirus cases are increasing throughout the US.It just might not bring the economy back to its pre-pandemic levels as quickly as hoped.Appearing in theBloomberg Invest Globalvirtual conference, Solomon said the US is "somewhere in the middle" of its turnaround. Just as economic activity nosedived in the second quarter, the CEO sees reopenings driving a similar turn higher through the end of the year."This crisis has had a profound impact on the economic environment that we're operating in," he said on Wednesday. "My guess is when you look at the shape of the recovery, the initial shape is going to look quite like a V." Solomon added that uncertainty still clouds such forecasts and second shocks could endanger the nation's long-term trajectory. The healthcare industry represents a major variable, as an effective coronavirus vaccine is largely viewed as the best bet for boosting consumer confidence. Human behavior can also deviate from expectations and either accelerate or halt reopening measures. These factors will likely slow the US economic bounce-back after 2020 and push a full rebound further down the road, Solomon said. "I do think we're going to see a sharp V to start with, but it's very open-ended as to what kind of economic friction we're going to see as we get through the end of the year and into 2021," the CEO said.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Tuesday June 23, 2020:

  • Dr. Anthony Fauci appeared before United States law makers on Tuesday and said the country is “seeing a disturbing surge of infections.” A key member of the White House coronavirus task force, Dr. Fauci said the way you need to address the recent surge is testing to identify, isolate and contact trace in an effective way. Dr. Fauci’s views though are seemingly in direct conflict with United States President Donald Trump. After stating at a political rally over the weekend, he wanted to see less testing, White House officials tried to say the President was only joking. President Trump’s response on Tuesday: “I don’t kid. By having more tests, we find more cases. It sounds bad, but actually we’re finding people, many of those people aren’t sick or very little – maybe young people.”
  • The Canadian federal government has extended the time period for temporary layoffs, by up to six months, giving employers more time to rehire employees who were laid off due to COVID-19. Employees who were laid off, prior to March 31st have six months or December 30th for employers to bring them back to work, whichever comes first. Prior to this extension, a worker would deem to be terminated if their temporary layoff notice expired before the employer brought them back to work, which was normally three months.

  • United Kingdom Prime Minister Boris Johnson announced as of July 4th, the government will replace the two-metre social distancing rule with “one metre plus” guidance. The July 4th date is significant as this is when pubs, restaurants, hotels and hairdressers will be given approval to reopen their establishments. Prime Minister Johnson told the House of Commons on Tuesday: “From the outset we have trusted in the common sense and perseverance of the British people. We have been clear that our cautious relaxation of the guidance is entirely conditional on our continued defeat of the virus.”
  • Germany has reimposed a lockdown for the first time since releasing restrictions last month. The western city of Gutersloh, home of the processing plant where 1,550 employees have tested positive for the coronavirus, and the surrounding area have been shut down by the prime minister of the state. Prime Minister Armin Laschet said the current lockdown will last initially for one week in hopes it will become clearer to what extent the virus has spread among people outside of the meat processing plant.

  • Saudi Arabia state media have reported the nation has banned international visitors making the Islamic pilgrimage, or Hajj this year in order to stop the spread of the coronavirus. Only a very limited number of people who are residents of Saudi Arabia will partake in the Hajj this year. Pre pandemic, the pilgrimage would have attracted an estimated two million people to Mecca for one of the most significant moments in the Muslim religious calendar.
  • On the other hand, one of India’s most celebrated religious processions is expected to go ahead with limited capacity after the country’s highest court ruled it could do so. The Rath Yatra, a Hindu festival, takes place in various cities around the country with the most famous in the coastal city of Puri, where more than a million people normally attend. The Supreme Court had previously ruled against the celebration, citing the risk of the coronavirus, but overturned its own decision when the Odisha state government (where Puri is located) promised to conduct the festival in a “limited way”. The religious festival started today and runs for a week. Meanwhile India recorded close to 15,000 cases on Tuesday, marking the sixth straight day of more than 12,000 new daily cases.

  • The Philippines set a new daily record of 1,150 new coronavirus cases on Tuesday, surpassing its previous record of 1,046 on May 29th. The country is struggling with a sudden spike in coronavirus cases in Cebu City, which led President Rodrigo Duterte to assign his Environment Secretary and former military general to lead a task force to try and contain the region’s outbreak. Meanwhile, a Presidential spokesperson said Metro Manila remains the epicenter of the coronavirus pandemic in the Philippines.

Covid-19 – Due Diligence And Asset Management

Fink Cautions Virus Impact on Small Business Still Unknown

Brief: BlackRock Inc. Chief Executive Officer Larry Fink said the full extent of the coronavirus pandemic on the U.S. economy’s smaller companies remains unclear, even as cities begin reopening. “We still have not witnessed the full impact on small and medium businesses,” Fink said in an interview Tuesday on Bloomberg Television. The virus’s spread forced a shutdown across the country, upending sectors from energy to consumer. Signs of acute pain for small businesses are already showing: about 14% of companies that received support from the Paycheck Protection Program, a key pillar of the U.S. government’s aid to small businesses, expect they’ll need to reduce their workforce after using the loans, according to a new survey from the National Federation of Independent Business. Last week, 13 U.S. companies sought bankruptcy protection, matching the peak of the global financial crisis, data compiled by Bloomberg show. While larger corporations have stabilized, the fate of other parts of the economy will be determined by how Covid-19 is handled in the coming months, he said. Fink’s remarks come as the world’s largest asset manager navigates a year of turmoil that includes the pandemic and a wave of protests over racial inequality that began in the U.S. He said he expects market uncertainty, which spiked in mid-March, to remain elevated for months to come.

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Pimco’s Roman Sees U.S. Inflation Remaining Low for Years

Inflation in the U.S. is likely to come back slowly, keeping the Federal Reserve from raising interest rates for an extended period, according to the chief executive officer of Pacific Investment Management Co. Over the next couple of years, prices are likely to increase to the 2.3% to 2.4% level, Emmanuel “Manny” Roman said Tuesday at the Bloomberg Invest Global virtual event. The central bank has learned its lesson from past interest rate increases and will be determined to avoid another “temper tantrum,” he said. “The days of inflation we remember are gone,” Roman said. “We don’t think the Fed is going to raise rates for a very long time.” Led by the Fed, central banks have been cutting interest rates and buying securities to combat the effects of the coronavirus pandemic, an intervention that helped stabilize global markets. Even as U.S. unemployment soared to its highest level in decades, stock markets have recovered most of their post-pandemic losses and corporate debt investors have poured money into junk bonds. U.S. equities rose to a two-week high Tuesday amid a report that President Donald Trump supports sending another round of checks to Americans and data that showed manufacturing nearing expansion. Pimco, with about $1.8 trillion in mostly fixed-income assets under management, is raising at least $6 billion for distressed credit and other corporate debt opportunities to take advantage of dislocations driven by the coronavirus pandemic.

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April Hedge Fund Redemptions Totalled USD38.1 bn, says Backstop BarclayHedge

Brief: The Covid-19 pandemic’s impact on hedge fund redemptions continued in April as the industry experienced USD38.1 billion in outflows. While a sizeable sum, the net redemption total was less than half of March’s USD85.6 billion redemption total. April’s redemptions represented 1.3 per cent of industry assets, according to the Barclay Fund Flow Indicator published by BarclayHedge, a division of Backstop Solutions. A positive note was a USD101.2 billion monthly trading profit fuelled by an April stock market rally, bringing total hedge fund industry assets to more than USD2.99 trillion as April ended, up from USD2.86 trillion at the end of March. Data from 6,000 funds (excluding CTAs) in the BarclayHedge database showed the greatest volume of April redemptions coming from hedge funds in the US and its offshore islands where investors pulled out USD21.7 billion during the month. Investors redeemed nearly USD13.1 billion from funds in the UK and its offshore islands during the month, while funds in Continental Europe experienced nearly USD2.6 billion in outflows.

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Manager Due Diligence in Times of Covid-19

Brief: A lively debate is currently taking place amongst allocators as to whether onsite due diligence and face-to-face meetings are still necessary given the current environment. The simple answer must be a resounding: yes, absolutely. Due diligence, both investment and operational, has always been an integral part of a well-structured investment process. Those of us who have been around since pre-2008 can certainly attest to the fact that a lot has changed since, and the days are long gone when it was possible for managers to simply refer to their stellar track records and assume that investments would be forthcoming without any other questions being asked. Investors have learnt that having a detailed understanding of a strategy is just the beginning and that the operational framework in which a strategy is implemented is also of great importance. The question, of course, is how to best ascertain all of this during the current period, whether process adjustments can and should be made and, critically, whether there are additional risks that necessitate closer scrutiny at present.

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Dyal Capital to Borrow Against Fund Investments to Pay Out Windfall, Source Says

Brief: Dyal Capital Partners is nearing a $1 billion loan against the fee revenue of private equity firms in which it has acquired stakes and will use the proceeds to return cash to its investors, a person familiar with the matter said on Monday. The loan pertains to investments made out of the firm’s $5.3 billion Dyal Capital Partners III fund, the source said. While private equity firms often borrow against companies they own to fund dividends to their investors, such borrowing at fund level is less common. The loan has an “A-“ credit rating, according to the source, underscoring the confidence of lenders that it will be paid back in the face of economic uncertainty brought about by the COVID-19 pandemic. Dyal, a subsidiary of asset manager Neuberger Berman Holdings, owns stakes in major private equity firms such as Silver Lake and Vista Equity Partners. It had initially looked to raise $500 million, but increased the size of the loan due to strong investor interest, primarily from large insurers, the source said. The loan carries a 4.4% fixed coupon and is expected to close on Tuesday. A spokesman for Neuberger Berman declined to comment.

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How One Strategy Delivered During the Covid-19 Crisis

Brief: Trend-following strategies have earned a reputation for outperforming during periods of crisis. That theory was borne out during the height of the Covid-19 crisis — up to a point. In a new paper entitled “The Coronavirus Crisis: What is the same? What’s different?,” Katy Kaminski, chief research strategist and portfolio manager at quantitative investment firm AlphaSimplex, analyzed nine substantial drawdowns in equity markets since 1998. The paper classified drawdowns into two categories: corrections, for losses of 15 percent over periods of two months or less, and crises, for more sustained, deeper losses.  Kaminski and AlphaSimplex junior research scientist Ying Yang concluded that the Covid-19 market crisis was “one of the fastest crisis periods in history.” They found that short-term, pure trend-following strategies proved better than other strategies — including other styles of trend-following strategies — at navigating the turmoil. 

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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 June 22, 2020:

  • As coronavirus cases top nine million around the world, health experts in the United States are worried Florida could be the next epicenter for the pandemic. The sunshine state are one of ten states to see a record number of cases in the last week as they now have surpassed 100,000 cases. Florida and Texas on Saturday, along with California on Sunday each reported record one-day cases in excess of 4,000. A Financial Times article notes that half of all new daily infections in the United States are originating in the deep south, some of which were the earliest in reopening to help stabilize their economies.
     
  • In Canada, the last three regions in Ontario, which includes the country’s most populous city, Toronto will be able enter stage 2 of its reopening on Wednesday. The move will allow residents of Toronto to dine-out on patios, get a haircut and shop within indoor malls, if they so choose. Elsewhere in the country, the Bank of Canada said the long-term economic damage from COVID-19 means a prolonged and bumpy course to recovery. In his first speech as the new governor of the Bank of Canada, Tiff Macklem warned Canadians that the short and sharp economic bounce-back over the coming months won’t likely last as ongoing physical distancing rules may mean workplaces can’t be as productive as they once were.

  • In the United Kingdom, 2.2 million of its most vulnerable residents will have more restriction rules eased as the country gains control over the coronavirus. As of July 6, those most vulnerable with pre-existing conditions will be allowed to form support bubbles with another household and meet in groups of up to six people outdoors. In recent weeks, the more vulnerable residents of the UK were only permitted to go outside once a day and meet with one other person outside, while maintaining social distancing.

  • Germany’s reproduction rate has jumped three times from what is needed to contain the virus after an outbreak at a meat processing plant has infected thousands of workers. The reproduction number indicates how much the virus is spreading in the country. A reproduction rate of 1 means each person with the coronavirus will infect another person. In May, Germany’s R-number had fallen to 0.75, but thanks to the outbreak, data published by the Robert Koch Institute puts the country’s current R-number at 2.88. Chancellor Angela Merkel, who has a scientific background, has repeatedly said Germany must keep their R-number below 1 if they want to successfully combat the virus.

  • Starting July 7, Dubai will open to tourists in an attempt to revive its economy. Those arriving at the Dubai Airport would need to present proof that they are not infected or take a test at the airport. Those testing positive will be required to enter quarantine for 14 days. Dubai also said nationals and residents will be allowed to travel outside the country with fewer restrictions as of Tuesday. Citizens will need to complete a health declaration form, be free of COVID-19 symptoms on departure and take a test again upon return. Anyone who tests positive upon re-entering Dubai must self-isolate for 14 days.

  • Australia is moving fast on trying to contain a fresh outbreak of the coronavirus in the Melbourne area. The region is home to the country’s second largest city and has accounted for nearly 90% of the 126 cases detected nationally over the last week. The Victorian state government has said it would reimpose restrictions on social gatherings after the surge they believe was caused by family get-togethers attended by people with mild symptoms. Officials have also criticized those who have gone to shopping while awaiting COVID-19 test results.

Covid-19 – Due Diligence And Asset Management

Schwarzman Sees ‘Big V’ Economic Rebound in Next Few Months

Brief: Steve Schwarzman, chief executive officer of Blackstone Group Inc., said the economy is likely to benefit from a V-type recovery in the next few months. The co-founder of the world’s biggest alternative asset management firm weighed in on markets in an interview Monday during the Bloomberg Invest Global virtual event. “You’ll see a big V in terms of the economy going up for the next few months because it’s been closed,” he said. Markets are benefiting from both liquidity and optimism that the coronavirus crisis can eventually be contained, Schwarzman said, but he cautioned on the economy, “It’ll take quite a while before we sync up and get back to 2019 levels.” The spread of the pandemic seized up credit markets and put an end to Wall Street’s longest-ever bull market earlier this year. The damage pushed the Federal Reserve to flood the markets with trillions of dollars in stimulus, which, combined with the easing of lockdown restrictions and hopes for a fast economic recovery, have helped the S&P 500 index rally almost 40% since its March low. Blackstone has been “aggressively” looking to put some of its $150 billion in dry powder to use, Schwarzman said in April.

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UBS May Increase Home Working After Coronavirus

Brief: A significant proportion of UBS’s (UBSG.S) staff could continue to work from home even after the coronavirus crisis has ended, the bank’s Chief Operating Officer Sabine Keller-Busse said on Monday.A third of the bank’s employees could work away from the office, she said, according to Bloomberg. UBS, Switzerland’s biggest bank, is deciding which tasks could be carried out from home and which would be transferred to the office. “It is conceivable that in the future up to a third of the staff will work remotely on a rotating basis,” a UBS spokeswoman said. The changes will be implemented globally, although the exact number of UBS’s 70,000 staff has not yet been determined. At the peak of the coronavirus crisis, more than 80% of the bank’s staff worked from home. Even before the pandemic, some of the employees did not come to the office, with this figure likely to be increased.

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Ackman’s Blank Check Company Could Raise Up to $6.45 Billion

Brief: Bill Ackman’s blank check company is seeking to raise as much as $6.45 billion through an initial public offering combined with a commitment from the billionaire’s hedge fund. The company known as Pershing Square Tontine Holdings Ltd. doesn’t specify what sectors it will be targeting, according to a regulatory filing Monday. The special purchase acquisition company, or SPAC, is aiming to initially raise $3 billion from outside investors with an a minimum of $1 billion in additional funds coming from funds associated with Ackman’s hedge fund, Pershing Square Capital Management. The blank check company plans to raise $3 billion from outside investors and between $1 billion and $3 billion from funds associated with Pershing Square. If the IPO over-allotment option -- the so-called greenshoe shares -- is exercised by the banks, it would bring the total to $6.45 billion. SPACs raise money on the public markets to make an acquisition within a set period of time. A target isn’t identified until after the shares start trading. At $3 billion, Pershing Square’s Tontine listing would be the largest SPAC IPO on record globally, according to data compiled by Bloomberg. That would surpass Michael Klein’s Churchill Capital Corp. III, which raised $1.1 billion earlier this year.

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Millennium Seeks $3 Billion of Private Equity-Style Capital

Brief: Millennium Management is in talks to raise as much as $3 billion in capital that it can draw on as needed to finance trades. The fundraising by Izzy Englander’s hedge fund will probably continue through the first half of next year, according to a person with knowledge of the matter. Building up such “callable” capital is a strategy often used by private equity funds. Investors would be required to commit at least $25 million to Millennium, and would only be allowed to withdraw 5% of their money per quarter, said the person, who asked not to be identified because the information is private. A representative of New York-based Millennium declined to comment. Millennium, which manages about $44 billion, is among a cohort of large hedge funds raising capital even as the industry endures an investor exodus. Investors have pulled more than $130 billion since the start of last year, according to data compiled by eVestment. This latest capital raising is part of Millennium’s drive to lock up investors’ money for longer to give it greater flexibility and avoid a rush of withdrawals when markets are in turmoil. The hedge fund was one of many that struggled in the first three weeks of March as coronavirus lockdowns shut much of the global economy. It has since recovered and was up 9% this year through June 15, the person said.

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U.S. Banks are ‘Swimming in Money’ as Deposits Increase by $2 Trillion Amid the Coronavirus

Brief: It’s the banking world’s version of the rich getting richer. A record $2 trillion surge in cash hit the deposit accounts of U.S. banks since the coronavirus first struck the U.S. in January, according to FDIC data. The wall of money flowing into banks has no precedent in history: in April alone, deposits grew by $865 billion, more than the previous record for an entire year. The gains were all driven, in one way or another, by the response to the pandemic: The government unleashed hundreds of billions of dollars to bolster small businesses and individuals via stimulus checks and unemployment benefits. The Federal Reserve began abarrage of efforts to support financial markets, including an unlimited bond buying program. And an uncertain future prompted decision makers, from two-person households to global corporations, to horde cash. More than two-thirds of the gains went to the 25 biggest institutions, according to the FDIC. And that was concentrated at the very top of the industry: JPMorgan Chase, Bank of America and Citigroup, the biggest U.S. banks by assets, grew much faster than the rest of the industry in the first quarter, according to company data.

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Brookfield Delays Payments While Asking Tenants to Pay Up

Brief: Asset manager Brookfield, which owns stakes in numerous malls, is demanding retailers pay back rent even as the Toronto-based investment group has missed mortgage payments, the Financial Times reported Sunday (June 21).Merchants who lease kiosks and small stores inside Brookfield malls have been told to pay rent for April and May, a time when they were forced to close, sources familiar with the discussions told the paper. The tenants, who requested anonymity, said they have asked for until next year to come up with the payments. In response, Brookfield has asked them to provide extensive financial information, including personal tax returns for 2019 and 2020, the merchants told the Times.A half dozen tenants wrote a letter to management at one of the Canadian group’s shopping centers seeking help, the report said. “I will not address the merits of your ‘petition,’ ” a Brookfield lawyer responded. The attorney added that confidentiality clauses in leases “could be deemed a default of your agreement with Brookfield. ”In a request for comment, Brookfield said 75 percent of its tenants have requested changes to their leases. The company said it had talked with all of them and they are prioritizing small businesses given their scale and immediate cash flow requirements.

Read more...


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 June 19, 2020:

  • In the United States, all eyes will be on Tulsa, Oklahoma over the weekend as President Donald Trump holds his first campaign-style rally since early March. The rally has health officials nervous as it is planned to take place in an indoor arena that can hold 20,000 people, but local officials are expecting 100,000 people to show up in the Tulsa area. For those who do get into the arena, attendees will not be required to maintain social distancing, or wear masks. Elsewhere in America, California Governor Gavin Newsom issued a statewide order for people to wear masks or facial coverings in public spaces, including public transportation, those seeking medical care, shopping and in most work scenarios. However, the governor didn’t address how this order would be enforced in America’s most populous state.

  • In Canada, the average number of Canadians infected by someone with the coronavirus has been falling since the third week of May. Nationally, the reproduction number, or the average number of Canadians infected by someone, is down to .65. This means on average three Canadians with the virus will  pass it on to two other individuals. At the height of the pandemic, every infected Canadian would pass on the virus to three more individuals. Health experts attribute the falling numbers to increased use of masks, lack of gatherings and the warmer weather.

  • United Kingdom biosecurity experts have recommended downgrading the country’s official coronavirus alert level, following a steady decrease in new cases for the virus. The level has been downgraded from a four to a three, which means while the virus is deemed to be in general circulation, transmission is no longer high, or rising at exponential rates. Prime Minister Boris Johnson said with the alert level coming down, the government can now start making progress on plans to end the lockdown. Prime Minister Johnson highlighted he would be giving guidance “very shortly” to help businesses, particularly the hospitality industry on how to reopen. Pubs and restaurants are scheduled to be allowed to reopen on July 4th.

  • A German government spokeswoman has said the country’s new coronavirus smartphone app has been downloaded 9.6 million times since it was launched on Tuesday. The 9.6 million would be equivalent to 12% of Germany’s population, but it is unknown whether some people have downloaded it on multiple phones.

  • According to a Reuters report, the European Commission is in advanced talks with pharmaceutical company Johnson & Johnson to reserve or buy up-front doses of its COVID-19 vaccine under development. If true, it would mark the first move since the 27-member European Union agreed to an emergency fund with more than $2 billion euros available to reach deals with up to six vaccine makers.

  • With India’s COVID-19 cases expected to surge by the end of July, India’s capital city is creating the “world’s largest quarantine facility”. The new facility to be set-up by Delhi’s border, will have 10,000 recyclable beds made out of cardboard to save on sanitation time. Studies have shown the virus doesn’t remain on cardboard surfaces for more than 24 hours. The city’s deputy chief minister has speculated the national capital may have to deal with more than 500,000 cases by July 31st.

  • China’s government and independent researchers are saying the latest outbreak in Beijing originated from Europe. According to China’s Centre for Disease Control and Prevention, “The results of preliminary genetic sequencing research show that this virus came from Europe… but is older than the viruses currently circulating in Europe.” A Chinese CDC official had told local media that the virus could have started spreading in Beijing as early as the start of May. Before last weekend’s noted cases, Beijing had no confirmed symptomatic infections for almost two months.

Covid-19 – Due Diligence And Asset Management

Fed Adds Coronavirus Scenarios to This Year’s Bank Stress Tests

Brief: Historically unique financial conditions brought on by the coronavirus have changed the way the Federal Reserve is conducting its stress tests for banks this year. In addition to the usual rigors that measure how well institutions are prepared for sharp downturns, the Fed is adding three new scenarios this year, Vice Chair for supervision Randal Quarles announced Friday. The scenarios examine different patterns of recovery and look to see how banks will respond. The initial testing focus was for stress in corporate debt and real estate and an unemployment rate higher than the 10% peak that prevailed during the Great Recession from 2007-09. In effect, that situation was less drastic than the current jobless level, at 13.3%, but more so than the conditions in debt markets, which have eased amid aggressive Fed actions. “But the larger issue is the unprecedented uncertainty about the course of the COVID event and the economy,” Quarles said in prepared remarks. “The range of plausible forecasts is high and continues to shift. We don’t know about the pace of reopening, how consumers will behave, or the prospects for a new round of containment. There’s probably never been more uncertainty about the economic outlook.”

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MSD Partners Raises $1.1 Billion for Real Estate Credit Bets

Brief: MSD Partners has raised about $1.1 billion for a fund dedicated to bets on structured credit secured by real estate, beating an initial target of $750 million. The MSD Real Estate Credit Opportunity Fund gathered about $300 million from Michael Dell and his family, as well as MSD employees. The vehicle will make and purchase commercial real estate loans and securities, in addition to structured investments.“ Since launching the fund, we have been investing actively, particularly during the recent market dislocation,” portfolio manager Rob Platek said in a statement, adding that the fund is positioned to tackle opportunities that arise in the current market environment. MSD Partners was formed in 2009 by partners of MSD Capital, the family office for Dell, the founder of the namesake computer maker. Starting with $400 million of capital two decades ago, the firms collectively manage about $16 billion. Dell is worth about $29 billion, according to the Bloomberg Billionaires Index. Previous wagers by the MSD Partners real estate credit team include buying transferable development rights attached to New York’s Grand Central Terminal and providing financing to One Thousand Museum, a luxury condominium in downtown Miami.

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Hintze’s CQS Cuts at Least 50 Jobs as Hedge Fund Retrenches

Brief: Hedge fund firm CQS has slashed at least 50 jobs in an overhaul, as billionaire founder Michael Hintze retrenches to focus on core credit trading strategies. The cuts are mainly concentrated in sales and support areas, but have also affected trading teams focused on asset-backed securities, according to people with knowledge of the matter, who asked not to be identified because the information is private. CQS is seeking to reduce costs following a slump in high-fee earning hedge fund assets, the people said. The firm employed more than 280 people globally at the start of December, according to a letter to investors seen by Bloomberg. A spokesman for the London-based money manager declined to comment. While CQS still manages $17 billion, up from about $15 billion in March, its share of lucrative hedge fund assets has shrunk to about a third of the money managed by the firm, down from around half last year. That’s putting pressure on revenues. The CQS Directional Opportunities strategy, run by Hintze himself, is facing redemptions after losing 33% in March and another 17% in April, according to people familiar with the matter.

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Covid-19 Business Disruption to End in 10 Months

Brief: Business activity across most sectors and regions is expected to return to a stable level within a year and grow to pre-Covid levels by the end of 2021, according to a survey of Fidelity International’s in-house analysts. This month’s survey shows growing optimism over the path of the Covid-19 outbreak, with business disruption estimated to come to an end within 10 months, according to the global average of responses.  Fiona O’Neill, director, global research, Fidelity International, said: “Against tough economic data, green shoots are starting to emerge. China is leading the recovery, with our analysts expecting a wait of just under 6 months to reach stability, a sign the country’s economic momentum is gathering pace. “The general upbeat picture is confirmed by a noticeable jump in the proportion of Fidelity analysts seeing positive leading indicators in their sectors.” O’Neill highlighted that the energy sector has seen the greatest improvement in fortunes, led by the stabilising price of oil, with 73% of analysts responding that leading indicators are positive, up from just 8% two months ago.

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BlackRock CEO Larry Fink Ranks China Among Biggest Opportunities

Brief: BlackRock Inc. Chief Executive Officer Larry Fink said China remains one of the firm’s top regions for growth despite uncertainties brought on by trade tensions with the U.S. and the virus outbreak.“We are here to work with China,” Fink said via video conference at the Lujiazui Forum in Shanghai on Thursday. “We firmly believe China will be one of the biggest opportunities for BlackRock.”The company is expanding in China to tap one of the fastest-growing wealth markets. China’s trillion dollar industry opened further in April, luring investment from companies including BlackRock, Vanguard Group Inc. and JPMorgan Chase & Co. While the further liberalization of the money management sector in China has been overshadowed by the coronavirus crisis, wealth firms are nonetheless laying out plans to tap a market in which retail funds alone could reach $3.4 trillion in three years, says Deloitte LLP.Fink added he was hopeful that the U.S. and China would continue to develop their relationship. “Despite the noise in the markets now, I am optimistic that the U.S.-China relationship can continue to develop for the whole world in a positive manner,” Fink said.He also sees signs that China and the rest of the world are slowly recovering from virus-induced slowdowns.“Encouraging signs are emerging,” Fink said. “As dramatic as this has been, I do believe the global economy will stabilize and recover steadily.”

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RBC, Brookfield CEO’s Join Push Against Canada’s Travel Restrictions

Brief: The heads of 27 Canadian companies, including the CEOs of two large banks and Brookfield Asset Management Inc., are urging Prime Minister Justin Trudeau and provincial premiers to ease air travel restrictions. Most international flights have been cancelled and the U.S.-Canada border has been shut to most travellers since March 21 — a policy that was extended to July 21. Last week, Air Canada Chief Executive Officer Calin Rovinescu called the restrictions “disproportionate” as the coronavirus outbreak improves in most parts of Canada. Now Rovinescu has the backing of the chief executive officers of nine companies in the S&P/TSX 60, who are among the 27 signatories to a letter published in Canada’s Globe and Mail newspaper on Thursday. “We are now entering a new phase, one in which we must find a responsible way to co-exist with COVID-19 until there is a vaccine. This includes prudently and thoughtfully opening aviation and lifting restrictions to safely resume travel throughout all provinces of Canada, as well as from select countries,” the executives wrote.

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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 June 18, 2020:

  • Once the epicentre of the pandemic in the United States, and now slowly reopening after flattening their curve, New York state is considering a quarantine for those entering. During a news conference on Thursday, Governor Andrew Cuomo acknowledged his health experts have advised him to issue a quarantine. The news comes as states that opened earlier such as Florida, Texas and Arizona have all experienced their highest single-day increases in new COVID-19 cases. New York City is planning to enter stage two of its reopening on Monday.

  • In what has become a worldwide trend, Canada has now announced a new cell phone app that will alert the user if they’ve come in contact with someone who tested positive for COVID-19. The technology works by having people who test positive upload their results anonymously to the app, under the guidance of a health-care professional. During a news briefing, Prime Minister Justin Trudeau said there are over 30 million smartphones in the country that could take on this app, but it will be up to the individual whether to use it or not. The app will be tested in Ontario first, before being available to hopefully all provinces by July.

  • The United Kingdom is switching course, dumping their contact-tracing app produced by the innovation arm of the National Health Service (NHSX), in favour of a new model based on Apple and Google technology. The NHSX model was criticized by privacy advocates and has experienced technical problems and delays. Speaking at a news conference on Thursday, UK Health Secretary Matt Hancock refused to issue a timetable for the new app saying the government is working on it, want to make sure the technology can help and is working effectively.

  • A German slaughterhouse was temporarily shut down on Wednesday after 650 of its workers tested positive for the coronavirus. The director of quality management for the company acknowledged the plant had a number of foreign workers who had travelled in recent weeks and might have been carrying the virus with them. The director also noted social distancing was not easy at the slaughterhouse facility. In reaction to the outbreak, the German government announced it would bring in new laws to protect workers.

  • Earlier in the week, Brazil recorded 32,000+ new coronavirus cases in a 24-hour time period, the most since the pandemic began. The country reported close to 1,300 deaths from the disease on Wednesday, which brought their death toll to 46,510, trailing only the United States for most in the world. Brazil is closing in on 1 million cases overall, again only trailing the United States for most worldwide.

  • India’s Prime Minister rejected media reports that the government was considering reimposing lockdowns. Instead Prime Minister Narendra Modi said the country has to think about further unlocking areas, while minimizing all possibilities of harm to people. This will prove to be a difficult task as India is a country of 1.3 billion people and have recently recorded their largest one-day spike of coronavirus cases, at close to 13,000.

  • After what New Zealand’s Prime Minister acknowledged as an “unacceptable” failure of the system, Australia is warning that their country’s borders could remain shut until at least next year. The two neighbouring countries were in talks of creating a travel bubble, but Australia’s Tourism Minister is urging its residents to consider a holiday at home.

Covid-19 – Due Diligence And Asset Management

Dalio’s Bridgewater Warns of Possible ‘Lost Decade’ for Stocks

Brief: A reversal of the strong growth seen over the years in U.S. corporate profit margins could lead to a “lost decade” for equity investors, Ray Dalio’s Bridgewater Associates warns. The margins, which have provided a big chunk of the excess return of equities over cash, could face a shift that would go beyond the current cyclical downturn in earnings, Bridgewater analysts wrote in a note to clients dated June 16. “Globalization, perhaps the largest driver of developed world profitability over the past few decades, has already peaked,” the analysts said. “Now the U.S.-China conflict and global pandemic are further accelerating moves by multinationals to reshore and duplicate supply chains, with a focus on reliability as opposed to just cost optimization.” The pandemic-induced collapse in demand has already resulted in a huge fall in profit margins in the short term, the analysts added. Intel Corp. and Taiwan Semiconductor Manufacturing Co. are cited as two examples of companies that have announced their intentions to build production facilities in the U.S., despite the higher costs.

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Lawyers Warn of Spike in Suits Against Hedge Fund ‘Fraudsters’

Brief: Frauds tend to be revealed amid a crisis — Bernie Madoff’s $64.8bn Ponzi scheme came to light not long after the financial fallout of 2008 as investors tried to retrieve their funds. It remains the largest financial fraud in US history and led to Madoff receiving a 150-year prison sentence. "When the music stops, often one sees the skeletons come dancing out of the closet," Paul Austin, director of business intelligence at City law firm Enyo Law, told FN. Noting the Madoff case,Austin said he expects similarlegal trouble for hedge funds and scrutiny of the industry as a result of the 2020 market shocks. "When things are going well and everyone's making money, it's harder to identify fraud because there's less scrutiny, but now there will be some nervous hedge funds out there." "People will use the crisis as an excuse to try to renege on contracts" Austin added. "As well as the contractual claims, you'll have fraud claims since during the bad times fraud gets uncovered. You might also see a surge in criminal claims as a result of Covid-related fraud." Austin said the recent decline in face-to-face meetings and lack of physical research, driven by workers in lockdown, will be a contributing factor towards what he says will be a surge in litigation. "Social distancing has made due diligence more challenging," he said. "Going to premises, interviewing people in person — that has stopped."

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Wall Street Rewrites Market Playbooks for Pandemic’s Second Wave

Brief: As the world braces for a second wave of infections from the coronavirus, stocks are priced for a booming global economy, bonds point to a protracted downturn and currency volatility is rising. Investors are increasingly uneasy with these conflicting signals among asset classes, but they are also resigned to them, and have adjusted their playbooks accordingly. Tried-and-tested strategies that directed buyers into stocks in good times and bonds in bad times began to unravel in the face of unconventional monetary policy a decade ago. They are being dropped now as central banks ramp up their response to the virus and governments pledge more than $8 trillion of fiscal stimulus to combat the fallout from the pandemic. “It’s a hard shift in markets and at the heart of all of this -- undoubtedly -- is the Federal Reserve’s efforts to revive the economy,” said Shyam Devani, chief strategist at SAV Markets in Singapore. “There are glimmers of 2008 financial crisis investing, but this time, from equities to bonds to currencies, there is a sense that stakes could be higher.” MSCI Inc.’s broadest measure of international stocks shows member companies trading at more than 19 times next year’s earnings. These kinds of levels haven’t been seen since the dot-com bubble burst in 2002. And what’s worrying is they come as millions of people are cast into unemployment by what the United Nations has called the most challenging crisis since World War II.

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KKR Buys Vacation Parks Firm Roompot in $1.1 Billion Deal

Brief: U.S. private equity firm KKR (KKR.N) said on Thursday it had reached an agreement to buy Dutch vacation parks firm Roompot from French private equity firm PAI Partners. KKR and Roompot did not disclose the price of the deal, but a source familiar with the transaction said it valued the Dutch company at around 1 billion euros ($1.12 billion). PAI put Roompot up for sale last October. It is the second-largest operator of vacation parks in Europe, operating its own 33 parks in the Netherlands, Belgium and Germany, and providing services to more than 100 other operators across Europe.  With over 2,100 employees catering for approximately 3 million guests per year, the company generates around 400 million euros in annual sales. PAI Partners bought Roompot for 600 million euros in 2016 from Dutch investor Gilde.

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Fund Managers Fear Markets “Overvalued” as Cash Levels Collapse

Brief: The highest number of managers since 1998 believe that the stock market is “overvalued”, as cash levels are collapsing and growth expectations jump, according to the latest Bank of America Merill Lynch fund manager survey. Although investor sentiment is past “peak pessimism”, optimism in June is both fragile and neurotic, with a second wave of the Covid-19 pandemic posing the biggest tail risk, the bank said in its report.  Only 18% of the 212 survey panellists expect a V-shaped recovery, against the 64% who believe we are headed for a U- or even W-shaped recovery. June also saw the largest fall in cash levels since August 2009, from 5.7% to 4.7% (led by institutional investors not retail investors.) Meanwhile, hedge fund net equity exposure soared from 34% to 52% - the highest since September 2018 as they chase the “pain trade” higher. The report also found that fear of prolonged recession was down to net 46% in June from 93% in April. But how the world will look post-Covid was a key issue for global fund managers, with large structural shifts expected.

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BNP Paribas Decides to Shut Down Onshore Wealth Management Business

Brief: French banking major BNP Paribas has decided to shut down its onshore wealth management business having assets under management of $14.5 billion, officials said on Tuesday.The entity said the move is driven by strategic reasons, wherein it wants to focus on businesses like corporate and institutional banking, and cannot be linked to the Covid-19 crisis. “BNP ParibasWealth Managementhas decided to exit its onshorewealth managementbusiness in India in order to focus on areas where its global footprint and diversified business strengths allow it to provide clients with more value-added services,” a spokesperson said. According to officials in the know, there are about 60 people working for the business in India and they have been given the option to either relocate to other businesses like its wholly owned brokerage subsidiary Sharekhan, which has products for the high networth individuals or join its offices in Hong Kong or Singapore.

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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 June 17, 2020:

  • In the United States, Dr. Anthony Fauci, a leading member of the White House coronavirus task force has urged states including Arizona, Texas and Florida that have seen recent surges to remain vigilant. The director of the National Institute of Allergy and Infectious Diseases is asking state leaders to move aggressively to prevent current cases from turning into a surge. Dr. Fauci’s comments follow United States Vice President Mike Pence, and head of the coronavirus task force, who penned an op-ed piece for the Wall Street Journal. In the article, Vice President Pence blamed the possibility of a second wave on media hype, and that “such panic is overblown”.

  • In Canada, the federal Liberal government will update the country on the state of government finances on July 8th. The government’s usual budget unveiling was shelved back in March due to the coronavirus pandemic. Prime Minister Justin Trudeau warned that because of the economic uncertainty created by the global pandemic, the budget update will be a “snapshot” and not a full-blown report, as per usual. Government opposition leaders, including the Bloc Quebecois accused the Liberals of unveiling the information during a time people will likely be paying little attention.

  • According to a YouGov survey, half of the United Kingdom’s businesses would have to cut staff within three months of the furlough scheme ending, due to the poor state of the economy in the aftermath of the coronavirus pandemic. Fifty-one percent of about 500 businesses surveyed said they would cut staff as under the current plan, companies will begin to shoulder costs related to the furlough scheme in August until its proposed ending in October.

  • The European Union (EU) has unveiled a plan that would see the European Commission centrally purchase a COVID-19 vaccine on behalf of all EU countries. The plan would see the commission pay upfront for some of the costs faced by vaccine producers, in exchange for the right to buy a set number of doses at a fixed price. The EU hopes their process would cut the red tape and produce a single point of contact for vaccine producers instead of dealing with 27 (the number of countries in the EU) separate processes.

  • Earlier in the week, Philippine President Rodrigo Duterte said partial restrictions would remain in place in the capital city of Manila for another two weeks. The area is still battling with the virus as one of the world’s longest and strictest lockdown measures were eased on June 1st to reduce the economic impact. President Duterte also reinstated strict lockdown rules in Cebu City, the country’s fifth most populous city, following increases in new infections.

  • China has raised its emergency level to its second highest level and has cancelled more than 60% of the flights in and out of Beijing due to the latest coronavirus outbreak in the country’s capital city. The raising of the threat level for the city of 20 million people means the cancellation of classes, suspended reopenings and stronger requirements for social distancing. China had relaxed many of its coronavirus controls after declaring victory over the pandemic in March.

  • Just one week after declaring themselves coronavirus free, New Zealand Prime Minister Jacinda Ardern called 2 new cases of the virus an “unacceptable” failure of the system. After a 24-day run with no new cases, two women who recently arrived from the United Kingdom were allowed out of quarantine early without being tested for the virus, even though one had mild symptoms. The two women then made a 650 KM (400-mile) road trip to see a dying relative. The pair were eventually swabbed and proved to be infected, but the realization was only made after their road trip. Prime Minister Ardern has now ordered the military to oversee New Zealand’s border controls to prevent similar failures in the future.

Covid-19 – Due Diligence And Asset Management

Bain Capital Raises $3.2 Billion for Latest Distressed Fund

Brief: Bain Capital Credit has closed a new distressed debt and special situations fund, with more than $3.2 billion in commitments, according to Jeff Robinson, one of the firm’s managing directors. About 50% of that total has been invested and committed, with the majority being deployed in the last three months, Robinson said. “While we do this in all market environments, now is one of the most attractive ones we’ve seen,” Robinson said in an interview. “On the distressed side, in any 10-year period, there are maybe two great years to be a distressed investor, and we’re in the midst of those two great years.” The firm raised capital from existing and new investors for the program called Bain Capital Distressed and Special Situations Fund 2019. It invests globally, including in North America, Europe, Asia and Australia. Bain joins firms like Blackstone Group Inc., Oaktree Capital Group LLC and Carlyle Group Inc. in looking to capitalize on potential opportunities created by the coronavirus pandemic that has hammered businesses. The first wave of deal flow early in the crisis included companies that needed to raise liquidity as they contended with high levels of cash burn and an erosion of enterprise value, according to Robinson.

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HSBC Revives 35,000 Job Cut Plan After Pandemic Pause

Brief: HSBC is resuming plans to cut around 35,000 jobs which it put on ice after the coronavirus outbreak, as Europe’s biggest bank grapples with the impact on its already falling profits. It will also maintain a freeze on almost all external hiring, Chief Executive Noel Quinn said in a memo sent to HSBC’s 235,000 staff worldwide on Wednesday and seen by Reuters. “We could not pause the job losses indefinitely - it was always a question of ‘not if, but when’,” Quinn said, adding that the measures first announced in February were “even more necessary today”.  An HSBC spokeswoman confirmed the contents of the memo. HSBC (HSBA.L) had postponed the job cuts, part of a wider restructuring to cut $4.5 billion in costs, in March saying the extraordinary circumstances meant it would be wrong to push staff out.However, Quinn said it now had to resume the programme as profits fall and economic forecasts point to a challenging time ahead, adding that he had asked senior executives to look at ways to cut more costs in the second half of 2020.The bulk of the job cuts are likely in the back office at Global Banking and Markets (GBM), which houses HSBC’s investment banking and trading, a senior executive familiar with the plans said.

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Why Investors Should be More Terrified of a ‘Blue Wave’ of Democrats than Trump Being Re-Elected

Brief: Another four years of President Trump may not excite everyone, but it could be way better than having what’s known as a ‘blue wave’ of Democrats taking control over the House and Senate in November — at least from an investor standpoint. “I think the markets will be most concerned of what they call the blue wave, not just the executive branch going Democratic but certainly the Senate swings as well,” said Wells Fargo Investment Institute chief investment officer for wealth and investment managementDarrell Cronk on Yahoo Finance’s The First Trade. “I think why they would be concerned of that, mostly, is because it would put in jeopardy the 2017 Tax Reform Act. There are discussions that certainly the Democrats would like to repeal that legislation and bring the tax rates back up somewhere around 28% to 29%, which would be pre-2017 levels. That would certainly challenge margins and earnings growth in an environment where it’s already challenged.” Of note is that there are 35 seats identified as up for grabs in the Senate in November, according to polling tracker 270toWin. Currently the Senate has 53 Republicans and 47 Democrats. In the House, Ballotpedia estimates 74 of the 435 House races are in play. The Democrats control the House, 233 to 197. But a blue wave must not be ruled out amid dissatisfaction among voters with how Trump has handled the twin crises of the COVID-19 pandemic and racial injustice.

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How Covid-19 is Reshaping Asset Management

Brief: Covid-19 continues to take its toll on financial markets, presenting major challenges for asset managers, from active funds to passive investments. The implications have been significant and central banks have now injected close to $100 billion to prop up investment funds hit by the market turmoil, raising questions about the systemic risks posed by the sector. With the effects of the crisis likely to be felt for several years ahead, how can asset managers adapt to this ‘new normal’ and begin to prepare for future challenges? Given the scale of Covid-19 and its impact on the global economy, asset managers were always likely to face high levels of volatility and challenging market conditions. However, the immediate reaction to the crisis produced varying results for different investment strategies and approaches. Passive funds tracking equity and bond indexes, which have proved highly popular with investors in recent years, have been exposed to the full extent of market volatility from the very beginning of the crisis. These funds suffered significant losses in value throughout February and March, but they weren’t the only immediate losers. Funds managed with traditional quantitative methods have experienced a similar struggle. These funds typically work on the assumption that patterns can be found in historical data and then used to inform investment choices.

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Hedge Fund Industry Split Over Return to Work and Client Meetings, as Lockdown Measures Ease

Brief: Most hedge fund industry employees have been working remotely during the coronavirus pandemic, but now firms are split over when staff should return to work and when businesses can resume face-to-face contact with investors and other clients, a new study by the Alternative Investment Management Association has found. The survey data suggests firms with smaller headcounts are more confident on resuming client contact and overseas travel later this year. But firms with larger staff numbers do not expect to return to normal until 2021, suggesting they face bigger practical challenges in ensuring social distancing among employees.  AIMA, the trade body for the globally hedge fund industry, recently surveyed 240 members – two-thirds of which were hedge fund management firms, with the remaining third comprising service providers and investors - altogether representing more than 67,000 employees. The survey found that some 92 per cent of hedge fund industry employees have been working either entirely (67 per cent) or mostly (25 per cent) from home throughout the Covid-19 lockdown. As countries begin to ease lockdown measures, AIMA’s study has found that the hedge fund industry is divided over how to proceed back to work.

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M&G, Legal & General, Standard Life Keep Property Funds Frozen

Brief: Asset managers M&G, Legal & General, Standard Life and Janus Henderson said they were keeping their property funds frozen as valuers continue to struggle to assess real estate assets due to the coronavirus crisis. M&G froze its $3.2 billion UK Property Portfolio in December, as uncertainty over Brexit and weakness in Britain’s retail commercial property sector prompted redemption requests. Most other UK property funds also halted redemptions in March, as valuers said there was “material uncertainty” about property values at the end of the first quarter due to the coronavirus pandemic. As the second quarter draws to a close, M&G said its valuers were still applying a material uncertainty clause due to the lack of property deals. However, it said its clause did not apply to the industrial and logistics property sectors where there had been transactions. Legal & General said there was no change to the lock-up of its 2.9 billion pound ($3.7 billion) fund. Standard Life said two funds totalling about 500 million pounds remained frozen due to valuation difficulties, while Janus Henderson said the material uncertainty clause still applied to its 500 million pound fund. The funds are expected to remain frozen till at least September due to the valuation challenges, and some of those which usually offer daily redemptions may need to change structure to survive, industry sources say.

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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 June 16, 2020:

  • In the United States, Federal Reserve Chairman Jay Powell told a Senate banking committee that a full economic recovery is unlikely until the public is confident the coronavirus can be contained. Despite figures last week that showed an unexpected bump in jobs, Powell is not convinced this is leading to stabilization. Instead, Powell points out that levels of output and employment remain far below their pre-pandemic levels. The United States government has butted heads with the Fed Chairman over statements such as these in an election year. White House adviser Peter Navarro even went as far last week to say Chairman Powell should release the data and then keep his mouth shut.

  • Canadian Prime Minister Justin Trudeau announced Tuesday during a news briefing that the border with the United States will remain closed until July 21st to all non-essential travel. The latest deal was set to expire on Sunday, but both sides agreed to another 30-day extension. Canada is closing on 100,000 confirmed coronavirus cases, while America has just surpassed 2 million. Also, as promised, the federal Liberal government has announced the Canada Emergency Response Benefit (CERB) will be extended by another two months. The CERB has provided taxable payments of $2000 per month,  for up to four months to Canadians who lost their job during the pandemic. Prime Minister Trudeau said the government will find ways to encourage people to work when they are able.

  • United Kingdom Prime Minister Boris Johnson praised Oxford University based scientists for finding the biggest COVID-19 drug breakthrough to date. Scientists have learned from a trial that a cheap and widely available steroid named dexamethasone was found to cut the death rate of the most seriously ill patients on ventilators by one-third. The success rate drops slightly to one-fifth of patients using oxygen. Martin Landray, an Oxford professor of medicine, epidemiology and deputy chief investigator of the trial estimated up to 5,000 fewer people in the UK would have died from the virus if the steroid had been used from the start of the outbreak.

  • Spain’s central government announced a €16 billion stimulus package that would be disbursed to the country’s 17 regional governments. Starting in July, €9 billion will go to the health sector, €5 billion to help people who suffered income losses due to the pandemic, and €2 billion to education. This injection of cash will be in addition to the €69 billion already provided in financing guarantees to Spanish businesses.

  • In Germany, Berlin’s top health official is urging residents to use a new government-based contact app rolled out on Tuesday. The app is similar to one launched in Japan where it uses Bluetooth technology and is designed to measure whether cell phone users have breached a two-metre proximity for a long period of time. If a user has tested positive and shared information with the app, it will inform other users nearby of their diagnosis. The issue is the government hasn’t made the app mandatory for citizens and most don’t want to use it, citing a reluctance to share their data with government authorities.

  • Dubai’s COVID-19 command and control centre said the region is on track to curb the coronavirus citing data pointing to a “significant decline” in recent weeks. Some area hospitals have no COVID-19 cases and most medical facilities have resumed normal diagnostic treatment services. Dubai has been reopening its economy slowly since ushering in a harsh 24-hour curfew through most of April.

  • After 27 fresh new cases on Tuesday, authorities in Beijing, China locked down more residential compounds, disinfected more than 30,000 restaurants and tightened outbound travel. Beijing has now seen more than 100 infections from the latest outbreak connected to Xinfadi, the city’s largest wholesale food market.

Covid-19 – Due Diligence And Asset Management

BofA Survey Finds 78% of Investors See Market as ‘Overvalued’

Brief: Investors are sinking their cash in droves into a stock market that looks the most overvalued in decades as one of the most unloved rallies in history rattles the pros on Wall Street. That’s the conclusion drawn from the latest seven-day Bank of America Corp. survey that ended on June 11 -- just as the S&P 500 had its worst drop since the March turmoil. The poll indicated that fund managers slashed their cash positions by the most since August 2009, to 4.7%, in order to use their dry powder to chase the rally. With global equity benchmarks up more than 30% from this year’s lows, hedge funds increased their exposure to stocks to 52%, the highest level since 2018, the survey showed. A whopping 78% of polled investors, the largest number since the survey started in 1998, believe the stock market is overvalued, with 53% calling it a bear market rally. As lockdowns ended in some major economies, investors raised their global growth bets but said they don’t expect global manufacturing to show expansion before October. At the same time, only 18% of “moody bulls” expect a V-shaped, or sharp economic recovery compared with 64% who think it’ll be U- or W-shaped, or more gradual, according to BofA.

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U.S. Bank Profits Plunge 70% on Coronavirus Loss Provisioning

Brief: U.S. bank profits fell by 69.6% to $18.5 billion in the first quarter of 2020 from the year prior as banks felt the economic impact of the novel coronavirus pandemic, according to data from a banking regulator.The Federal Deposit Insurance Corporation reported that “deteriorating economic activity” caused lenders to write off delinquent debt and set aside billions of dollars to guard against future losses. Over half of all banks reported a profit decline, and 7.3% of lenders were unprofitable.The new report, the first government survey of the industry since the pandemic shut down large parts of the economy, shows banks set aside $38.8 billion to cover potential loan losses in the future, up nearly 280% from the year prior. The amount of loans banks charged off as delinquent was up nearly 15%, driven by an 87% increase in charge-offs for commercial and industrial loans. The amount of non-current loans rose 7.3% from the previous quarter, the biggest increase since 2010.Despite the setbacks, FDIC Chairman Jelena McWilliams said banks had been able to effectively serve clients in the downturn, and were a “source of strength for the economy.”

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Hedge Funds Nurse Losses on Bets Against Greek, Italian Shares

Brief: Some hedge funds that bet against a series of Greek and Italian companies are nursing losses after the European Union’s breakthrough plan for a 750 billion euro (£673 billion) recovery fund sent stock markets surging across southern Europe. The funds, which include Citadel, Marshall Wace and AKO Capital, still hold short positions on companies such as Italy’s Banco BPM and Greece’s Piraeus Bank ahead of a June 18-19 EU summit to debate the recovery fund, aimed at helping European economies recover from the impact of the coronavirus pandemic.Essentially a bet that the price will fall, shorting involves borrowing shares then selling them in expectation of being able to buy them back cheaper and pocket the difference.Early last month, shorting Italian and Greek shares may have seemed like a no-brainer; heavily dependent on tourism, their economies are expected to contract 9-13% this year. Italy has also witnessed 34,000 coronavirus deaths.But the May 18 Franco-German proposal for the recovery fund upended those bets, lifting stock markets across southern Europe. The moves accelerated after the European Central Bank upped the size of its emergency stimulus programme on June 4.

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Private Equity Exits Have ‘All But Stopped,’ McKinsey Says

Brief: The global coronavirus pandemic has ground economies around the world to a halt — and the slowdown is having a major impact on private equity exits, according to a new report from global consulting firm McKinsey & Co. “With a couple of exceptions — such as structured transactions and deals signed before the crisis — traditional PE exits have slowed significantly since mid-March of this year,” wrote McKinsey partners Alastair Green, Ari Oxman, and Laurens Seghers in the report. “Announced PE exits dropped almost 70 percent globally in May 2020 versus May 2019.” Several factors have contributed to the slowdown, according to the authors, who interviewed more than 40 sponsors, investment bankers, and CEOs from March to May, mostly based in Europe and the United States. Valuations have suddenly shifted, with businesses facing tanking demand as a result of the crisis — which has also laid bare new weaknesses in many portfolio companies.  The crisis has also thrown up major barriers to deal execution, preventing face-to-face due diligence meetings and increasing financing costs. 

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Hedge Funds and the Darwinian Struggle for Survival

Brief: Hedge funds are in a Darwinian struggle, as the cost of succeeding has increased in terms of technology and human capital, says this week's guest on Masters in Business, Luke Ellis, chief executive officer of Man Group Plc. The industry has become a winner-take-all competition, with a small number of stars and an army of also-rans. Man Group is the world’s largest exchange-listed hedge fund, focusing on actively managed investment, with $104.2 billion in assets under management. Luke previously built and ran the equities-derivative business at JPMorgan and after that the fund of fund business at Financial Risk Management, where he was managing director from 1998 to 2008. Ellis says his childhood love of horse racing and poker led him to alter the way he thinks about risk; the statistical patterns in gambling and investing are remarkably similar. His interests led him to earn degrees in mathematics and economics from Bristol University. Our conversation was recorded on Tuesday, June 9, before markets took an 11% hit. You can hear Ellis explain why he thought the market run up had gone too far too fast before that mini-crash. Ellis credits the firm’s disciplined, quantitative approach for helping the company navigate the big slump in March. The firm’s investments are about 60% hedged and 40% long-only. The hedged portions did especially well. For the first quarter, Man’s total returns were down only 11%, about a third as much as the broader market. His favorite books are here; a transcript of our conversation is here.

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Asia’s Top Researchers Says the Worst Is Over – but Recovery Is ‘Far From Certain’

Brief: Between trade tensions with the U.S. and protests in Hong Kong, last year was tumultuous for Asia. But all of that paled in comparison to the coronavirus that would sweep through the continent — and go on to infect the rest of the world. “For those of us that are Hong Kong-based, the protests led pretty much straight into the pandemic,” said Martin Yule, head of research for Asia Pacific at UBS. “At times, Hong Kong felt like the eye of the storm. Rising geopolitical tensions were definitely the defining macro force at the end of 2019, but Covid pushed these concerns into the background pretty quickly.” Six months since Covid-19 was first discovered in China, countries in the region are now loosening lockdown restrictions. And many Asian equity markets are rebounding, partly on the back of the large stimulus packages in the United States and Europe. “The biggest surprise of 2020 thus far has been the speed of the market recovery,” said Yule, who succeeded UBS’s long-time Asia Pacific research head Damien Horth in February. But the region is by no means out of the woods yet, Yule said. “The speed of the economic recovery is far from certain, and it would appear that epidemiologists seem to agree on one thing: a second wave is likely,” he continued. “That will test equity markets over the back half of 2020.”

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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 June 15, 2020:

  • The United States Food and Drug Administration (FDA) has revoked its emergency use authorization for the drugs hydroxychloroquine and chloroquine for the treatment of COVID-19. The FDA based their termination on reviewing current research available on the drugs and that they don’t meet “the statutory criteria” for emergency use authorization as they are unlikely to be effective in treating the coronavirus. United States President Donald Trump had publicly backed the drugs in news conferences and admitted to taking it himself to help stave off the potential of catching COVID-19. White House economic adviser Larry Kudlow said during a media interview over the weekend the $600 boost in weekly unemployment benefits will end in late July. Instead, he touted a proposal for a hiring bonus as right now Kudlow says the government is paying people not to work and it is better than some of the salaries Americans would normally receive.

  • North of the border in Canada, Prime Minister Justin Trudeau announced their country’s benefit for the unemployed (Canada Emergency Response Benefit – CERB) will be extended with details to follow in the days ahead. The CERB, which was launched in April is set to come to an end in early July. Eight million Canadians have applied for the CERB since its launch, but the treasury board president noted since the economy has reopened in many parts of the country, “new parameters” will be placed on the program when the extension is formally announced.

  • United Kingdom residents formed long, socially-distanced lines outside of London’s most popular shopping districts as many non-essential retail outlets opened for the first time since March. As for those two metre social distancing measures, Prime Minister Boris Johnson said his government will be doing a review of that rule, noting it would be completed in a couple of weeks. The hospitality sector, which includes restaurants, pubs and hotels, are set to reopen July 4th and will be keen to see the results as many in the industry believe the two metre social distance rule will kill their businesses upon reopening as many don’t have the space to do so.

  • Over the weekend, French President Emmanuel Macron announced a further easing of restrictions due to the coronavirus. The country will begin a full reopening of its cafes and restaurants, along with lifting the bans on travel from other European countries starting July 1st. The country was one of the hardest hit in Europe, suffering over 30,000 deaths due to COVID-19.

  • The German government plans to invest €300M in a private biotech company that will give them a 23% stake in the company. CureVac is looking into developing a potential vaccine for the coronavirus and is set to start clinical trials next month using a technology that can produce a vaccine more swiftly than traditional methods. In March, a German newspaper had reported the US government had sought to take over CureVac in an effort to secure a supply of a potential vaccine.

  • The southern Indian state of Tamil Nadu, which is home to the city of Chennai, is re-imposing a strict and total lockdown from June 19th-June 30th as it tries to stop the surge of the coronavirus. Chennai and the surrounding area are a hub for India’s car manufacturing industry. New Delhi, the country’s capital will not be going into another lockdown according to one of their chief ministers saying there are no such plans, even though they are struggling as well with a surge in cases.

  • China’s capital Beijing have locked down residential compounds, including a seafood supermarket and have fired officials over a new COVID-19 outbreak in the area. Health officials have warned the risk of the outbreak worsening was “very high.” On Monday, 49 new cases were announced, 36 stemming from the Xinfadi seafood supermarket in Beijing’s southern section. The country’s capital had gone 55 days without community-based spread of the infection, but now have reported 79 such cases in the past four days.

Covid-19 – Due Diligence And Asset Management

Likely to See a Second Wave of Stock Selling Instead of a Second Wave of COVID-19 Cases: Strategist

Brief: Before there is any form of “second wave” of COVID-19 globally, the stock market may first experience asecond wave of sellingas it once again prices in worse-case scenarios for economies and companies. “We think you’re more likely to see a second wave down from markets as opposed to a second wave up in COVID-19 — we have concerns here,” said FBB Capital Partners director of research onYahoo Finance’s The First Trade. Bailey pulls no punches on how bad a second wave down in markets could be — the benchmark being the 35% downdraft from the late February highs to the March 23 lows for the S&P 500. Continued Bailey, “I don’t know if it will be as bad as the first wave [of selling]. It could be half that bad. You take a look at valuations for the S&P 500 now and we’re back to dot com bust levels. I think we have a reasonable downside over the next weeks or months here.” To be sure, the market has started the week equally concerned about a second wave of COVID-19 and still overheated valuations.

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BlackRock Jumps on the Virtual-Life Bandwagon With a New Fund

Brief: BlackRock Inc. is planning to start an exchange-traded fund tracking companies that specialize in remote-working, learning and entertainment. The world’s largest asset manager is seeking to launch the iShares Virtual Work and Life Multisector ETF, according to a filing with the Securities and Exchange Commission. The list of holdings isn’t yet available. In April, Direxion announced plans to start a new “work-from-home” fund tracking industries such as cloud technologies, remote communications and cyber security. While Americans are moving around and interacting more than they did before the reopenings, concern over a second wave of the coronavirus threatens recent efforts to relax restrictions. That means companies that specialize in virtual living could keep growing in popularity, according to Jason Kotik, investment director at Aberdeen Standard Investments. “It’s kind of the next hot thing,” said Kotik. “People want to jump on this. While I agree there is definitely a change going on secularly, not everything is going to win.” One of the biggest challenges for those niche funds is that they have struggled in a crowded ETF marketplace. Another hurdle is that the coronavirus shutdowns have so rapidly differentiated winners from losers.

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Schroders Boss Responds to £9M Coronavirus Pay Controversy

Brief: Schroders chief executive Peter Harrison has responded to controversy over his £2.5m pay increase announced in the midst of the coronavirus lockdown while the asset manager was urging companies to keep executive pay under control. In April, Schroders announced it would pay Harrison up to £9m for the current financial year, a 39% increase on the £6.48m he took home in 2019. Until April, he had also been chair of the Investment Association, which was also urging companies to exercise restraint on executive pay. In aninterview withThe Times, Harrison said: “In hindsight, I wish it had been different, because the point is a really important one,” he told the newspaper from his second home in Cornwall. “I’ve taken the very public view that we will not make any staff redundant, we won’t furlough anybody, we won’t accept [government] aid.” The Investment Association had linkedits comments about executive payto those companies that had slashed dividends. He has since paid £631,000 to the coronavirus relief effort.

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Hedge Funds May See $100 Billion Redeemed in 2020, Barclays Says

Brief: Investors may pull as much as $100 billion from the hedge fund industry this year, as a result of the economic fallout from the coronavirus crisis. The outflows -- which may range from $50 billion to $100 billion -- would mark the largest drawdown since the global financial crisis, when the industry saw $154 billion in withdrawals in 2008, according to a Barclays Capital Solutions report. “We’re already $30 billion in -- in terms of redemptions,” Kate Holleran, managing director of capital solutions at Barclays, said in a telephone interview. “We were optimistic coming into this year, given the strength of 2019, that we might actually see inflows. That is clearly not going to be the case.” The year fell into chaos as Covid-19 became a global pandemic, seizing up credit markets and putting an end to Wall Street’s longest-ever bull market. The damage pushed the Federal Reserve to intervene, flooding the markets with trillions of dollars in stimulus. That effort, combined with the easing of lockdown restrictions across the U.S. and rising hopes of a quick economic recovery, helped the S&P 500 index soar from its March low. With markets defying the initial gloomy expectations, Holleran believes redemptions will likely come in at the lower end of the range.

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Pimco’s Seidner Says It’s Time to Give ‘The New Normal’ a Rest

Brief: It may be time to scrap the oft-used phrase ‘the new normal.’ So says Marc Seidner of Pacific Investment Management Co. “Pimco often gets credit for coining the phrase ‘the new normal’ coming out of the financial crisis,” Seidner, the firm’s chief investment officer for non-traditional strategies, said in a webcast Friday organized by Boston College’s Carroll School of Management. “I’m actually getting pretty sick of the phrase.” Instead, Seidner said, he may try to convince his Pimco colleagues that “maybe we’re heading into what is an old, old normal.” The way Seidner sees it, investors were “lulled into complacency” over the last decade. The 2010s saw Wall Street’s longest-ever bull market, historically low interest rates and an economy that grew every year. “Perhaps we’re going back to some sense of old, old normal where we all have to manage through periods of radical uncertainty, where the distribution of possible outcomes isn’t this beautiful bell shaped curve where you can assign succinct probabilities to tail events,” he said. A Pimco spokesman declined to comment on his remarks.

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Renaissance Technologies Posts 21% Drop at Market-Neutral Fund

Brief: Renaissance Technologies, the quantitative hedge fund firm founded by Jim Simons, lost almost 21% this year through the first week of June in its market-neutral vehicle. Part of the decline for the Renaissance Institutional Diversified Alpha fund came this month amid volatility brought on by the coronavirus crisis, according to a person briefed on the matter. The fund lost almost 9% in the first week of June, said the person, who asked not to be identified because the information isn’t public. A spokesman for the firm declined to comment on the returns, which were reported earlier by the Financial Times. The firm’s quantitative equity hedge fund rose 2.3% in May, Bloomberg reported last week. The Renaissance Institutional Equities Fund, which only trades U.S.-listed stocks that its computer models expect to rise, was down 11% this year through May. Renaissance, which oversaw about $75 billion as of earlier this year, has long been one of the $3 trillion hedge fund industry’s most profitable firms. The East Setauket, New York-based firm is best known for its Medallion fund, which is only open to executives and employees and has had annualized gains of roughly 40% over the past three decades.

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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 June 12, 2020:

  • As the number of coronavirus cases in the United States eclipse the two million mark, the Centers for Disease control and Prevention (CDC) released the latest version of their guidelines for living daily life during the pandemic. The CDC wants to remind Americans that the disease is still spreading, to limit the amount of people they associate with and public transit and travel is still risky. The CDC warns the country could see more COVID-19 cases as states continue to reopen throughout the summer and are reminding the public that getting flu shots in the fall will be more important than ever.

  • In Canada, the province of Ontario took its biggest step to reopening since a state of emergency was declared nearly three months ago. The majority of Canada’s most populous province is entering stage two of its three stage reopening phase, which means shopping malls can reopen, restaurants and bars can serve customers seated outdoors, and places of worship can operate at a 30 per cent capacity. Large urban areas such as the Greater Toronto and Hamilton areas though remain in stage one.

  • Elsewhere in Canada, major grocery chains Loblaws, Metro, as well as Walmart are facing public backlash as they have decided to stop giving their workers an extra $2/hr pay bump they put in place during the pandemic.  “As the economy slowly reopens and Canadians begin to return to work, we believe it is the right time to end the temporary pay premium we introduced at the beginning of the pandemic," Loblaws chairman Galen Weston said.

  • The United Kingdom government will review its policies on their 14-day travel quarantine on June 29th as the British Transport Secretary says they are trying to do everything to avoid a second wave of the virus. The review of the travel quarantine coincides with news that major airlines British Airways, easyJet and Ryanair launched legal action against the UK government’s actions saying it will devastate the country’s tourism and aviation industry.

  • Horrendous. Horrific. Pathetic. These were the words used by India’s Supreme Court on Friday to describe Delhi’s local government’s handling of the coronavirus pandemic. The court stated patients were being “treated worse than animals” and while some have called for authorities to re-impose lockdowns in hard-hit cities like New Delhi, authorities are ruling it out. Senior doctors and health officials in the New Delhi area are saying many more patients are dying of COVID-19 at their hospitals than what official figures suggest.

  • The United Arab Emirates have stated they would increase efforts to bring back nearly 200,000 of its residents stranded worldwide due to the restrictions caused by the coronavirus. Expatriates who want to return need to register online and upon returning, must self-quarantine for 14 days on their own and install apps to monitor their health.

  • Japan will launch a smartphone app based on technology from Apple and Google next week, according to the government. Smartphones with the app installed will be able to detect each other via Bluetooth, and log those who come in close contact. If a phone user is found to be infected, people who spent more than 15 minutes within a one metre (3.3 feet) distance to that individual over the previous 14 days will be notified and prompted to seek medical consultation. The message will only be sent if the infected person gives consent, and a positive diagnosis will remain anonymous to the receiver of the notification.

Covid-19 – Due Diligence And Asset Management

The Early Pandemic Warning That Woke up Wall Street

Brief: The warning was stark. It was late January, and there were just six known cases of Covid-19 in the US. A leading infectious disease specialist who previously had battled Ebola and SARS had an alarming message for a group of money managers: It was about to get a lot worse. “In the 20 or 30 years I’ve been involved in emerging infections,” Jeremy Farrar told the managers on the January 31 call, “I’ve never seen anything that has been as fast or as rapidly moving and dynamic as this has been.” The director of the Wellcome Trust, a UK health foundation, followed that up with an estimate on a February call that deaths in the US related to the spread of the new coronavirus could reach between 500,000 to 1 million within a year assuming there were no lockdowns or other restrictions. The calls held for managers of Wellcome’s $33bn endowment served as one of the earliest known warnings to investors about the coming impact of a disease for which humanity had no immunity. The information spread like a kind of samizdat among certain quarters of Wall Street, and beyond. Those who took heed of the predictions from Dr Farrar, an adviser to the UK and German governments on the virus, spread the word to friends and family and took steps to try to protect their investments from the virus’ fallout.

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KKR’s Apple Leisure Said to Hire Advisers, Weigh Capital Raise

Brief: Apple Leisure Group has hired advisers as it contemplates raising new capital after being battered by the Covid-19 pandemic, according to people with knowledge of the matter. The travel and hospitality company, as well as owners KKR & Co. and KSL Capital Partners LLC, have hired financial and legal advisers, said some of the people, who requested anonymity because the matter is private. The company is not currently weighing restructuring or bankruptcy as an option, some of the people said. Apple Leisure has a $950 million first-lien loan due in 2024 that last traded at about 67 cents on the dollar, according to data compiled by Bloomberg. It fully drew down its $175 million revolving credit facility earlier this year, a person with knowledge of the matter said. Representatives for Apple Leisure and KKR declined to comment and a spokeswoman for KSL didn’t immediately have a comment. Apple Leisure Group focuses on trips to regions including Mexico and the Caribbean. It specializes in all-inclusive resorts, which sell lodging, food and other services for a single price. The model, once viewed primarily as a budget way to travel, was having a moment before the coronavirus, with Marriott International Inc. and Hilton Worldwide Holdings Inc. embracing the concept.

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Mega-Rich Urged to Unleash $121 Billion for Desperate Charities

Brief: Billionaires are getting a clear message from nonprofits, lawmakers and even other billionaires: Many of you already got tax breaks for giving away your money. Now, amid the pandemic and recession, it’s time to ensure cash actually gets to charities quickly. For the past several years, wealthy Americans have poured billions of dollars into donor-advised funds, or DAFs, vehicles that have grown popular because they’re so flexible. Givers get an immediate tax break, which can equal 57 cents or more of every donated dollar, but they have unlimited time to decide where the money should go. Many nonprofits worry the surge of money into DAFs has cost them in recent years as total giving by individuals has stagnated. Some lawmakers seem to agree. Congress barred DAFs from taking advantage of new incentives for charitable giving included in the $2.2 trillion CARES Act approved in March. In California, state legislators proposed pushing major DAF providers to be more transparent. Now, the pandemic is prompting more money to flow out of DAFs and into charities where it can do some good. Fidelity Charitable, the nonprofit arm of Fidelity Investments, said in late May that giving from its DAFs was 30% higher so far this year. Vanguard Charitable and Schwab Charitable both said giving increased about 50% over similar time frames from February to mid-May.

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Hedge Fund Positioning Data Shows How Market Ran Away From Them

Brief: New positioning data shows how frustrating a straight-up rally in companies with shaky finances has been for professional speculators. While they are getting a measure of recompense today, hedge funds have struggled after shunning airlines, hotels and restaurants, with exposure sitting near multiyear lows, data compiled by Morgan Stanley’s prime brokerage unit show. The aversion toward companies hit hardest during the pandemic contrasts with retail investors, who piled into stocks like American Airlines, putting all their chips on an economic reopening. It’s the latest example of the widening division between Wall Street and Main Street. Professional money managers have been reluctant to embrace the most speculative stocks amid concern that the worst is not over with the coronavirus. Hedge fund clients at Morgan Stanley have stuck to the safety of the stay-at-home trade, with holdings in technology and health-care hovering near a decade high. “I would venture to guess that hedge funds are looking at the fundamentals of investing. The typical recovery doesn’t happen this quickly,” said Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute. “Maybe retail investors saw what happened in ‘07, ‘08 and are using that as their model and realizing that had you invested when that market was down, you would have had a significant return over the past decade.” While hedge funds’ cautious stance helped them avoid deeper losses during the March selloff, it’s now pressuring returns with tech shares lately trailing cyclicals such as airlines.

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Abu Dhabi’s Mubadala Says it is Well Placed to Handle Virus Challenge

Brief: Abu Dhabi state fund Mubadala said on Thursday its strong liquidity position and a diverse portfolio will help the fund tackle the challenges posed by the coronavirus outbreak and weak oil prices, as it posted a four-fold jump in its 2019 income."All of this positions us very well to handle this very extraordinary situation in the best way possible," group chief executive Khaldoon Khalifa Al Mubarak said referring to the fund's strong balance sheet and $232 billion portfolio in a video message.Mubadala Investment Co's total comprehensive income grew to 53 billion dirhams ($14.43 billion) in 2019 from 12.5 billion dirhams in 2018, helped largely by gains in its public equity portfolio and funds.Assets under management also rose 1.5% to 853 billion dirhams or $232 billion at year-end, it said in a statement.The results are also the first to consolidate the full-year results from the Abu Dhabi Investment Council, an investment arm of the Abu Dhabi government, which joinedMubadalain 2018."Not only did we deliver strong financial results, but also continued to grow our presence across multiple asset classes in key sectors and markets," Mubarak said.The Abu Dhabi sovereign investment company said it realized 63 billion dirhams in 2019 from the "monetization of mature assets and distributions from investments locally and abroad."

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Emerging Markets Enjoying Their Strongest Crisis Bounceback Ever

Brief: Emerging markets (EM) stock markets are enjoying their strongest crisis bounceback ever, as coronavirus (COVID-19) infections stabilise and governments remove two-month-long lockdowns.Economies around the world have been hit by the shock of the pandemic and many have also suffered from a concurrent oil price shock sparked when Russia walked out of the OPEC+ production cut deal on March 6. However, as economies open up again and oil prices have broken above $40 after almost halving in price in the last two months, investors have turned “risk on” again and are snapping up cheap shares ahead of their inevitable rebound. “At this point in the rebound, this EM rally is now the strongest of any of the big-5 EM sell-off rebounds (1998, 2001, 2008, 2016, 2020) and with US, DM and safer (particularly Asian) EM equity markets having less than 10% to go before reaching pre-coronavirus (Jan-Feb) 2020 peaks, investors are being forced up the risk curve in search of potential returns,” Daniel Salter, head of equity strategy at Renaissance Capital (Rencap), said in a note on June 10. Russia is in the vanguard as one of the “safe haven” markets thanks to its low debt and large reserves, and the economy is already showing signs of a rebound. Rencap saw it coming and marked the whole Russian market up to Buy in the first week of May, in what is now starting to look like a classic call, as bne IntelliNews reported at the time.

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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 June 11, 2020:

  • In the United States, as multiple media reports are describing an increase in cases since reopening and the possibility of a second wave in the fall, the government says a shutdown of the economy will not be happening again. Treasury secretary Steven Mnuchin told CNBC, “We can’t shut down the economy again. I think we’ve learned that if you shut down the economy, you are going to create more damage.” Democratic leaders are also calling for a briefing from the White House coronavirus task force. Since the reopening of the country, the task force meetings have been cut back to about once a week and while members do communicate via conference calls with governors weekly, the last formal news briefing from the task force was on April 27th.

  • In Canada, the doctor who was being blamed by the province of New Brunswick for creating a second wave of the coronavirus is seeking an apology from the Premier of the province. Speaking through his lawyer, Dr. Jean Robert Ngola says private investigators have found that he couldn’t have been the first patient, and that his trip to pick up his daughter from neighbouring province Quebec was not the source. The lawyer for Dr. Ngola notes he only interacted with a few people during the week of May 10th, all of whom have tested negative for COVID-19. Dr. Ngola has said he has been on the receiving end of threats, online racial attacks, local harassment and has seeked police protection since the New Brunswick government made the news public during a news conference. As of Wednesday, there were 28 active cases in the region Dr. Ngola practices medicine, most of which are residents and employees of a long-term care home.

  • United Kingdom health secretary Matt Hancock has said around “70-80%” of those who tested positive for the coronavirus after taking an antibody test had not displayed any symptoms. The health secretary cited an Office for National Statistics study for the numbers. When pressed how this would influence the government’s test and trace method when so many don’t even show symptoms, Hancock insisted the test and tracing would help “break the chain of transmission”.

  • In an interview with the Financial Times, Spain’s health minister and chief epidemiologist said the country will use “surgical” restrictions and improved detection to keep the coronavirus under control as they emerge from their lockdown. The health minister said once the government’s emergency powers conclude on June 21st, they would use existing health legislation to respond to new outbreaks. Compulsory quarantine of specific groups, as well as restrictions on activities in affected areas are examples of tools the government could use.

  • The European Commission has outlined a set of criteria and guidelines that will gradually allow a reopening of Europe’s external borders as of July 1st. The decision to lift restrictions will be if a specific country is in a similar or better epidemiological situation than Europe, whether it has comparable hygiene measures at transport hubs, and whether or not the country has lifted travel restrictions for the European Union. European external borders have been closed since March following the outbreak of the coronavirus.

  • Brazil restored its detailed COVID-19 data earlier this week on a national website after a ruling by the Supreme Court justice ordered that the full set of information be reinstated. It was noted earlier in the week, the removal of information over the weekend caused an uproar alleging the government was trying to cover up the severity of the coronavirus pandemic in the country.

Covid-19 – Due Diligence And Asset Management

Top Trump Adviser: Jerome Powell Should Provide the Data and Then ‘Keep his Mouth Shut’

Brief: On Thursday morning, stocks slid following the Federal Reserve’s monetary policy decision and a press conference from Chairman Jerome Powell highlighting ongoing economic challenges. The Federal Reserve says itexpects real GDP to contract by 6.5% in 2020, with the unemployment rate reaching 9.3% by the end of the year. Top White House advisor Peter Navarro, it’s safe to say, is not a fan of those projections or of Fed Chairman Jerome Powell’s approach. During a Yahoo Finance interview with Andy Serwer, Navarro commented that Powell has “probably the worst bedside manner of any Fed chairman in history.” If he was going to market sushi, Navarro added, we “would market it as cold dead fish.” Navarro added… Larry Kudlow, director of the White House’s National Economic Council,added to the pile-onin a Fox Business interview Thursday. "I do think Mr. Powell could lighten up a little when he has these press offerings" he added a joking aside that "we'll have some media training at some point. Like Trump, Navarro, who serves as the director of the White House Office of Trade and Manufacturing Policy, has long been critical of the Fed. In 2019, Navarrotold Yahoo Finance thatthe Fed “is playing checkers in a chess world.” However, Navarro’s and Trump’s comments today come off the heels of recent praise for Powell from Trump about the Fed’s response to the economic fallout of the coronavirus pandemic.

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Third Point Hedge Fund Seeks to Raise More than $500 Million

Brief: Billionaire Dan Loeb’s Third Point is seeking to raise more than $500 million for a new hedge fund to wager on structured credit markets which imploded during the coronavirus market turmoil. The Third Point Structured Credit Opportunities Fund started fund raising on June 1 and has collected about $380 million, according to an investor update seen by Bloomberg. A spokesman for the New York-based investment firm declined to comment. The structured-credit market went into a tailspin in March, with some hedge funds invested in the market losing as much as 50%. Firms including Medalist Partners, EJF Capital and Prophet Capital Asset Management froze redemptions from their funds to avoid fire sales of assets. At the same time, many firms have started funds to take advantage of the dislocation. “In under three weeks, we saw a price decline in structured credit that took over nine months to achieve during the global financial crisis,” Third Point told investors in April while disclosing the plan to start the fund. The new fund will mainly invest in residential mortgages, consumer credit, consumer real estate and collateralized loan obligations. Investors’ cash is locked in for one year and the fund is aiming to return as much as 20% annually.

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Pandemic Will Not Be the End of Office Buildings, Brookfield CEO Says

Brief: The coronavirus pandemic will not be the end of office buildings, Brookfield Asset Management Chief Executive Bruce Flatt said on Wednesday in an interview with Reuters Breakingviews. Office workers globally have shifted to working from home during the pandemic, with Gallup reporting that 62% of employed Americans in April had worked from home during the crisis, double the number in March.While this trend has raised questions about the future of office space, Flatt said he believes that company culture and productivity are dependent on sharing a common space and “it is ludicrous to think that companies will not return to offices. Anyone who says they’re not going to be in offices is naive about how company culture is built.”Toronto-based Brookfield manages over $515 billion in assets and is the parent company of Brookfield Property Partners, a real estate company that holds one of the largest commercial portfolios in the world. Commercial real estate has been hit hard by the pandemic, as retailers and restaurants have missed payments or shuttered entirely. Brookfield Property’s share price has fallen 33.8% in the year to date.

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Goldman Sachs Employees to Start Returning to U.S. Offices from June 22

Brief: Goldman Sachs Group Inc said on Wednesday it plans to start the return of an initial group of its employees to its offices in New York, Jersey City, Dallas and Salt Lake City from June 22. The Wall Street bank also announced the return of more employees to its London office from June 15 and added that it was expecting to review the process of employees returning to its Bengaluru office towards the end of June. Working from home was made mandatory across many Wall Street firms in March as financial firms reported their first confirmed cases of coronavirus and the outbreak triggered a state of emergency in New York City. In March, Goldman Sachs told its employees that most staff across North America and Europe would start working from home or at one of the bank’s business continuity centers on a rotating schedule. Chief Executive David Solomon told employees last month about the bank’s strategy to gradually return staff to work in offices worldwide. Morgan Stanley, another Wall street bank, last month announced plans to start getting some traders to return to its New York headquarters in mid-to late-June.

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HSBC Sees ‘Swoosh-Shaped Recovery’ with Asia Leading the Way

Brief: HSBC Global Asset Management anticipates a “swoosh-shaped recovery” for the global economy as it emerges from the coronavirus crisis, with China and industrialized Asia the best positioned economies. In a mid-year outlook report seen by CNBC, Global Chief Strategist Joseph Little said this manner of recovery entails a sharp rebound once lockdowns are lifted, followed by a gradual pickup to pre-crisis levels of activity. “Working backwards, it means the recovery has begun already in this quarter. By the end of next year, the global economy should be fully established on a new, lower trajectory, but a roughly similar trend growth rate,” Little said. China and industrialized Asia, including South Korea, Singapore and Taiwan, are best placed to capitalize on the recovery, while other emerging markets, smaller oil exporters, frontier nations and the euro zone are less resilient, according to HSBC GAM. Downside risks to this scenario, Little outlined, include policy flexibility in certain economies, the risk of a second wave of Covid-19 infections and the potential for permanent economic damage. However, he suggested that policy mistakes pose the greatest risk to recovery.

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It’s Active Management’s Time to Shine: Has It?

Brief: In the first four months of the year, active managers got the opportunity they wanted to show investors that they can beat their benchmarks in periods of market volatility. So how did they do?Not well, according to new research. “Early 2020 results rebut the view that active funds navigate market turmoil better than index-based funds,” wrote Berlinda Liu, director of global research and design at S&P Dow Jones Indices, in a blog post published Wednesday. “Even where results are relatively favorable, the data show the difficulty of market timing. Mixed results in the short term did not change active funds’ tendency to underperform indices over the long term.” S&P Dow Jones Indices publishes two scorecards each year, reporting how active managers performed compared with their benchmarks. Given the record volatility in markets since the coronavirus shut down economies around the globe, S&P published a shortened version of its semiannual scorecard to see how active managers fared during the worst of the market carnage in March and during the recovery that began in April. Liu noted in the blog post that active managers “sometimes seek to soften the conclusions” of the index provider’s regular semiannual scorecards by arguing that “while index funds may have the advantage in rising markets, it’s in volatile downturns that active management can prove its worth.” 

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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 June 10, 2020:

  • In the United States, a Bloomberg article is reporting a second wave of the coronavirus emerging as states reopened over the past several weeks. The article points to three out of the four most populous states as examples. Florida has reported 8,553 new coronavirus cases this week, the most of any seven-day period. Texas hospitalizations have increased 6.3%, the highest since the pandemic emerged and the third consecutive daily increase. Finally, California’s hospitalizations are at their highest since May 13th and have risen in nine of the past 10 days.

  • In Canada, CBC News is reporting the border closure between the country and United States will be extended beyond the June 21st deadline. Both Canada and the United States agreed to a temporary border closure back in March to non-essential travel, meaning only commercial traffic and essential workers who cross the border for work could freely move back and forth. It is unclear how long the border restrictions would be extended to, but in the previous two agreements, both were extended 30 days.

  • In the United Kingdom, a sore spot of testing has been brought to light yet again. The Royal College of Pathologists stated on Wednesday the UK government’s testing regime must be “urgently addressed” if the country wants to effectively battle the pandemic. The college says the government has been too focused on setting a goal for a numerical target for tests, instead of laying out a clear strategy. The Royal College cited some of the problems as slow turnaround for results, a failure to inform patients’ doctors when they test positive for the virus and workforce shortages.

  • A European Union (EU) report has warned that China and Russia have spread disinformation during the COVID-19 pandemic in an attempt to undermine democracy and stoke social unrest. In what the EU has dubbed an “infodemic”, officials have called on technology companies to do more and stop the misinformation being spread by the two countries. Both China and Russia have denied any wrongdoings regarding the disinformation campaigns.

  • As India has eased its lockdown from the coronavirus, a Bloomberg article noted the worst may be yet to come. The article cites the capital city of Delhi as the city of 16 million is having their hotels and community centers be used as COVID-19 wards, while bodies pile up in hospital morgues and crematoriums. Doctors and public health experts warn the peak of the pandemic may not come for another couple of weeks and by the end of July, infections could increase to 550,000 cases. As of Wednesday, India has just over 280,000 confirmed cases.

  • The Philippines announced 740 more coronavirus infections on Wednesday, the highest number of cases since the country’s health department adjusted its reporting on May 29th. The adjustment takes into the account the number of “fresh” cases and those that are part of a validation backlog into the country’s overall daily totals. The Philippines are struggling to report their cases on time with only 47 out of 54 laboratories able to do so.

  • An Australian public health official has stated the country is on track to have largely eradicated the coronavirus by July. The country’s largest state – New South Wales said it would resume community sports like netball and cricket starting July 1st after the state went two weeks with any cases of community transmission. Some Australian states though, including Queensland and Western Australia have kept their borders shut. This has slowed down the possibility of creating a travel bubble with neighbouring New Zealand who earlier this week lifted all restrictions, except international border controls, after declaring themselves free of the coronavirus pandemic for now.

Covid-19 – Due Diligence And Asset Management

OECD Sees Deepest Peace-Time Slump in a Century

Brief: The global economy will suffer the biggest peace-time downturn in a century before it emerges next year from a coronavirus-inflicted recession, the OECD said on Wednesday. Updating its outlook, the Organisation for Economic Cooperation and Development (OECD) forecast the global economy would contract 6.0% this year before bouncing back with 5.2% growth in 2021 - providing the outbreak is kept under control. However, the Paris-based policy forum said an equally possible scenario of a second wave of contagion this year could see the global economy contract 7.6% before growing only 2.8% next year. “By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments,” OECD chief economist Laurence Boone wrote in an introduction to the refreshed outlook. With crisis responses set to shape economic and social prospects for the coming decade, she urged governments not to shy away from debt-financed spending to support low-paid workers and investment.

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AllianceBernstein Nashville Office Opening Delayed by Pandemic

Brief: AllianceBernstein Holding LP Chief Executive Officer Seth Bernstein said the opening of the company’s Nashville headquarters has been pushed back to the first or second quarter of 2021 after the coronavirus crisis delayed construction plans. The firm had planned to be moved in by the end of the year until the pandemic hit, Bernstein said Wednesday during a virtual conference. AllianceBernstein had $596 billion in assets under management at the end of May.

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Goldman Traders Gain $1 Billion in Commodities Revenue After Oil Slump

Brief:  Goldman Sachs Group Inc (GS.N) commodities unit generated more than $1 billion in revenue this year through May as traders positioned their bets for the collapse in oil prices, a source familiar with the group’s finances said on Wednesday.The gains were largely driven by oil trading, the source said, though other commodities, including natural gas, power and precious metals contributed, the source said. Oil prices plunged to their lowest in years in a dramatic selloff at the start of March. U.S. crude futures at one point fell deep into negative territory as panicked traders bailed out of positions after realizing many would be forced to take physical delivery of oil without a place to put the barrels.Most of Goldman’s boost came from oil trading overseen by Singapore-based partner Qin Xiao and Anthony Dewell in London, amid the collapse in oil prices, according to Bloomberg News, which first reported the $1 billion figure, citing people with knowledge of the matter.

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Gundlach: A ‘Wave’ of Layoffs is Coming for $100,000/Year White-Collar Jobs

Brief: Billionaire bond investor Jeffrey Gundlach, the CEO of $135 billion DoubleLine Capital, sees the potential for a "wave of more higher-end unemployment' hitting white-collar workers making more than $100,000 per year as employers increasingly question the value these employees bring. In 11 weeks, more than 42 million Americans filed for unemployment insurance as the COVID-19 pandemic wrecked the economy. The bulk of these job losses hit lower-income households the hardest. "A lot of times it's not the earthquake, it's the fire," Gundlach said on a webcast for the DoubleLine Total Return Bond Fund (DBLTX), later adding that he could "easily see layoffs in various industries" affecting higher earners. Gundlach, who runs the Los Angeles-based bond investment firm, explained that one of the outcomes of remote work is it reveals who produces and who doesn't. "What people may have learned for white-collar services jobs, in particular, during the work-from-home lockdown situation, at least in my perspective — I've talked to a lot of my peers on this —  I kind of learned who was really doing the work and who was not really doing as much work as it looked like on paper that they might have been doing," Gundlach said. He's witnessed this at DoubleLine, where people running "certain groups" haven't been as responsive, while the more junior members on their team have stepped up.

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Covid-19 and the Future of Sustainability

Brief: As lockdown eases in some countries but not in others, and as the death toll continues to rise, there may be a light at the end of this long, dark tunnel of uncertainty – as long as the world does not backtrack, back to business as usual, nor falter on the promised path toward a sustainable future. For Jamie Jenkins, co-head of the responsible global equities team at BMO Global Asset Management, it’s going to be very difficult to return to how things were before the pandemic rattled markets worldwide. “The particular nature of this current crisis, or recessionary period we’re about to go into, is different. Every time you get a drawdown in markets, every time you get some kind of shock, it tends to be different,” he says. “And what’s different about this one, from the financial crisis in ‘08/09, is that first and foremost it’s a public health crisis that is leading into a consumer crisis because of this unparalleled period of government-mandated lockdown. And so it’s a health crisis, it’s a consumption crisis, and by extension, it becomes a financial concern because of the stress on consumer income.”

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In the Age of Coronavirus, Activist Shareholders are Going After Company Bosses

Brief: Activist shareholdershave increasingly focused on ousting top bosses since the coronavirus pandemic took hold of the global economy, according to a new report from investment bank Lazard. In the second quarter, so far, 50% of all campaigns by shareholder activists have involved attacks against boards or management teams, compared to a consistent 33% in the first quarter of 2020 and the whole of 2019. The removal or replacement of top executives at European companies has become a more prominent demand since the onset of the coronavirus pandemic, according to the report. Lazard Head of European Shareholder Advisory, Rich Thomas, told CNBC’s “Squawk Box Europe” on Tuesday that leadership is “never more important” for activist investors than in times of crisis. “That is why we are seeing leadership of companies firmly in the crosshairs of many activists and activist campaigns,” Thomas explained, adding that the coronavirus crisis has taken away some of the traditional tools available to shareholder activists.

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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 June 9, 2020:

  • In the United States, at least 28 of the 50 states are not following the US Centers for Disease Control and Prevention (CDC) guidelines on reporting new COVID-19 cases, according to a CNN report. Half of those 28 states saw their cases increase in the last week. CDC says states should be reporting probable cases that show evidence of an infection without the confirmation of a lab test and cases where coronavirus was listed as a cause or contributing cause of death, but are not confirmed with a lab test. America’s four largest states by population – California, New York, Texas and Florida are among those listed as not reporting probable cases.

  • The Canadian federal government is proposing legislation that would impose fines and possible jail time for those deliberately lying on the country’s emergency response benefits applications. The Liberal minority government is facing fire from opposition governments who want completely different things. The Conservatives want to weed out the fraudulent claims and get people back to work, while the left of center NDP want to extend emergency aid and avoid going after those who make ineligible claims.

  • In the United Kingdom, retail outlets can reopen starting June 15th as long as they comply with government secure guidelines the government’s Business Secretary said on Tuesday. Restaurants, pubs, as well as hairdressers, barbers, nail bars and related services will remain closed until July 4th at the earliest. Prime Minister Boris Johnson didn’t approve of protestors “flouting social distancing” over the weekend. Around 200 anti-racism protests took place over the weekend in the country, and while most did remain peaceful, it was the 35 police officers injured, and the tearing down of statue to slaver Edward Colston in Bristol that Johnson thought might undermine the movement, “in the eyes of many who might otherwise be sympathetic”.

  • France’s government has announced a €15 billion rescue plan for its aerospace industry after it took a beating from the coronavirus pandemic. The plan hopes to save hundreds of thousands of jobs while keeping plane maker Airbus and airline Air France globally competitive. In exchange for the aid, the French government wants the industry to invest more in electric, hydrogen, or lower-emission aircraft as the country looks to make their aviation industry the “cleanest in the world.”

  • Brazil’s government continues to face backlash over the handling of the coronavirus pandemic. The latest in a string of controversies happened over the weekend when government officials stopped publishing cumulative totals on the Health Ministry’s website after Brazil passed Italy for third in most COVID-19 related deaths. After a public outcry and backlash over the decision, a top Health Ministry official told reporters that the body would restore the cumulative death toll to its website later this week.

  • The Chinese government has angrily rejected findings by scientists at Harvard University that claim the coronavirus started circulating in the city of Wuhan at the end of last summer. If Harvard’s claim is indeed true, this would be months earlier than the Chinese authorities have admitted. The researchers came to their conclusion after analysing satellite images of hospital car parks in Wuhan, ground zero of the coronavirus outbreak, and internet search queries about disease symptoms such as a cough.

  • The World Health Organization (WHO) is walking a back a statement that claims it is “very rare” for asymptomatic sufferers of COVID-19 to transmit the virus. The statement came on Monday from Dr. Maria Van Kerhove during a news briefing. On Tuesday, Dr. Van Kerhove changed her tune stating that the organization needs to better understand the spread of asymptomatic cases. The WHO’s current evidence suggests between 6 and 41 per cent of the population could have COVID-19 and not show any symptoms, a very wide gap to make any concrete declarations.

Covid-19 – Due Diligence And Asset Management

Quarantine’s a Price Worth Paying to get on a Mega Deal, Bankers Say

Brief: Investment bankers would be willing to plunge into self isolation for two weeks under new UK quarantine rules for travel, if it meant securing a lucrative role on a big deal. With M&A bankers itching to get back on the road as deal volumes remain in the deep freeze during the coronavirus pandemic, some senior dealmakers admit privately that a two-week quarantine period would be a price worth paying to be in the mix for a large transaction, according to conversations with three senior bankers. “If there was even a 5% greater chance that we would get the deal, we’d get on a plane and take the two weeks in a hotel or at home,” said one senior M&A banker in London. “Maybe we could just travel every two weeks,” joked another senior dealmaker. The UK government imposed a 14-day self-isolating period on 8 June for any travellers or returning Britons entering the country on planes, trains or ferries — even as the country begins to unwind lockdown restrictions that have kept the majority of the population at home since March.“We would just travel and then figure out the painful logistics of working from home or a hotel room, or whatever they ask us to do,” said another senior banker.

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Exclusive: Savings Surge Forces Goldman to Shut Marcus to New UK Clients

Brief: Goldman Sachs (GS.N) is closing its easy access savings business to new customers in Britain from Wednesday after deposits surged near to regulatory limits during the coronavirus lockdown.The British arm of digital brand Marcus, which pays market-leading rates to savers starved of meaningful cash returns, has attracted about 21 billion pounds ($27 billion) from more than 500,000 savers since its launch in 2018. However, British banking rules demanding ring-fencing of retail deposits totalling more than 25 billion pounds have prompted its executives to take steps to manage its growth. “We’ve really seen our growth accelerate under lockdown as people hold off on discretionary spending and take time to reorganise their finances and get the best deal for their money,” Des McDaid, head of Marcus UK, told Reuters. Ring-fencing would require Marcus in Britain to become a separate legal entity with its own board and limit how much capital it could share with the rest of Goldman’s businesses.

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Exclusive: Banks to Berlin – Loosen Coronavirus Cash Rules for Firms

Brief: Germany’s bank lobby is set to urge the government to drop some of the conditions attached to a trillion euro rescue scheme, arguing that companies are so reluctant to take the help that it threatens any recovery from the coronavirus outbreak. Martin Zielke, the head of the lobby and Commerzbank, will appeal this week to limit conditions - like pay caps and board seats - for government cash injections into companies, three people with knowledge of the matter said. Zielke argues that companies are taking on further debt, the chief means of government support, as prospects for revenue dim, and Berlin should offer capital injections with fewer strings, according to a paper outlining his position seen by Reuters. Companies will not otherwise accept help, the three people said, citing Zielke, whose Commerzbank caters to the Mittlestand companies that form the backbone of the German economy and was bailed out during the last financial crisis. The state still holds a 15% stake in Commerzbank and occupies two board seats.

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Shop Til you Drop: Mall Giant GPT Takes $500m COVID Hit

Brief: Diversified property giant GPT Group has become one of the first real estate investment trusts to reveal the impact of the coronavirus with a near $500 million write-down in the value of its shopping centre portfolio. Retail landlords have been hard hit by the COVID-19 pandemic as shoppers were forced to stay home under the lockdown laws, causing foot traffic and revenue to plummet. GPT, which owns 12 malls across the country, has written down the value of seven centres in which it has part or full ownership by $476.7 million after undertaking an independent assessment of its retail assets covering the months between December 31, 2019 to May 31. It is an 8.8 per cent decline since December. The group has also withdrawn its full-year 2020 guidance and is amending its dividend payout ratio policy. Chief executive Bob Johnston said the revaluations reflect the effects COVID-19 and the subsequent social restrictions have had on the retail assets. "This has generally been reflected in lower market rental growth rates, increased vacancy and abatement allowances and some softening in investment metrics," Mr. Johnston said.

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Advent Countersues Forescout, Asking Out of $1.9 Billion Deal

Brief: Advent International Corp. countersued Forescout Technologies Inc. in Delaware Monday, six weeks before a YouTube trial over the breakdown of their $1.9 billion take-private buyout, saying the deal’s collapse can’t be blamed on the coronavirus alone.“Because Forescout’s precarious finances would leave it insolvent upon closing of the proposed transactions, buyers cannot in good faith certify the solvency of the post-closing entity—which is a condition to close the $400 million term loan financing,” the Chancery Court filing says.Forescout’slawsuit against Advent, filed about two weeks ago, is part of awave of suitsasking courts to keep mergers on track as acquirers balking at the coronavirusscramble deals worldwide. Most of those disputes are being heard in the Chancery Court…According to Forescout’s complaint, an Advent representative told its CEO as they sought to renegotiate the transaction that “the Covid-19 outbreak caused a change of heart.”

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Private Equity Managers Eyeing Distressed Funds, Private Debt

Brief: Nearly all private equity managers expect to see a surge in distressed fund deals over the coming year, according to a new survey.The poll, commissioned by fund service firm Intertrust Group, found that 92 percent of private equity professionals across North America, Europe, and Asia believe distressed fund activity will increase in the wake of the coronavirus pandemic, which devastated businesses in the U.S. and elsewhere. Likewise, private equity managers viewed distressed funds as the biggest fundraising opportunity in the near future, with 83 percent indicating there would be more investor demand for strategies targeting distressed assets.This sentiment is already being borne out at major private equity firms. Last month, Apollo Global and KKR & Co. said they raised $1.75 billion and$4 billion, respectively, for credit funds focused on “dislocation” resulting from the Covid-19 crisis. Both funds were raised in just 8 weeks. Some respondents to the Intertrust survey also saw existing private equity funds shifting assets to target distressed opportunities. According to the report, 41 percent believed managers would reallocate unfunded commitments to “new distressed or non-traditional strategies.”

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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 June 8, 2020:

  • One hundred days after their first case of coronavirus was recorded, New York City was allowed to reopen some of its doors for business on Monday. New York City was the epicenter of the coronavirus pandemic in the United States, experiencing 21,000 related deaths due to COVID-19. America’s most populous city though is only entering their first phase of reopening, which means construction and manufacturing businesses are prioritized to resume activities. Retailers will be limited to curb-side pick-up for pre-arranged orders with few exceptions and many offices will remained closed for the time being. State governor Andrew Cuomo declared the city will carry out 35,000 tests a day to start and have opened 15 testing sites. These locations will prioritize testing for those who participated in the massive anti-racism protests over the last two weeks due to the death of George Floyd.

  • Canada’s most populous province announced details of their phase two reopening plan. Ontario Premier Doug Ford said during a news briefing on Monday that 24 of the 34 public health unit regions in the province will be allowed to enter phase two as of June 12th. The remaining 10 areas, which include the Greater Toronto area and others close to the southwestern tip of the province near the Canada/US border will need to wait until daily case numbers decrease more consistently. A social gathering increase, places of worship at a 30 per cent capacity limit and restaurants and bars reopening for outdoor dining on patios are some of the additions to the province’s phase two reopening.

  • Elsewhere in Canada, as of midnight tonight, the country will begin to allow immediate family members separated by temporary COVID-19 travel restrictions to enter the country. Those entering must not be showing any signs or symptoms of COVID-19, need to stay in the country for at least 15 days upon arriving, and self-quarantine for 14 days as well upon entering Canada.

  • United Kingdom health secretary Matt Hancock said the coronavirus is in retreat across the country. Hancock pointed to the government’s scientific advisers estimating the reproductive rate currently below one in all regions. There were no COVID-19 related deaths in London Hospitals on Sunday and the death toll was the lowest since the lockdown began on March 23rd. As of today, travellers entering the country also have to self-isolate for 14 days under the government’s new quarantine rules.

  • India is forging ahead with its reopening plan even as the country experiences 10,000 new cases of the coronavirus per day. The country’s restaurants and religious sites were allowed to reopen their doors on Monday as the country now has the 5th most cases in the world with more than 257,500 confirmed cases, passing previous European hotspots Spain and Italy. India is also thought to be underestimating their death toll from COVID-19 as they don’t count the people who die at home, or shortly after arrival at the hospital as they are frequently not tested.

  • A ban of anti-racism protests enforced by the New South Wales supreme court was overturned in the 11th hour and went ahead with a few tense moments, but no major incidents according to most media reports in Australia over the weekend. However, the protests did not sit well with some in the Australian government, including Finance Minister Mathias Cormann calling those who attended the demonstrations as reckless and self-indulgent. The head of Australia’s Medical Association stated those who attended the Black Lives Matter protests should self-isolate for 14 days to be absolutely safe and limit any potential new coronavirus outbreaks.

  • New Zealand announced on Monday that the last known person with coronavirus has recovered as the country appears to have eradicated the disease, at least for the time being. With no new cases in the last 17 days, New Zealand will be one of the first countries that could look as close to what people remember as normal in a long-time. Public events, retail and hospitality are back without limitations across the country of five million people. 

Covid-19 – Due Diligence And Asset Management

They’re ‘Free Markets’ Guys – and They Want the Government to Intervene

Brief: When making his case for the government to rescue the oil industry, Wil VanLoh wanted Texas regulators to know that at heart he was a free-markets kind of guy. “I am a free-market person through and through,” the founder of private-equity firm Quantum Energy Partners told the Railroad Commission of Texas — the regulatory body that oversees the state’s oil and gas industry — at a mid-April meeting. Yet VanLoh was pleading with the commissioners to temporarily limit oil production, warning their inaction would lead to widespread failure of small and midsize oil companies. The reduced supply, he hoped, would raise the value of the oil taken from the ground if done in coordination with other U.S. states. “We don’t live in a world of free markets,” he lamented, pointing to the massive government intervention during the 2008 financial crisis. “The system of capitalism the world now works under is one where the markets are generally left alone, except during extraordinary times of volatility,” VanLoh said during the April 14 meeting, held online due to the coronavirus pandemic. “And that, commissioners, is exactly what we’re experiencing right now in the oil and gas industry — and why you must intervene.”

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Private Equity Could Help British Businesses Stuck with £36bn in Toxic Debt – Report

Brief: Lobby group TheCityUK has warned that up to £36bn in government-backed loans could turn toxic by next year, as companies impacted by the Covid-19 pandemic struggle to pay back the debt.The Recapitalisation Group, a taskforce led by TheCityUK and accountancy firm EY,  found that companies would be left with approximately £100bn of unsustainable loans by the end of March 2021 in aninterim updatepublished on 8 June. Of this, nearly a third has been provided by the government's coronavirus business interruption schemes.The report suggested that the government could encourage buyout firms, insurers and pension funds to provide longer-term capital to struggling businesses in order to help them pay off the debt they took on to survive past the coronavirus crisis.The private equity industry in the UK, which has more than £150bn of dry powder, “could support equity financing to address the UK SME recapitalisation challenge”, the taskforce said.

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Stanley Druckenmiller Says He’s Been ‘Humbled’ by Market Comeback, Underestimated the Fed

Brief: Longtime hedge fund manager Stanley Druckenmiller told CNBC on Monday the market’s strong performance over the last three weeks has “humbled” him and that he underestimated the power of the Federal Reserve.“I had long-term concerns for the last few years that because of easy money, too much debt was being built up in the corporate sector,” Druckenmiller said on “Squawk Box.” “When Covid hit, I was pretty much of the view that there was a good chance that the credit bubble had finally burst and the unwinding of that leverage would take years.”That concern prevented the investor from capitalizing on the market’s robust rebound since the March 23 low: Druckenmiller said he has returned just 3% during the market’s 40% rally since the S&P 500′s springtime bottom.“Well I’ve been humbled many times in my career, and I’m sure I’ll be many times in the future. And the last three weeks certainly fits that category,” he said.

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Sustainable Investing is Set to Surge in the Wake of the Coronavirus Pandemic

Brief: The coronavirus pandemic has altered society in immeasurable ways, including, of course, investing. Stocks that benefited from people staying home, such as Netflix and Zoom Video, outperformed expectations in the past few months, while retailers and airline companies, among others, saw their stocks fall off a cliff. And now some of those worst-performing stocks of March and April are staging a comeback, as economies begin to reopen. But there could be a more long-lasting effect on Wall Street: Covid-19 may well prove to be a major turning point for ESG investing as the pandemic alters society’s values. This investing approach, which evaluates a company’s environmental, social and governance ratings alongside traditional financial metrics, was already coming off a banner year, and its reach continues to expand. So far this year, U.S.-listed sustainable funds are seeing record inflows, despite the market turmoil.

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Hedge Funds Continue Fightback, as Equity Managers Soar Amid Lockdown-Easing and Activists Seize on Dislocation

Brief: Hedge funds are continuing to recover from sharp losses suffered earlier this year, notching up positive returns for the second successive month in May as economies slowly reopen following the coronavirus lockdown, new data from Hedge Fund Research shows. All long/short equity hedge fund strategies clawed back profits last month, including sector-specialist managers such as technology and materials, while activist and special situations funds are making hay amid widespread global market dislocations. The HFRI Fund Weighted Composite Index – which tracks the performance of more than 1,400 single manager funds of various strategies globally – gained 2.5 per cent in May, with equity hedge funds and event driven strategies leading the pack. The rise follows a 4.79 per cent advance in April – the index’s first positive return of 2020 and its biggest monthly rise since the 5.15 per cent gain in May 2009.

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For Private Assets, the Pandemic Repricing is Just Getting Started

Brief: Things move quickly in our digital world. An email sent from Vancouver is received in Mumbai in seconds. Rumours spread on Twitter in a heartbeat. And stocks and bonds react instantly to new information. In March, price declines were head-spinning as investors reacted to a deteriorating outlook. There’s a category of investments, however, that was slower to react. Prices for private investments such as commercial real estate and mortgages, private equity, infrastructure and private debt take time to adjust. The post-COVID reality will filter into their valuations over the course of the year. This sorting-out process will be fascinating to watch. Some private assets will skate through without a wobble while others will surprise us with bad news and writedowns. Here’s a sneak preview. Real Estate Investment Trusts (REITs) trade on the stock exchange. So far this year, buyers and sellers have taken the sector down over 20 per cent. Private real estate funds work differently. They rely on independent valuations to set a price, a process done over the course of the year outside the emotion and volatility of the stock market.

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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 June 5, 2020:

  • The United States government received some good news on Friday when the latest job numbers revealed a 13.3% unemployment rate. While that number is still incredibly high, some economists had predicted the rate could spike to 20% when the month of May ended. The American economy added 2.5 million jobs in May after 20.7 million positions were cut in April.

  • Canada too unexpectedly added 289,600 jobs to its economy in May after seeing its unemployment number rise to record highs the month before. Canada’s unemployment rate in April was 13.7%, surpassing the previous high of 13.1% in 1982. Economists had predicted 500,000 jobs would be lost in the month of May, but with provinces reopening a little earlier than most expected, some businesses were able to rehire.

  • United Kingdom’s health secretary has pleaded with British citizens not to attend large demonstrations over the death of George Floyd due to the coronavirus. “Like so many I am appalled by the death of George Floyd and I understand why people are deeply upset but we are still facing a health crisis and coronavirus remains a real threat, said Matt Hancock. So please for the safety of your loved ones do not attend large gatherings including demonstrations of more than six people.” Planned anti-racism protests are expected to happen this weekend in the UK.

  • Australia tried a different approach in stopping or limiting their anti-racism protests: the court system. The police in the state of New South Wales took the protest planned by Black Lives Matter activists all the way to the New South Wales Supreme Court. The police wanted the protest banned, citing coronavirus safety concerns, and the court sided with them granting an injunction ruling the protest illegal. Protest organizers say they will continue to march, which may lead to heated interaction with police.  “We are not going to stop. We are going to march. We don't care what any acts of law tells us what to do because those acts and laws are killing us," said Letona Dungay.

  • Spain’s health minister says half of the population will move into the third and final stage of the country’s easing of coronavirus restrictions next week. Salvador Illa said 52% of the country will move into the third stage, which will allow those regions to regain control of the reopening process. So far, that process has been handled by the federal government. However, Spain’s two largest cities Madrid and Barcelona are only moving from stage one to stage two of their reopening phase.

  • The World Health Organization (WHO) has updated its recommendations on mask wearing and is now calling on nations to encourage the general public to wear fabric masks in areas where there continues to be an intense spread of the coronavirus. Previously, the WHO advised for people to not wear masks unless they were sick, or caring for someone who was sick, so masks could be kept available for health workers. The health organization also advised the general public to wear masks where physical distancing is difficult, such as public transport, in shops, or other confined/crowded environments.

Covid-19 – Due Diligence And Asset Management

‘Black People Are Locked Out’: $10 Billion Fund Manager On Race Inequality

Brief: John Rogers wants to be clear: corporate America is missing its moment to act on racial inequity. It’s not just rhetoric and donations that will make the difference, said the co-chief executive officer of $10 billion fund manager Ariel Investments, which focuses on value stocks. Businesses need to hire more African-Americans into senior roles -- including board seats and executive suites -- and work with other companies that have diverse leadership, he said. Rogers, 62, is one of the fund industry’s leading African-American figures after founding Ariel Investments nearly four decades ago. Its Ariel Fund has returned an average of about 10% a year since its inception in 1986, outpacing the Russell 2500 Value Index… On lasting change to prepare for post-Covid-19: “People are going to be downsizing and reconfiguring their offices. I think it’s pretty clear people are not going back to work in a normal way. There will be changes in the whole travel area, hotel companies too. A reduction in travel will go right to the bottom line. If there’s even 10% fewer people on the plane or your hotel, you’ll be hit drastically.”

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Stock Day Traders Are Unleashing Most Bullish Bets in Nine Years

Brief: Exuberance in American stocks is spurring speculators to unleash bullish bets in the options market at a rate unseen in almost a decade. Trading in contracts that wager on single names to increase in value has surged to the highest since 2011, with a whopping 2.3 million calls changing hands on Thursday, according to Cboe data. The bullish action is reminiscent of the explosion of retail interest on online forums on the eve of the coronavirus crisis in sleepy companies like Virgin Galactic Holdings Inc. and Plug Power Inc. This time around, the beneficiaries are concentrated in tech and cloud computing, as well as in single names rocked by the pandemic such as United Airlines Holdings Inc., according to Chris Murphy, co-head of derivatives strategy at Susquehanna. “We are seeing a lot of bullish options speculators, and I think the ‘message board flow’ is playing a part,” he said, referring to retail speculation typified on the Reddit forum r/wallstreetbets. Even after the S&P 500’s 40% surge in little more than two months, demand for single-stock hedges is muted, with the number of put options traded for every call slumping to the lowest in six years.

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Who Still Wants to Lease NYC Office Space? Russell Investments

Brief: Russell Investments’ lease on its New York office is up in September, and the firm has no new office space ready to go. But, according to the firm, it wants to find a new spot in the city.  Before the Covid-19 pandemic, the investment manager’s New York staff occupied the 14th floor of 3 Bryant Park in Manhattan, the same building that houses tech giant Salesforce. Now, Russell’s employees are working from home, and the September 30 deadline is looming.  Russell, in some ways, is in an enviable position as far as finance firms in New York go: a lease expiration could cut costs significantly. And it’s not unprecedented for finance firms to move amid crises. “I’ve seen a lot of different downturns and problems with New York real estate,” said Michael Colacino, president of SquareFoot, a New York-based commercial real estate company. After 9/11 and the dot com bubble burst, Colacino said, New York subleases rates doubled, increasing from about 20 percent to 40 to 45 percent. He added that something similar happened during the financial crisis of 2008.

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One of Canada’s Biggest Private Lenders Looking to Sell 11% of Loan Book

Brief: One of Canada’s largest private lenders is looking to sell as much as 11 per cent of its loans to help ride out the coronavirus crisis. Bridging Finance Inc. has already sold $30 million in loans (US$22 million) and plans to offload a further $170 million to other direct lenders and institutional investors, Chief Executive Officer David Sharpe said by phone. The firm, which has $1.8 billion in assets under management, froze redemptions on its funds in April. “We are selling some loans at par value to improve liquidity,” Sharpe said. “We are doing it in a prudent fashion, as we need to keep cash on hand for the revolvers and for foreign-exchange effects, and once we are comfortable with our liquidity, we will lift the gating of the funds.” The company lends to small and mid-sized companies involved in everything from milling flour to delivering groceries. Most of its funds are invested in collateral-based bridging loans, inventory and accounts-receivables financing. The pandemic, which forced the shutdown of many smaller businesses the sector typically lends to, is a major test for the asset class. The market has swelled to about US$820 billion globally from US$200 billion before the 2008 financial crisis. 

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Encap Goes Back to the Office

Brief: As Texas goes back to work, Houston-based EnCap Investments provides an early glimpse of what office re-integration may look like for many private equity firms. The firm, ranked 21 in the PEI 300, began its office re-integration on May 18 after Texas became one of the first states to begin reopening its economy. Craig Friou, deputy CFO and CCO at EnCap, told Private Funds CFO the firm began ‘phase one’ of its office re-integration by dividing staff up into ‘red’, ‘white’ and ‘blue’ teams. The red and blue teams alternate days in the office, with the white team, which includes some administrative staff, not returning at all for the time-being. Splitting the firm’s workforce into different teams not only designates which days staff are allowed to be in the office, but also groups individual teams together (ie, finance team is red, deal team is blue, etc.), causing employees to only work in close proximity with their immediate teams. The color-coded teams apply to all staff except for those at the partner level, who are free to come into the office on whichever days they like.

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Citi Says Wealthy Clients Are Holding Too Much Cash, Time to Buy

Brief: Wealthy clients of Citigroup Inc.’s private bank hold way too much cash, according to chief investment officer David Bailin, and he and his colleagues have big plans to help put an end to that. The private bank’s mid-year outlook, “From Fear to Prosperity: Investing in a New Economic Cycle,” released Thursday, recommends major changes to portfolios to reflect what Bailin called “the complexities and new realities of our time.” “There are plenty of things to buy,” Bailin said in a phone interview. “The more study that we did for the report, the more excited we got. The data is compelling.” The report’s big-picture outlook is for a “brief, extremely deep, rolling global recession” followed by a sharp snapback in global economic activity and “a partial, uneven recovery.” Underpinning recommendations for major changes to client portfolios is a projected five-year period of low interest rates. With fixed income no longer a natural hedge for equities, achieving diversification now includes greater long-term exposure to small- and medium-sized companies, as well as emerging market debt and equity, 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 Thursday June 4, 2020:

  • The Center for Disease Controls and Prevention Director (CDC) believes the protests held in the United States and other parts of the world over George Floyd’s death could be a “seeding event” for more coronavirus outbreaks. Director Robert Redfield was speaking at a House Appropriations Committee meeting on Thursday and said he would like to see people who took part in protests to get tested for the virus over the next several days. Redfield has been concerned that the agency’s public health message for the coronavirus isn’t resonating with the American people pointing to protestors without masks, crowds gathering for Memorial Day and the SpaceX launch as recent examples.

  • Canadian federal data over the last 14 days has revealed Ontario and Quebec have accounted for more than 90% of national COVID-19 cases. That revelation, along with several others was noted in a news briefing by Canada’s Chief Public Health Officer Dr. Theresa Tam on Thursday. The latest figures show Canada could see between 98,000-108,000 cases and 7,700 and 9,400 deaths due to the coronavirus by June 15th.  The numbers also continue to show COVID-19 has hit the Canadian long-term care homes the hardest as those facilities represent 18% of total cases and an alarming 82% of Canada’s 7,495 deaths.

  • In a United Kingdom led conference hosted by Prime Minister Boris Johnson, $8.8 billion was pledged by global donors to fund vaccination programmes for children in low income countries over the next five years. This funding is projected to save up to 8 million lives from diseases such as measles and cholera. As the world’s attention turned to the coronavirus, the support is made to reinforce routine immunization programmes and for those who have stayed away from vaccination clinics in fear of COVID-19. The conference also launched a new advance market commitment (AMC) for vaccines developed successfully for COVID-19, so that poorer countries won’t be left behind in a potential vaccine nationalism by wealthier nations.

  • Spain had to walk back a comment made by its tourism minister that the country’s land borders would be open by June 22nd. The announcement made by the tourism minister caught neighbouring Portugal off-guard and Spain’s new stance is that they will reopen its land borders with coordination between Portugal and France.

  • Dubai police have fined more than 100 people for visiting their newly reopened public beaches for failing to adhere to coronavirus safety rules. Dubai allowed public beaches to reopen on May 30th after more than two months of closure. Those not wearing masks and not social distancing by at least six feet were fined on the spot by police. Fines are $817 USD for anyone not wearing a mask in public or failing to maintain social distancing.

  • Despite setting records of coronavirus cases on back-to-back days, Brazil is moving to ease restrictions due to the coronavirus. Earlier in the week, a number of non-essential businesses and venues in major cities such as Sao Paulo and Rio de Janeiro reopened for the first time in months. An epidemiologist at the University of Sao Paulo labeled the reopening an absurdity and outlook as awful. Not surprisingly considering his very public thoughts on the coronavirus, President Jair Bolsonaro seems okay with the reopening noting, “We are sorry for all the dead, but that’s everyone’s destiny.”

Covid-19 – Due Diligence And Asset Management

How a Hedge Fund Firm Sidestepped the First Quarter’s Market Carnage

Brief: Many hedge fund firms initially underestimated the threat of the coronavirus. Cinctive Capital was not one of them. Cinctive, founded by Diamondback Capital Management veterans Larry Sapanski and Richard Schimel, launched in September with backing from PAAMCO Launchpad, the joint venture between the Employees Retirement System of Texas and investment firm PAAMCO Prisma to seed and support emerging hedge fund managers. Cinctive, headquartered in New York City’s Hudson Yards, is a long-short equity fund using a multi-manager approach, with numerous investment teams covering roughly half a dozen sectors. One of those teams — a technology team focused on semiconductors and software — started looking into supply chain disruptions in China early this year. The team talked to factory workers and company managements based in China and shared their findings with Cinctive’s other sector teams. 

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America’s Billionaire Wealth Jumps by Over Half a Trillion During COVID-19 Pandemic: Report

Brief: The combined wealth of America’s billionaires, including Amazon.com Inc (AMZN.O) founder Jeff Bezos and Facebook Inc (FB.O) CEO Mark Zuckerberg, jumped over 19% or by half a trillion since the onset of the COVID-19 pandemic in the United States, according to a report published by the Institute for Policy Studies (IPS).  During the 11 weeks from March 18, when U.S. lockdowns started, the wealth of America’s richest people surged by over $565 billion, while 42.6 million workers filed for unemployment, the report said. “These statistics remind us that we are more economically and racially divided than at any time in decades,” said Chuck Collins, a co-author of the report.During the 11 week period, Bezos saw his wealth soar by about $36.2 billion while Zuckerberg’s fortune surged by about $30.1 billion. Tesla Inc (TSLA.O) Chief Executive Elon Musk’s net worth also rose $14.1 billion.The past week also saw the wealth of U.S. billionaires jump by $79 billion, according to the report.

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Wall Street Warning to Corporate America: Get Cash While you Can

Brief: Bankers have a message for America’s debt-laden companies: raise money now, because things could get a lot worse. The gradual reopening of businesses after months-long shutdowns and a pick up in manufacturing activity have given investors reason for optimism in recent weeks. But underwriters who cater to heavily indebted corporations are offering their clients a bleak preview of what may lie ahead. The long list of worries includes a new wave of coronavirus contagion in the fall, an extended period of double-digit unemployment, a spike in defaults and a slower-than-expected economic recovery as businesses around the globe adapt to the realities of prolonged social distancing. Of course, pitching bond sales to companies is part of the job description, and corporate treasurers expect nothing less from bankers whose bonuses are tied to how many deals they do. Still, the grim warnings to stockpile cash reflect how the rally that credit markets have enjoyed since the Federal Reserve took action may be obfuscating an economic picture still fraught with risks.

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Wall Street Week Ahead: Bond Investors Look for Fed to Justify Steepening Yield Curve

Brief: Expectations that the global economy has dodged the worst-case scenarios for the coronavirus pandemic have led to a dramatic selloff in U.S. government bonds from their record highs, pushing the yield curve to its steepest level since March. Investors will get a chance next week to see whether the U.S. Federal Reserve agrees with their optimism. The U.S. central bank is expected to hold a two-day meeting that will conclude Wednesday, the first since a meeting in April in which Fed Chair Jerome Powell said that the U.S. economy could feel the weight of the economic shutdown for more than a year. While the Fed could introduce additional bond-buying programs known as quantitative easing or yield-curve control measures to target short-term rates, some fund managers say they expect that yields would need to rise significantly from here to justify any intervention in the bulk of the curve. Instead, they are watching for hints that the central bank believes the worst part of the coronavirus crisis has passed.

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Standard Life Tells Staff to Work from Home for Rest of 2020

Brief: Standard Life Aberdeen Plc told most of its U.K. staff to work from home for the rest of the year as other asset managers mull how the pandemic has reshaped the future use of their offices. The firm told its 4,900 U.K. employees that the majority shouldn’t expect to come into the office in 2020, according to a June 2 internal memo seen by Bloomberg. Janus Henderson Group Plc workers and BNP Paribas Asset Management’s London staff will also continue to work from home for the foreseeable future, while Baillie Gifford is planning a phased return of employees in coming months, according to representatives of the firms. “One of the consistent messages across the U.K. is that, where possible, people should work from home if they can and this very much applies to financial services,” Mike Tumilty, chief operating officer at Standard Life, said in the note. “It has become evident that while we may see some easing of working restrictions, we do not expect this principle to change materially for the foreseeable future.” While there are some signs of business slowly returning to normal as lockdown measures are eased, many financial firms are still keeping employees away from their offices.

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GMO Says Stock Market Rally Has Gone Too Far

Brief: GMO has shifted its stance on equities since mid-March, when the firm was willing to wade into plunging markets to buy stocks globally amid the coronavirus tumult. U.S. and developed-market stocks have rallied too far from their 2020 low, according to Ben Inker, the head of GMO’s asset allocation team. The firm has reduced its equity exposure by shorting equity futures against the stocks it holds in those regions, while continuing to like its long bets in emerging markets, Inker said by phone. “Stocks in the U.S. and most of the developed markets look to us to be a pretty bad risk-reward tradeoff,” he said. “They’re already priced for the best outcome you could reasonably expect.” That’s a change from late March, when stocks globally, apart from U.S. large cap, appeared cheap or priced at fair value, according to Inker. The equities market went on to produce in two months the types of returns GMO would expect to see over five to seven years, he said, all while the prospects of the economy remain uncertain. “We are in the midst of the worst economic crisis the world has seen really since the Great Depression,” said Inker. “We’d love to see stocks priced for more potential pain.”

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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 June 3, 2020:

  • One of the United States leading infectious disease experts struck an optimistic tone believing by early 2021, America will have “a couple of hundred million doses” of a vaccine for the coronavirus. Dr. Anthony Fauci, a key figure on the White House’s coronavirus task force granted an interview to the Journal of the American Medical Association on Tuesday and said four or five trials are underway for vaccine candidates. Many public health experts, including Dr. Fauci have said previously it could take 12 to 18 months to develop a vaccine.

  • Canadian Prime Minister Justin Trudeau will continue making the case for a coordinated global response to the coronavirus pandemic in order to limit the impact on some of the world’s poorest countries. Prime Minister Trudeau was set to speak on Wednesday to leaders and heads of state during a virtual summit of the Organization of African, Caribbean and Pacific States (OACPS). Prime Minister Trudeau made a similar plea last week while co-hosting a United Nations summit, alongside the UN secretary general and Jamaican Prime Minister.

  • United Kingdom Prime Minister Boris Johnson has defended the government’s decision to impose a 14-day quarantine for people arriving in the UK as of June 8th. Critics of the policy note it is pointless to impose a quarantine against arrivals from countries with much lower infection rates than the UK. Meanwhile, travel and hospitality sectors believe the quarantine will leave others looking for another travel destination, significantly hurting industries already reeling from the coronavirus pandemic. During a news conference on Wednesday, Prime Minister Johnson said his government would explore the possibilities of travel corridors with countries that had low rates of infection, but only when the evidence shows that it is safe to do so.

  • Germany will lift the travel ban to 29 European countries as of June 15th. The ban currently in place will be changed to travel guidelines. For instance, while travel to the UK will be allowed, it will be recommended to avoid due to the country’s upcoming 14-day quarantine for any incoming travellers.

  • Sweden’s state epidemiologist has admitted for the first time that the country should have imposed more restrictions to avoid having such a high death toll from the coronavirus. During an interview on Swedish radio, Anders Tegnell admitted, “[i]f we would encounter the same disease, with exactly what we know about it today, I think we would land midway between what Sweden did and what the rest of the world did.” Sweden’s government announced earlier in the week it would appoint a commission to investigate the country’s approach to the coronavirus before the summer. Sweden has had close to 4,500 deaths due to the coronavirus, a higher death rate than countries such as France or the United States.

  • The Spanish parliament granted its sixth and last state of emergency to the government, which will expire on June 21st. Spain is now in its third month of an extended state of emergency, which gives the government continued authority to restrict movement across the country. Spain is currently in stage two of its three stage approach to lift coronavirus restrictions. Once in the third stage, the country’s 17 regional governments will have the power to determine the pace and course of how they emerge from the pandemic.

  • In India, 100,000 people have been evacuated, including COVID-19 patients as the region is experiencing its first cyclone in more than a century. The Indian state of Maharashtra has been hit harder due to the coronavirus than any other state in India. A total of 72,300 cases and 2,465 deaths have been recorded in the state due to the coronavirus.

Covid-19 – Due Diligence And Asset Management

Private Equity Gets Trump Administration’s Nod to Tap 401Ks

Brief: Private-equity firms notched a major win in Washington with the Trump administration paving the way for the industry to tap a massive pot of money that has long been off limits: the trillions of dollars held in Americans’ retirement accounts. The Labor Department issued guidance Wednesday effectively allowing 401(k) plans to invest in buyout firms. The agency said the move will bolster investment options for consumers and let them access an asset class that can provide better returns than stocks and bonds. In a statement, Labor Secretary Eugene Scalia said the action “will help Americans saving for retirement gain access to alternative investments that often provide strong returns.” The announcement is a significant de-regulatory decision that private-equity lobbyists have sought for years. It is sure to face harsh criticism from consumer groups and progressive Democratic lawmakers, who argue that high-fee private equity firms are inappropriate for unsophisticated investors because the industry locks-up clients’ money for years and invests in businesses seen as far more risky than a plain-vanilla bond fund.

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CQS Rocked by Pandemic Losses

Brief: The outsiders that Michael Hintze brought in to his secretive hedge fund firm didn't last long. Nor did their growth plans. The billionaire's firm, known as CQS, a bastion of money-making whose flagship fund has returned more than three times the average of hedge fund peers since it opened in 2005, is now headed in reverse. The Hintze-managed fund plunged as much as 45% in March and April — its worst-ever loss — missing the rebound that followed the initial shock from the coronavirus pandemic even as peers recovered to post gains in April. More than $3 billion of assets were erased, leaving the firm with $16 billion. And that doesn't include potential withdrawals from the fund's clients, who are required to give six months' notice. "It's going to be very difficult for them to attract new assets," said Don Steinbrugge, head of Agecroft Partners, a Richmond, Va.-based consultant that helps hedge funds gather assets. "If I was an existing investor, I would be concerned about significant redemptions from the fund over time, which could potentially cause the quality of the fund to erode."

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Hong Kong Hedge Fund Offers 100% Coverage on Losses. For a Fee

Brief: A Hong Kong hedge fund is offering to cover 100% of any losses in a bid to attract investors that have been avoiding the sector amid the Covid-19 pandemic. Infini Capital Management Ltd. is gauging investor interest for full loss insurance on a new class of shares in a fund it launched last year. In exchange, the firm would charge a performance fee as high as 50%, more than double the industry standard. Although Infini says the offer isn’t linked to growing tension in Hong Kong sparked by China’s new security law, it shows the extent to which hedge funds are willing to boost enticements to attract fresh money. Investors yanked $31 billion in the first four months from the global hedge fund industry as the spread of the Covid-19 virus triggered market selloffs in March and led to the worst monthly performance since the 2008 global financial crisis, according to eVestment. Capital raising has been especially challenging for younger funds. “This offering is to hopefully get some investors over the edge who might still have some concerns about being an early investor in Infini,” Chief Operating Officer Michael Friedlander said in an interview.

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Covid-19: How Fund Managers Mitigated Systemic Risks

Brief: Once considered damaging for fund manager reputations, liquidity management tools - such as redemptions on restrictions - have gained further acceptance amid the Covid-19 crisis. And what’s more, these tools have slowed the spread of market contagion, says Xavier Parain, CEO of FundRock Management Company. The Covid-19 crisis has changed so much about daily and commercial life - and the fund management industry is no exception. Business continuity plans and procedures - tested more frequently than ever implemented in the past - have been deployed universally. Portfolio managers, risk officers, due diligence professionals and others immediately and seamlessly transitioned to working from home, crucially, without any major impact for investors. This crisis has caused a rethink on redemption restrictions and other liquidity management tools. As the global financial crisis (GFC) of 2007-2008 reminded us, a “run” on a financial institution takes different forms and frequently occurs hidden from public sight.

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Fiera Capital Chief Optimistic COVID-19 Vaccine Can be Found in Next 12 Months

Brief: Quebec’s largest independent asset manager is ready to bet one or more COVID-19 treatments will be found in the next 12 months, pushing global stock markets higher. Fiera Capital chief executive officer Jean-Guy Desjardins says there’s an almost two-thirds probability that a vaccine will be found by June 2021. In the meantime, odds are that an existing drug can lessen COVID-19’s effects and reduce mortality rates, said Desjardins, a veteran money manager who founded Montreal-based Fiera in 2003 and counts four decades of experience in the investment industry. After plunging in March amid the pandemic’s global spread, stock markets in North America and elsewhere have rebounded on optimism over a second-half economic recovery. Canada’s benchmark S&P/TSX Composite Index has gained more than 30 per cent since hitting a multiyear low in late March, though it’s still down about 10 per cent for the year.

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The II Fear Index: No Business-as-Usual Anytime Soon

Brief: Around the world, businesses are beginning to reopen from the coronavirus pandemic. But asset owners and investment managers won’t be returning to normal anytime soon, according to the latest II Fear Index. Institutional investors participating in the weekly poll broadly indicated they would continue to stay home for at least the next month, with just 15 percent planning to return to the office in June. However, a majority believed they would be back at their workplace by fall: Thirty percent said day-to-day office work would resume in July or August, while another 30 percent predicted it would happen in September or October. There was less consensus on the subject of in-person meetings. While the highest proportion — 31 percent — indicated they would begin meeting with clients or asset managers in September or October, another 28 percent anticipated that they would not have any face-to-face meetings until 2021. Respondents were least optimistic on the prospects of business travel, with the plurality — 38 percent — predicting they would not resume traveling for work until next year. 

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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 June 2, 2020:

  • In the United States as all 50 states have at least partially reopened, several southern states have reported sharp increases in COVID-19 infections. Alabama, South Carolina and Virginia all saw cases rise at least 35% or more in the week ended May 31st, compared to the prior week. Cases have risen in 17 states overall, according to a Reuters report. United States Surgeon General Dr. Jerome Adams is the latest in a number of health experts who fears new outbreaks of the coronavirus will result from the nationwide protests of George Floyd’s death. In an interview, Dr. Adams highlighted the coronavirus pandemic has disproportionately affected communities of colour, noting "I remain concerned about the public health consequences both of individual and institutional racism [and] people out protesting in a way that is harmful to themselves and to their communities.”

  • The doctor who was responsible for a new cluster of coronavirus cases in the Canadian province of New Brunswick is speaking out. Dr. Jean-Robert Ngola said he did not self-isolate upon returning from an overnight return trip to neighbouring province Quebec to pick up his four-year old daughter. The mother of the child had to travel to Africa for her father’s funeral. Dr. Ngola, who isn’t showing any symptoms, is unsure of where he obtained the virus noting, "Who can say? … The virus is circulating everywhere. … How many people are unwitting carriers?” Since word has circulated of his case, Dr. Ngola says he is now the target of racist harassment, false reports have been made to the police, and feels abandoned by public health officials. There are 12 new cases of the coronavirus in northern New Brunswick since May 21st. Prior, the province had gone two weeks without a new case.

  • The United Kingdom government is considering a travel corridor with other countries who have low rates of coronavirus infection. Those nations that would fall under that criteria would not have to adhere to the UK’s 14-day self-isolation period, which is due to take effect on June 8th. The UK travel and hospitality sectors have warned that the government’s quarantine plan will further damage their industries which have already been hit hard by the coronavirus pandemic.

  • In France, cafes and restaurants were allowed to open for the first time in 11 weeks after being closed due to the coronavirus lockdown. Restaurants and cafes still have to limit the number of customers due to social distancing rules and in the Paris region, customers can only be served on outdoor terraces until June 22nd. France’s finance minister has noted the economy will likely shrink by 11% this year but is convinced it will rebound in 2021 with the help of government support.

  • Wuhan China’s Health Commission announced Tuesday that it had completed 9.9 million coronavirus tests of its residents with no new confirmed cases. There were 300 asymptomatic cases discovered in the testing, but China does not count asymptomatic cases as confirmed cases. The testing began on May 14th for the city of 11 million people, which was ground zero for the coronavirus epidemic.

  • A Brazilian university study is projecting the country could reach 1 million cases of the coronavirus and 50,000 deaths by the end of the month. The study conducted by the Federal University of Rio Grande do Sul predicts the number of COVID-19 cases in Brazil will double in the next 18 days. As of Tuesday, Brazil has reported close to 527,000 cases and close to 30,000 deaths.

  • Japan has announced the approval of saliva-based tests for the coronavirus as a way of boosting testing rates as the Tokyo government issued a stay-at-home alert following an increase in infections. The state of emergency was lifted in Tokyo last week, but the local government is urging people to stay at home for non-essential business and to practice social distancing as 34 new cases were reported on Tuesday, the most since May 9th. Japan’s testing rate is well behind other industrialized nations such as the United States, Italy and South Korea leaving critics to say the low rate of testing is making it difficult to trace the virus.

Covid-19 – Due Diligence And Asset Management

Private Equity Lands Billion-Dollar Backdoor Hospital Bailout

Brief: As the coronavirus pandemic upended the U.S. health-care system, EmCare IAH Emergency Physicians, a Houston staffing company owned by private equity firm KKR, made a little-noticed request of the government: It applied for a $317,379 interest-free loan. KKR had for years paid lobbyists to fend off efforts to ban a practice known as surprise billing used by EmCare and other providers that has driven up the cost of health care. But that didn’t stop the U.S. Health and Human Services Department from approving the loan and almost 300 others totaling more than $60 million to subsidiaries of KKR-owned companies. Shut out from many coronavirus relief programs, private equity companies have found a back door at HHS, where they have borrowed at least $1.5 billion, according to a Bloomberg News analysis of more than 40,000 loans disclosed by the department…  Health-care facilities owned by Apollo Global Management, which started the year with about $46 billion, received at least $500 million in HHS loans. And Cerberus Capital Management’s Steward Health Care System LLC, which threatened to close a hard-hit Pennsylvania hospital, received at least $400 million in loans. Last month Cerberus was working to quadruple the size of a fund to invest in distressed loans to $750 million.

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Wall Street Sends Wine, Masks to Clients with Steakhouses Closed

Brief: Wall Street investment funds won’t let a pandemic and riots stop them from wooing clients. With boozy steakhouse meetings no longer an option, evenings on the town are being replaced with wine tastings via conference call and online concerts. There are also care packages tailored to the times -- packed with masks -- and donations to food banks and charities. Disruptions set off by the coronavirus pandemic, now complicated by protests and curfews, are prompting asset managers overseeing products such as mutual funds and exchange-traded funds to figure out new ways to remotely grab the attention of wealthy customers, institutional investors and financial advisers. That often means trying to hobnob in the virtual world. It’s accelerating a shift that was already underway, as big firms rely less on social outings to generate and work leads, said Amanda Walters, principal at Casey Quirk, a division of Deloitte Consulting. “Asset managers are asking, ‘Do we need to be face-to-face as much as we were before?’ And the answer is probably no,” she said.

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Goldman Sachs Commits to New Central Paris Headquarters

Brief: U.S. bank Goldman Sachs (GS.N) has signed a lease for a new Paris headquarters building, committing to a city centre office development at a time when many banks are weighing scaling back their presence in cities amid the COVID-19 pandemic. Goldman has signed a 12-year deal for 6,500 square metres of space at 83 Marceau, an office building being redeveloped a block away from the Arc de Triomphe, developer SFL said on Tuesday. The commitment represents 81% of the building’s floor space. The project is expected to be completed in the third quarter of 2021.

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Relief Rally or Bear Market Bubble? For Investors, it’s Hard to Tell

Brief: What started as a bear market bounce in U.S. equities has transformed into one of the most dramatic rallies in memory, leaving investors looking to past rebounds, options markets and technical analysis for clues on how far it could run. The S&P 500 is up 37% since its late March close as of Monday and the Nasdaq Composite is near a fresh record after a surge that has seemingly ignored widespread economic upheaval and uncertainty over the coronavirus pandemic. The rally’s speed has left investors in a quandary. While few are willing to bet against a rebound that has steam-rolled most forecasts, some are concerned the market has become detached from economic reality by expectations of unlimited support from the Federal Reserve and U.S. lawmakers. The S&P 500, for instance, now trades at 21.2 times earnings, its highest level since 2002, even as unemployment is at levels last seen in the Great Depression. A Reuters poll showed investors expect Friday’s U.S. employment data to show a loss of 7.45 million jobs cut in May, after a record 20.5 million in the previous month.

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No One Knows What Their Bond Fund is Worth

Brief: During the worst of the market chaos in March, some credit hedge funds suspended redemptions because they didn’t know what their holdings were worth and the prices of fixed income exchange-traded funds were out of whack with the net asset value of their underlying bonds. The prices for stocks, which trade on an exchange, are available in real-time. But bonds still trade over-the-counter, meaning a dealer and an investor negotiate a price, whether on a screen of over the phone. As a result, there is no central place to go for bond prices. Bond mutual funds, for example, use what are called evaluated prices from third parties such as ICE Data Services. ICE has analysts and algorithms gathering and assessing multiple sources of information scattered throughout the market to provide evaluated bond prices to investors, asset managers, dealers, and others. In March and April, as markets cratered and transactions ground to a halt, that information evaporated.

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The Buy-Side Trader is Getting Outsourced in Coronavirus Crisis

Brief: A once-in-century disruption to securities trading is intensifying a revolution in how some investment firms conduct business. With at-home traders navigating the wildest market swings in history, more money managers are tapping outsourcing companies to buy and sell financial assets on their behalf. With their employees at risk of falling sick or losing regular access to market venues, the buy side in lockdown is turning to a booming industry that’s drawing big-gun entrants including State Street Corp., AllianceBernstein Holding LP and Wells Fargo & Co. In so doing, the largest providers are reporting a surge in revenues as transaction volumes jump and new clients sign up. Outsourced traders essentially act as a middleman between the buy side and sell side in handling trading flows. Some outsourced trading divisions are run inside bigger financial services firms, like Jefferies Financial Group Inc., while others operate as small, standalone shops. Their pitch to asset managers: Ensuring best execution with an extensive network of brokerages and high-speed technology, which can be expensive for smaller funds to maintain on their own.

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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 June 1, 2020:

  • In the midst of the coronavirus pandemic, the United States are dealing with mass protests over the death of George Floyd, an unarmed black man at the hands of four former Minnesota police officers. Health officials are concerned, along with state and city leaders of spreading the coronavirus due to the close contact of the protestors. While many are wearing a mask, as the situation escalates with police and national guard members, health officials fear the use of tear gas and other methods are forcing protestors to cough and sneeze, which could spread the virus. As the unrest grows in America, the tension doesn’t appear to be dissipating anytime soon as United States President Donald Trump told state governors on Monday they must be tougher and use more aggressive tactics on the violent protestors.

  • The World Health Organization (WHO) have called on President Trump to reconsider terminating their relationship with them over the handling of the coronavirus pandemic. On Friday during a news briefing, President Trump announced the United States would end its relationship with the WHO but provided no further details on what that separation would like. “The US government's and its' people's contribution and generosity toward global health over many decades has been immense, and it has made a great difference in public health all around the world," WHO Director-General Tedros Adhanom Ghebreyesus said. "It is WHO's wish for this collaboration to continue."

  • Canadian Prime Minister Justin Trudeau said the federal government will be accelerating its plan of delivering infrastructure funding to cities who badly need it after suffering a hit from the coronavirus pandemic. Prime Minister Trudeau said $2.2 billion in annual infrastructure will be delivered in one payment this month to give municipalities earlier access to the funds instead of waiting on multiple payments. Government opposition have said the help is too little too late, and municipalities are only receiving money they were entitled too, not any additional help in operating shortfalls.

  • Health officials in the United Kingdom have told Prime Minister Boris Johnson he has eased the coronavirus restrictions too soon in the country, which will risk a spike in infections. As of Monday, some school classes were allowed to resume, up to six people can meet outside and two million vulnerable people who were sheltering in place, were also allowed to spend time outdoors. Health officials believe the government doesn’t have a fully functioning tracking system in place to track new outbreaks and media reports showing Britons enjoying the nice weather at beaches, with little social distancing over the weekend, did nothing to ease their concerns.

  • India began loosening some coronavirus-related restrictions on Monday even though the country is experiencing it largest daily increases of COVID-19 cases. Indian’s health authorities said close to 8,400 cases were recorded in back-to-back days. The country will shorten the nationwide curfew and allow some states and territories to decide if they want to resume intrastate and interstate travel. The first phase of India’s three-part reopening formally begins on June 8th.

  • Familiar traffic jams and crowds of commuters greeted those in the Philippine capital of Manila as one of the world’s longest lockdown restrictions was lifted. Public transportation could only carry a fraction of the people they normally could due to social distancing measures, which meant commuters had wait for hours to catch a ride. Police have warned citizens they will go after violators who don’t wear face masks, or don’t observe social distancing.

  • In south Australia further restrictions have been eased as some business will be allowed to open their doors for the first time in more than two months. Australians will be allowed to return to the gym, go to the movies and have a seat at the bar, but capacity limits are still in place. For instance, a maximum of 80 people are allowed inside a gym and pubs in New South Wales can have up to 50 guests, instead of 10.

Covid-19 – Due Diligence And Asset Management

‘Appalled’ – Here’s What Wall Street CEOs are Saying about the Killing of George Floyd and Protests Rocking US Cities

Brief: Wall Street CEOs expressed horror, anger and empathy in staff emails and messages posted to social media as protests continued to roil U.S. cities in the week after the death of George Floyd in Minneapolis. The May 25 death of Floyd, who had been handcuffed when a police officer kneeled on his neck for more than eight minutes, sparked introspection and calls to fight racism by the biggest American financial firms. Floyd’s death followed the recent deaths of other black citizens including Ahmaud Arbery in Georgia and Breonna Taylor in Kentucky. Here’s what they said…

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Wall Street and Fed Fly Blind as Coronavirus upends Annual Stress Tests

Brief: U.S. financial regulators, banks and their investors will get their first glimpse into the health of the nation’s banking system as it confronts soaring corporate and consumer defaults in the economic crisis sparked by the novel coronavirus. And no-one, including the U.S. Federal Reserve which sets the annual bank “stress test” exams, has a clue what to expect. “That is the $100,000 question. Actually, it’s much bigger than that and I am sure the Fed is working hard to get it right. We’re curious, and we don’t have clarity,” said Kevin Fromer, CEO of the Financial Services Forum, which represents the biggest banks in the U.S. That could mean banks may be on the hook for billions more in capital than they had anticipated, which could ultimately force them to slash dividends, slim down their balance sheets or reduce lending.

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Pinto Endured Lonely Weeks Co-Running JPMorgan as World Lurched

Brief: Daniel Pinto checked into a hotel in midtown Manhattan around 2 a.m. on a Friday in early March, hoping to get a little rest after an epically hard day. Things were about to get much worse. His slog that day had begun in London with a routine call with his boss, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon. But just a few hours later Dimon was rushed into emergency heart surgery, and the board named Pinto — who oversees the firm’s Wall Street operations — to temporarily run the bank alongside Gordon Smith, the head of its consumer business. Pinto flew to New York for what he thought would be a brief stay. Then markets began panicking over the coronavirus pandemic. He didn’t check out until a month later. “I’ve seen crises my whole life,” Pinto said in an interview. Yet “we haven’t seen a crisis of this magnitude. It’s probably short-lived but very deep, and it’s everywhere around the world.”

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Howard Marks: Get Used to Uncertainty

Brief: When will the Covid-19 pandemic end? What’s going to happen to the economy? Investors have a lot of questions about the future — but no one, according to Howard Marks, has the answers. In his most recent client memo, the Oaktree Capital chairman addressed the current state of uncertainty and what he described as the “futility of forecasting,” arguing that not even expertise in a given field necessarily equips a person to predict what will happen.  It’s an argument the credit investor has made before, including in his last missive to clients in early May. In this newest letter, released publicly on Thursday, Marks explained that forecasting is impossible because the future is path-dependent — in other words, whatever happens between now and then can affect the ultimate outcome. “Not only how will the virus behave, morph, travel, react to warm weather and infect, but also how fast will we reopen the economy, how will people behave when we reopen it, and what will the virus do at that time?” he wrote.

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Private Equity Firms and Investors Overcome Covid-19 Fundraising Hurdles

Brief: Increased information flow, more transparency and informal settings have mitigated a lack of in-person meetings as investors and fund managers find ways to overcome roadblocks resulting from the coronavirus pandemic. Face-to-face meetings, a traditional linchpin in the process of checking out fund managers before investors make commitments, have been prevented by government restrictions aimed at reining in the pandemic. Investors, placement agents and fund managers say virtual meetings using video conferencing and presentations using other technologies have kept fundraising largely on track. In addition, the adaptations often lead general partners to offer greater stores of information on investments, returns, deals in the pipeline and strategy to prospective limited partners, helping to compensate for the lack of in-person visits and to increase investor confidence. “I had never had the opportunity to see these general partners in a time of stress, how on top they are of what private equity can do with and for their portfolio companies,” said a limited partner who is considering a follow-up capital commitment with a fund manager.

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Nordea Liquidates L/S Equity Fund as Boutique Shuts

Brief: Nordea has liquidated one of its Alt Ucits strategies following the decision of its sub-adviser Madrague Capital Partners to close the firm.In a statement to shareholders, Nordea said Madrague Capital Partners’ decision to withdraw its asset management licence led to the termination of the Nordea 1 – European Long Short EquityFund.The fund was first launched in December 2018 and was the first fund since Nordea tool 40% stake in the investment boutique. Madrague Capital Partners’ investment team consisted of five members, including CIO Lars Franstedt and portfolio manager and CEO Martin Persson.‘The board of directors of Nordea 1 Sicav considers that this event is detrimental to the fund’s performance and therefore to the interest of the fund’s shareholders and has consequently decided to put the Fund into liquidation with immediate effect,’ the firm stated. Madrague Capital Partners was approached for a comment but didn’t respond at the time of the publication.

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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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