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Covid-19 Diligence Briefing

Our briefing for Monday August 31, 2020:

  • The United States have now surpassed six million coronavirus cases. It took 22 days for America to jump from 5 million to 6 million cases. The batches of one million total cases has slowed down slightly as it took 17 days to reach five million and 15 days to reach to four million. Elsewhere in the country, the head of the US Food and Drug Administration (FDA) said over the weekend that he is willing to bypass normal approval process for a COVID-19 vaccine. In an interview, Stephen Hahn said his agency would bypass the usual phase three trials as long as officials believe the benefits outweigh the risks. Hahn defended his organization against the accusations that the only reason they are considering this decision is to boost President Donald Trump’s re-election prospects. China and Russia have both approved vaccines without waiting for the end of phase three trials, usually the largest and most thorough of all tests for a potential new drug. 
  • In Canada, the federal government has signed agreements with two U.S. drug companies to secure up to 114 million doses of potential COVID-19 vaccines under development. The first deal announced was with Novavax for 76 million doses, while shortly later another deal was announced with Johnson & Johnson to secure up to 38 million doses of their potential vaccine. Prime Minister Justin Trudeau though announced he has no plans to rush a potential vaccine treatment, noting it will likely be the Spring of 2021, at the earliest, before a vaccine is made available to Canadians. 
  • The United Kingdom government have awarded over 100 contracts worth £109 million for advice on its response to the coronavirus pandemic. Since March, various consulting firms such as PwC, Deloitte and McKinsey have signed contracts with 10 Downing Street, some of which remained private for as long as three months. Government procurement rules state a contract award notice must be published within 30 days. The Financial Times are also reporting a number of consulting contracts have come with ridicule over the services they provided. For instance, Deloitte was appointed to manage personal protective equipment for hospitals and support testing sites but were criticized for a series of administrative errors and delays in providing support.
  • German police clashed with far-right protestors over the weekend in Berlin due to the coronavirus restrictions put in place by the government. Close to 40,000 people took to the streets of Germany’s capital city with some going as far as wanting Chancellor Angela Merkel and her government to resign. Most of the rally was peaceful, but police did have to make about 200 arrests. City officials tried to shut down the planned protest last week, but were unsuccessful after a court ruled the rally could go on as scheduled.
  • Spain’s Prime Minister Pedro Sanchez is pointing the finger at provincial politicians for the second wave of coronavirus infections after lockdown restrictions were lifted a few months ago. During the spring, Spain’s central government, led by Sanchez, invoked emergency powers to maintain lockdowns and override regional governments. However, the prime minister says it is now up to individual regions to ask the central government to grant them emergency powers to reduce the amount of spread. Prime Minister Sanchez’s political opponents accuse him of pretending the second wave of the virus is like a game of tag and he’s not “it” – opposition are arguing leadership during the pandemic must be centralized like it was during the first wave.
  • Australia and New Zealand seem to be turning the corner on their latest coronavirus outbreaks. Over the weekend, Australia’s Victoria state reported a one-day tally of 94 new cases, their lowest in nearly two months. The state’s largest city – Melbourne – is in week four of a six-week lockdown and authorities say they may ease restrictions, albeit gradually. In New Zealand the country reported only two new cases on Sunday and its largest city – Auckland exited their lockdown on Monday. Schools and customer-facing businesses were allowed to reopen, and a ban for travelling outside the city has been lifted as well. However, social distancing requirements remain in place, and anyone over the age of 12 must wear a facial covering on public transport.

Covid-19 – Due Diligence And Asset Management

Buffett Hunts Abroad with $6 Billion Wager on Japanese Firms

Brief: Warren Buffett, with more than $146 billion of cash on hand, has been struggling to find attractively priced assets at home in the U.S. Now, he’s looking abroad. The announcement late Sunday by Buffett’s Berkshire Hathaway Inc. that it bought stakes in five of Japan’s biggest trading companies marks one of his largest-ever forays into Asia’s second-largest economy. The wagers show that Berkshire’s chief executive officer, who turned 90 over the weekend, is willing to expand the company’s horizons in his search for ways to supercharge the Omaha, Nebraska-based conglomerate’s growth. “I think this is a definite signal that Berkshire is more likely to examine and pursue potential investments internationally,” David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business, said. “This could be the beginning of the tip of an iceberg. There could be many more investments such as this.” The investments into commodity-centric Japanese conglomerates known as “sogo shosha,” disclosed in a statement from Berkshire, underscore Buffett’s willingness to bet on economically sensitive companies despite the pandemic. The five Japanese companies also have interests in businesses ranging from home-shopping networks to convenience-store chains, offering Berkshire exposure to a wide swath of the Japanese economy.

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Women-Managed Funds are Outperforming as Tech Exposure Pays off, Goldman Finds

Brief: Mutual funds managed by women are outperforming those managed by men this year as higher relative exposure to technology names drives performance, according to new research from Goldman Sachs. The firm found that 43% of women-managed funds — as defined by those with at least one third of portfolio manager positions held by women — have outperformed their benchmark this year, compared with just 41% of those managed by men. Adjusting for volatility, the median fund with all women portfolio managers has returned more than double that of the typical all-male managed fund. “Female-managed funds withstood many of the market swings, with the median fund outperforming its benchmark by 50 [basis points] from the start of the year to March 23rd. On the other hand, the typical fund with no women managers lagged its benchmark by 20 [basis points] during that period,” Goldman strategists led by David Kostin wrote in a note to clients. “Since the market trough, 48% of female-managed funds have generated alpha, compared with only 37% of all-male funds.”

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‘I Can’t Believe I’m Saying This, But I’m Passing on Seth Klarman’

Brief: Exclusivity is like fiat currency: It only works if everyone believes it’s real.  For decades that wasn’t a problem for Seth Klarman’s $29.5 billion Baupost Group. The only way to get money into its famed hedge funds was to already have some invested, and everyone knew it. Even for that coterie, Klarman would periodically slide some of their capital back, a potent reminder that Baupost didn’t need more — or your — money.  But doubts have begun to percolate within the elite investor class, an investigation by Institutional Investor reveals.  “We’re walking away,” says one capital allocator. It’s not clear whether or not Baupost knows this yet. The firm declined to comment for the story. “Seth is running Baupost more like a wealthy person might run their personal money than like the aggressive hedge fund manager that he’s been over the years,” the investor says. “He has pretty considerable net worth and all of his money invested in that firm. Other people’s fees are paying for him to run his personal money. If you want to come along, come along.” But that allocator won’t.  “Even though we have terribly high regard for Seth,” the investor went on, “this isn’t what we want. Performance is slipping; the strategy changed. It’s not the consistent, thoughtful type of process and results that they had for a couple of decades.” Baupost’s best days have passed — at least for the firm’s clients, the investor asserts. 

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Institutional Crypto Interest Hasn’t Been Affected by COVID-19

Brief: The coronavirus pandemic has truly been a watershed event — not just for the financial industry but for the world at large. Many had plans and goals that they wanted to achieve before the year ran out but had to stop. Companies had to file for bankruptcy, and people lost their jobs. Like every sector of the global economy, the financial sector has also suffered significantly from the effect of the pandemic. Countries have been scrambling to keep their economies afloat, while people have been looking for means to stay solvent. It goes without saying that stock markets and financial institutions across the world are uniquely vulnerable at this point. This is a level of danger that the world has never seen before. Even the global financial crisis of 2008 wasn’t able to prepare us for the impact COVID-19 would have on the world economy. However, one aspect that has so far managed to weather the storm has been the crypto market. While Bitcoin (BTC) dropped to $3,800 in March, the top cryptocurrency’s value managed to surge and consolidate faster than any other investment vehicle in the world. The stock market has just begun to rebound, and alternative assets are still in their everlasting state of volatility. Cryptocurrencies, however, have been going strong.

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GTCR Raising $6.75 Billion for New Buyout Fund

Brief: GTCR is seeking to raise $6.75 billion for a buyout fund that would be its biggest yet, according to a person with knowledge of the matter. The firm has begun preliminary discussions with prospective investors, said the person, who requested anonymity because the talks are private. A spokeswoman for GTCR declined to comment. The Chicago-based firm raised $5.25 billion for its 12th buyout fund, which closed in October 2017 and marked GTCR's largest fundraising to date. "We have the organizational capacity to pursue more and potentially larger-scale investment opportunities," Craig Bondy, a managing director, said at the time. The firm has traditionally focused on five sectors: technology, business services, media and telecommunications, health care and financial services and technology. It announced this month an agreement to acquire Xermelo, an oral therapy for carcinoid syndrome diarrhea. In July, GTCR agreed to sell Optimal Blue, a digital marketplace for mortgages, and in June announced the purchase of software maker Citra Health Solutions.

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Warburg Pincus Seeks $2.5 Billion for New Financial Sector Fund

Brief: Warburg Pincus is seeking to raise $2.5 billion for its second fund dedicated to financial sector deals, according to a person with knowledge of the matter. The private equity firm has begun preliminary discussions with investors about the WP Financial Sector II fund, which will invest alongside its flagship vehicle in areas such as payments and financial technology, said the person, who asked not to be named because the information isn’t public. It plans to formally launch capital-raising efforts in November, with a first close targeted for mid-2021, the person said. Former Treasury Secretary Tim Geithner, Warburg Pincus’s president, will oversee the fund, the person said. The firm gathered $2.3 billion for its first financial sector fund, which closed in December 2017. A spokeswoman for New York-based Warburg Pincus declined to comment. Warburg Pincus, which has more than $53 billion in assets under management, made a $400 million investment in financial technology service provider Wex Inc. in June, and last year acquired an 80% equity stake in Indian education finance company Avanse Financial Services Ltd.

 

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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 August 28, 2020:

  • In Japan, Shinzo Abe, the country’s longest serving prime minister announced he will stand down on Friday due to poor health. “The most important thing in politics is results. If I can’t discharge my responsibility to the people of this country with confidence, then I judge I should not continue as prime minister, said Abe at his news conference. Abe had served in his role as prime minister since 2012, but a relapse of ulcerative colitis, an intestinal disease has weakened him physically. His resignation will take effect as soon as the party chooses a successor and that person will have quite a tall task ahead of them. Japan is struggling to deal with COVID-19, struggling to reboot the world’s third largest economy and has disputes with its neighbours in China and South Korea.

  • A coronavirus model in the United States is projecting more than 317,000 Americans will die from COVID-19 by December. The model from the University of Washington and previously cited by the White House administration, has a marked increase of 8,000 deaths from their previous model a week ago. According to data compiled by Johns Hopkins University, 180,000 Americans have died so far during the pandemic, so according to the model 136,000+ could die over the next several months. Despite this grim outlook, these are only projections and not definitive, and researchers note if mask wearing in public would increase to 95%, more than 67,000 American lives could be saved.

  • Statistics Canada released their second quarter numbers and as expected, it wasn’t pretty. The Canadian economy suffered its worst quarterly fall since records began in 1961 - dropping 11.5% from April to June. Job losses, closure of shops and limited construction activities were all reasons for the decline as the country closed up shop during COVID-19 restrictions. The country is expecting the GDP number to rise in the third quarter, but Canada has racked up a projected $343 billion (Canadian) deficit to steady the country through its difficult first half of 2020.

  • The United Kingdom government plans to launch a campaign to get people back to their workplaces as they are concerned city centres will be permanently damaged with people working from home. The government will start with advertisements in regional media, along with employers urging their staff that it’s safe to return to the office and show how measures have been put in place to stop the spread of the virus. At the start of August, Downing Street officials emphasized a return to normalcy when it came to day-to-day work life but have been alarmed at the slow return to the workplace. Many big employers have told the Financial Times they plan to keep the majority of their staff working from home until early 2021, due to the difficulty of maintaining social distancing.

  • German Chancellor Angela Merkel has announced tougher measures to help curb the spread of the coronavirus as the country heads into the autumn and winter seasons. The new restrictions included a fine for people who fail to wear facial coverings in public spaces and a ban on large scale gatherings, including concerts and sporting events until the end of the year. However, government officials can’t stop a mass protest this weekend expected to take place in Berlin. A court overturned the ban on an expected protest against the government’s response to the coronavirus. As many as 20,000 people are expected to attend, but the court said organizers must comply with coronavirus restrictions in place.

  • As daily infections continue to hit daily records, India’s government is planning on holding millions of exams for students next week. Hundreds of protestors took to various Indian city streets on Friday to protest the government’s plan as more than 2.4 million students are set to take tests for admission to medical and engineering schools.  The federal government has declined to defer as the exams have already been postponed twice this year, but students want another delay as they are worried for risk of infection due to travelling to exam centres.

Covid-19 – Due Diligence And Asset Management

Empty Hotels Might Just Be Next Big Short for Hedge Funds

Brief: Hedge funds and other short sellers are beginning to set their sights on a U.S. credit-derivatives index with outsized exposure to hotel debt as the pandemic sinks the hospitality industry into distress. The firms are starting to build up wagers against the synthetic index, known as CMBX 9, shifting attention from a high-profile bet against America’s challenged malls. The shift, which market participants say is beginning to show up in some trading flows, comes as delinquencies on hospitality property loans surge and even begin to exceed those in retail. “In the last month there has been more selling pressure on the CMBX 9 than any of the other CMBS indices,” said Dan McNamara, a principal at MP Securitized Credit Partners, a hedge fund focused on shorting commercial mortgage bonds. “That’s because some hedge funds are actively looking to play the short side on the Series 9 index due to its significant hotel exposure.” Retail debt has been a lucrative bearish bet this year as people stayed home amid lockdowns and shopped online, exacerbating an existing threat to brick-and-mortar stores. Traders have been taking positions on retail through a 2012 version of the commercial mortgage index called CMBX 6, which has a high concentration of debt tied to shopping malls.

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Banks Eye Layoffs as Short-Term Crisis Ends, Long-Term Costs Emerge

Brief: At the height of the coronavirus pandemic last spring, the heads of U.S. banks including Morgan Stanley, Bank of America Corp and others pledged not to cut any jobs in 2020 because it was the wrong thing to do. However, as executives prepare for an extended recession and loan losses that come with it, layoffs are back on the table, said consultants, industry insiders and compensation analysts. Compared with April projections, bank economists and executives expect the U.S. economy to take longer to recover, with high unemployment into 2021 and interest rates staying near zero for the foreseeable future. On top of that, working from home has shown some managers that they need fewer employees to do the same amount of work. “No question, layoffs (will) come across the board for all the banks,” said Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management, which invests in JPMorgan Chase and other large Canadian banks. Banks have to cut costs because of expected credit issues, as well as low interest rates and regulatory pressure to trim dividends, he said. 

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Global Funds Once Again opt out of Stocks, Despite Rally, Reuters Polls Show

Brief: Funds recommended equity holdings be trimmed to the lowest in over four years in August, despite record-breaking gains by world stocks, as the pandemic drags on and new data suggest the nascent economic rebound is stalling, Reuters polls found. The August 17-27 poll of 35 fund managers and chief investment officers in the U.S., Europe, Britain and Japan was largely taken before Federal Reserve Chairman Jerome Powell announced a new policy framework promoting higher inflation to spur economic recovery and job creation on Thursday. The Fed’s new strategy sent U.S. Treasury yields higher, which gave a lift to interest rate-sensitive financials and in turn boosted the S&P 500 index to a new record high and pushed the MSCI’s all-country world index to surge past its pre-COVID-19 high reached in February. While world stocks have risen as much as nearly 60% since March troughs, the poll showed average recommended exposure for equities in August in the model global portfolio was the lowest since July 2016, down to 43.1% from 43.9% the previous month. Overall equity exposure is down 6.6 percentage points from the beginning of the year, down from 49.7% in January.

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Active Fund Managers Fail to Beat Passives Even in a Bear Market

Brief: Active managers have long claimed that they needed volatility to beat the market. Yet many of them still failed to outperform the average passive fund during the “once-in-a-decade” volatility at the beginning of the Covid-19 pandemic. According to research from Morningstar, only about half of active stock funds and one third of active fixed-income funds bested their average passive peer during the first six months of 2020. The twice-yearly Morningstar Active/Passive Barometer measures the performance of Europe-domiciled active funds against their passive peers. It covers almost 22,600 funds managing €3.7tn of assets. Morningstar’s research is unusual because it compares the performance of stock pickers with fee-charging passive funds, instead of against a cost-free index. It found that 35% of UK large-cap managers have beaten their passive counterparts over the last 10 years. However, Europe-based US large-cap, Japan large-cap, France large-cap, Germany large-cap and Switzerland large-cap have done less well. Between 5.6% and 28.3% of managers in those sectors have outperformed the average passive fund.

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Profits Nosedive as Hedge Funds Lose EUR800m on Airline Bets in August

Brief: Hedge funds seeking to take advantage of turbulence in the global aviation industry have lost almost EUR800 million in August, according to data from Ortex Analytics. Analysis of short positions against the world's 10 largest airlines throughout 2020 shows hedge funds lost EUR791.6 million in August. The losses reduced total returns YTD from the group by over a third, however hedge funds remain EUR1.4 billion in profit. A large proportion of this (EUR1.2 billion) came from short positions in March as international travel restrictions came into effect as a result of the Covid-19 pandemic.  Peter Hillerberg, co-founder of Ortex Analytics, says: “This year has no doubt been the most difficult on record for the aviation industry. Hedge funds were quick to capitalise on the impact of travel restrictions and made significant profit as a result. However, what we’ve seen in recent months is a reversal of fortunes as short sellers made substantial losses in June and August. Although there is still much uncertainty about the reopening of international travel, when it comes to short profits, hedge funds should remember something airline pilots know for certain, what goes up must come down.”  

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Blackstone is Encouraging US Workers to Return to the Office After Labour Day, and that’s Putting Some Employees on Edge

Brief: Private-equity giant The Blackstone Group is gearing up for US employees to return to the office after Labor Day, according to memos seen by Business Insider.
Blackstone is partnering with Vault Health to provide COVID home testing kits to US employees before they return to the office, according to the memo written by HR director Paige Ross. All investment professionals and asset managers will have a test sent to their home by Aug. 31. One person with direct knowledge of the return-to-office plans said calls within the firm were strongly encouraging investment teams to come to the office, unless they had a “valid reason” to remain remote. A Blackstone spokesman said in a statement that the health and safety of employees is the firm’s top priority.

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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 August 27, 2020:

  • United States House Speaker Nancy Pelosi and White House Chief of Staff Mark Meadows are expected to hold a call on Thursday to discuss coronavirus relief legislation. The two sides haven’t spoken since talks broke down two weeks ago without a deal. This is just the first step though as both sides don’t think a deal will be made before lawmakers return to Washington in September. In any new government stimulus deal, the Democrats have pushed for a topline of above $2 trillion, which includes nearly half being treated as aid to state and local governments. The White House has firmly opposed the $2 trillion price tag and reject any new substantial aid for states and municipalities.

  • In Canada, CBC is reporting a collaboration between a Chinese company and Halifax research team working on a potential COVID-19 vaccine has been put on ice amid tensions between the two countries. A partnership between the National Research Council of Canada and CanSino Biologics was announced in May. After promising human trials in China, the Canadian trials were set to begin in Halifax within the next few weeks. However, late last month, the Canada-China partnership was reported to be on shaky ground when China held up shipments to send to Halifax, which were supposed to arrive at the end of May.  It is not sure if subsequent tensions between the two countries over the handling of a Huawei executive facing extradition to the United States and two Canadians being held in a Chinese prison played any role in this development.

  • Similar to other European nations, the United Kingdom is now experiencing its highest number of new coronavirus cases in months. The UK recorded 1,522 new cases over the last 24 hours, their highest number since June 12th. The country is also struggling to keep up in their test and trace program. According to the Scientific Advisory Group for Emergencies, Sage at least 80% of close contacts of anyone infected with COVID-19 must be traced and isolated within 72 hours for the system to be effective. Data from the government’s test and trace system has shown between 71.6%-75.5% of infected people’s contacts were being reached and asked to self-isolate within 48-72 hours over the last two weeks.

  • In Germany, Chancellor Angela Merkel has urged citizens to stop travelling to countries where there is a high risk of coronavirus infection. Germany has designated large parts of Africa, Asia, the United States, as well as some regions of Europe as some of those high-risk areas. Those returning from risky areas will have to go into a quarantine and wait until the fifth day at the earliest to take a COVID-19 test. If the test result comes back negative, the person can end their quarantine. Government officials are also looking to change a law for people making an avoidable trip to a high-risk area so they can no longer claim loss of income compensation due to a post trip quarantine.

  • France is trying to avoid another mass shutdown by declaring areas as “red zones”. The country’s Prime Minister Jean Castex has declared 21 areas (20% of France’s regions) in the country as a “red zone”. Doing so allows authorities in those areas to make masks compulsory outdoors and close bars and restaurants in order to curb the spread of the virus. For instance, Marseille one of France’s largest cities has already taken this measure.

  • The World Health Organization (WHO) is coming under fire again from countries such as the United States and Australia after returning from a three-week COVID-19 fact-finding mission in China. The WHO’s two party team spent three weeks in Beijing but didn’t visit the location deemed to be ground zero of the epidemic, Wuhan. This has fueled concern from western governments over Beijing’s commitment to finding legitimate answers to the cause of the pandemic. The WHO said the team was merely laying groundwork in advance of a full international mission. However, Dave Sharma, an Australian government MP said: “The international community is right to have serious concerns about the rigour and independence of the WHO’s early response to the pandemic, and its seeming wish to avoid offending China.”

Covid-19 – Due Diligence And Asset Management

Millennium Returning at Least $5 Billion to Investors This Year

BriefIzzy Englander’s Millennium Management plans to return at least $5 billion to investors at year-end as part of an effort to create a more stable capital base. The money will come from a share class that can be redeemed in full after a year, people familiar with the matter said. The share class represents about $37 billion of the firm’s $45.4 billion in assets. In a new twist, any additional money raised will now be deemed committed capital, with the firm having three years to call the pledged money from investors, who learned of the change in a letter Wednesday. Once that happens, clients will be able to withdraw only 5% each quarter, meaning it would take five years to cash out completely. A spokesman for New York-based Millennium declined to comment. Englander’s firm has sought to lock up capital for longer ever since the 2008 financial crisis, when investors in need of cash pulled money, cutting Millennium’s assets in half. Other hedge funds had halted redemptions. Millennium, which climbed 12% this year through July, has produced steady returns over its three-decade history, making the new structure an easier sell. Two years ago, the firm started a 5%-a-quarter share class that now accounts for about $8.5 billion of assets.

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Blackstone Gets Back into Rental Houses with Tricon Deal

Brief: Blackstone Group Inc., which led Wall Street’s initial foray into the single-family rental business, is making a new investment in suburban houses at a time when the Covid-19 pandemic is pressuring traditional commercial real estate. The private equity giant, which exited its stake in landlord Invitation Homes Inc. last year, is leading a group of investors in a $300 million minority investment in Tricon Residential Inc., which owns and manages more than 30,000 single-family rental homes and multifamily units in North America…  The suburbs are in high demand as city-dwellers seek quarantine comforts such as backyards and room for home offices. At the same time, with more than 16 million Americans out of work, many renters have said they lack confidence in their ability to pay for housing, and experts are warning that the country is headed for a massive wave of evictions. Shares of single-family landlords have been rewarded during the pandemic as their rent collections have held up better than those of multifamily landlords. Tricon’s stock has surged 91% since March 23, compared with a 24% gain for a Bloomberg index of apartment REITs.

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Emerging Markets Hedge Funds Surge as Equities Gain Through Global Pandemic

BriefEmerging Markets and Asian hedge funds surged in Q2 2020, recovering from steep losses experienced in late 1Q, with many indices posting gains for YTD 2020 through July.  The HFRI China Index gained 6.8 per cent in July, which followed a 14.5 per cent gain in Q2, the best quarterly performance since Q1 2019, to bring YTD performance to +13.1 per cent, as reported in the HFR Asian Hedge Fund Industry Report and the HFR Emerging Markets Hedge Fund Industry Report. Hedge fund capital invested in Emerging Markets also surged concurrent with the record performance gains, ending Q2 at USD244.4 billion (CNY1.55 trillion, BRL1.24 trillion, INR16.6  trillion, RUB16.9 trillion, SAR842 billion), an increase of nearly USD13 billion from the prior quarter. Hedge fund capital invested in Asian markets also increased to USD115.5 billion (CNY798 billion, INR8.57 trillion, JPY12.28 trillion, KRW1.09 trillion).

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The Fed is Expected to Use a New Pandemic-Era Tool to Fight a Long-Running Battle Against Low Inflation

Brief: Even before Covid-19 crushed the economy, the Fed was worried about low inflation and was working on ways to let it run slightly hotter temporarily in order avoid the trap of long-term sluggish growth and weak pricing power. Chairman Jerome Powell, in a much-anticipated speech Thursday, is expected to discuss the Fed’s policy framework and specifically how it will alter its posture on inflation.  The Fed has had a 2% inflation target, but in the decade since the financial crisis it has more often than not seen inflation fall below its target…  The Fed has taken extraordinary actions to fight the impact of the coronavirus. It has vowed to keep rates at zero for a long time; it also has provided more liquidity, purchased assets and inserted itself in different markets to assure they run smoothly. The Fed already had been reviewing its policy framework, and inflation was part of it. Even before the virus, Fed officials had said they would allow inflation to overshoot their 2% target but they didn’t formalize it. “This is longer running than just Covid. If they had wrapped this up last year, Powell would have to signal this policy shift with rates above zero, ” said Jon Hill, senior fixed income strategist at BMO. “Since we’re already at zero, it means we’ll be at zero even longer and the central bank is going to be even more aggressive about trying to meet its inflation mandate. In the past they pre-emptively hiked to get ahead of inflation pressures. What they’ve shifted to is actually waiting until they get sustained inflation.”

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Bridgewater is Having a Bad Year. David McCormick has a Plan

Brief: The email, formal and foreboding, landed at 9:38 a.m. on Monday, March 2.  “Can you please call me when you have a second to talk?” the Bridgewater Associates employee asked.  The call, the email’s recipient knew, would not be good: Karen Karniol-Tambour, the hedge fund’s head of investment research, was scheduled to be a lunchtime speaker at an investment conference at Washington, D.C.’s Watergate Hotel just over 24 hours later. But at that moment, on March 2, a man in Westchester County — a mere 30 miles from Bridgewater’s two main campuses in Westport, Connecticut — was undergoing treatment as the first Eastern Seaboard case of Covid-19 with an unknown origin. Karniol-Tambour wasn’t going to make it, the conference organizer feared. Bridgewater had been on high alert all weekend. The firm’s health security “posture” was the subject of ongoing discussions. Already, anyone who had traveled to certain areas — including the West Coast of the U.S., where Covid-19 had already killed individuals in Washington state — or lived with someone who had traveled, was barred from the offices.

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Most Alternatives Managers Predict No Investment Changes due to COVID-19

Brief: Sixty-three percent of investors in alternatives do not anticipate changes to their investment plans in response to the COVID-19 crisis, the results of a Preqin survey show. And 29% expect to invest more in alternative investments in the long term than they would have prior to the pandemic, the survey indicated.  Meanwhile, 72% of private equity investors surveyed indicated that returns have met their expectations. Seventy-four percent of private debt investors, 72% of infrastructure investors and 66% of real estate investors said that returns have met their expectations. Forty-seven percent of hedge fund and 58% of natural resources investors said that returns are below expectations, according to the survey. However, 42% expect returns to decline due to the COVID-19 crisis, the survey indicated.

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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 August 26, 2020:

  • In the United States, the Centers for Disease Control and Prevention (CDC) has reversed course on its COVID-19 testing guidelines and are now saying people without symptoms may not need to be tested, even if they’ve been in close contact with someone known to have the virus. The sudden change has left health officials in a state of confusion as the CDC did not explain why they made the update, but CNN is reporting the new guidance was a result of pressure from the Trump administration. “I am worried this is just a way to slow down testing that would clearly not be good. We don’t want to decrease the amount of testing. We want to decrease cases by decreasing transmission, not by decreasing testing, said Dr. Carlos del Rio, an American infectious disease specialist.

  • In a news conference on Wednesday, the Canadian federal government announced a $2B funding plan, aimed at helping provinces and territories re-open their schools safely in the midst of the pandemic. While in Canadian politics, education falls under provincial jurisdiction, the federal government said the money is meant only to top up provincial resources and comes with no strings attached on how it’s spent. The funding can be used to help adapt learning spaces, improve air ventilation, increase hand sanitation and hygiene and buy personal protective equipment – all things needed now in dealing with COVID-19.

  • According to the World Travel & Tourism Council, the coronavirus will see the United Kingdom’s travel industry lose more than £20B. The industry group points to the UK’s “devastating” policy on quarantining travellers with high COVID-19 infections – a list that is reviewed on a weekly basis and has been criticized by tourism advocates for its stop-start measures. This dire outlook goes hand-in-hand with the news on Wednesday that London’s Gatwick airport plans to cut a quarter of its workforce as part of a major restructuring. Currently as much as 75% of the airport’s staff are on furlough at the country’s second busiest airport.

  • Authorities in Germany’s capital city, Berlin have banned several protests planned for the weekend. The protests were due to the government’s coronavirus pandemic measures currently in place.  A similar protest, which is supported by German far-right leaders was held in Berlin on August 1st during which protestors ignored mask-wearing initiatives and social distancing rules, which were imposed on the protest. Elsewhere in the country, coalition parties agreed on Tuesday to extend measures to help soften the blow to Europe’s largest economy. The new measures could cost up to €10B and include prolonging a short-time work scheme and freezing insolvency rules.

  • In Italy, the Vatican released a statement that as of next Wednesday (September 2nd) the faithful will be readmitted to Pope Francis’s weekly general audiences. Thousands of people usually attended the weekly Wednesday gatherings, but haven’t been able to do so since the pandemic outbreak in the country began in March. The Vatican said starting from next week, the Pope would hold attendance in the San Damaso Courtyard of the Apostolic Palace and anyone who wanted to attend, could do so.

  • South Korea has ordered doctors in the Seoul area back to work on Wednesday as they began a three-day strike in protest of several government proposals. The strikes come at a time when the country has seen new cases hit the triple digits for the past week and a half.  Earlier in the week, the doctors had reached an agreement with the government to look after any COVID-19 patients but hit a wall on any of the broader issues. The government wants to increase the number of medical students by 4,000 over the next 10 years to better prepare for public health crises like the COVID-19 pandemic. However, student doctors said the plan would unnecessarily flood an already competitive market. They are asking for the extra funding to be spent improving the salaries of existing trainees, which would encourage them to move out of the capital city of Seoul and into more rural areas where more health professionals are needed.

Covid-19 – Due Diligence And Asset Management

World Economic Forum says Annual Meeting in Davos Will be Delayed until Summer 2021

Brief: The World Economic Forum announced Wednesday that it decided to postpone its upcoming annual meeting in Davos, Switzerland, due to safety concerns and in an effort to slow the spread of Covid-19. The meeting, originally scheduled for January, will be rescheduled to “early next summer,” according to Adrian Monck, managing director of public engagement at the Forum. “The decision was not taken easily, since the need for global leaders to come together to design a common recovery path and shape the ‘Great Reset’ in the post-COVID-19 era is so urgent,” Monck said in a statement. “However, the advice from experts is that we cannot do so safely in January.” The World Economic Forum’s annual summit in Davos is routinely one of the globe’s largest collections of world leaders and corporate executives. This year’s gathering, which took place over four days starting Jan. 21, featured commentary from President Donald Trump, European Central Bank President Christine Lagarde and climate activist Greta Thunberg. The 2020 conference also included Wall Street and finance bigwigs, and counted among its ranks billionaire George Soros, hedge-fund manager Paul Tudor Jones, JPMorgan Chase CEO Jamie Dimon, and Bridgewater Associates founder Ray Dalio.

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Global Stocks Hit Record on Trade Deal Progress, Vaccine Hopes

Brief: Global equities climbed to a record high on Wednesday, as progress in U.S.-China trade talks and hopes for the development of a vaccine against the novel coronavirus fueled investor appetite for stocks. The MSCI All-Country World Index, which includes both emerging and developed world markets, climbed 0.4% to 581.11, topping a previous high from February. While tensions between the U.S. and China have been rising recently, risk assets rallied after the two countries this week reiterated their commitment to a phase-one trade deal in a biannual review. Massive stimulus injections to boost pandemic-ravaged economies in the U.S., Europe and other major regions are fueling a rally as stocks rebound from the global sell-off through March. Covid-19 cases are rising in some parts of Europe and the U.S. and U.S.-China trade tensions persist, but investors in search of returns have few alternatives to equities. With investors focused on vaccine progress, Moderna Inc. said it’s near a deal to supply at least 80 million vaccine doses to the European Union.

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Coronavirus no Damper for Southeast Asian Private Equity Firms Flush with US$8.7 Billion in Unspent Cash

Brief: While private equity firms’ fundraising activities have been hit by the economic fallout of Covid-19, those in the industry say the pandemic has created opportunities for companies with deep pockets – particularly in Southeast Asia. Singapore-based Ascent Capital Partners has its sights set on Myanmar, where it is looking for investments in tech, education and health care start-ups. The country of 53.7 million has gone from SIM cards costing more than US$2,000 on the black market during the military dictatorship’s rule until 2011, to 80 per cent of the population owning smartphones as of 2018. Having worked with partners to invest a combined US$26 million in local internet service provider Frontiir in June, Ascent Capital has another US$70 million in its pockets. Founder and managing partner Lim Chong Chong said that as the adoption of technology in Myanmar was likely to accelerate, the company wanted to make another investment this year, and two to three more in the next 18 to 24 months – each of at least US$10 million. “Education and health care … are the sectors where our discussions are the most advanced,” Lim said. Private equity firms’ Asia-focused fundraising slumped 44 per cent year on year to US$13 billion in the first quarter of 2020 due to the pandemic, the lowest since the third quarter of 2013, according to a recent Reuters report referencing data from Preqin.

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Hamilton Lane Says Private Equity, Debt to Outperform Post-Covid

Brief: Private equity and credit are set to outperform publicly-traded assets in the aftermath of the Covid-19 pandemic as investors looking to take advantage of market dislocations pile in, according to $68 billion alternative investment manager Hamilton Lane. “Investors have recognized that the greatest periods of outperformance in the private markets relative to public markets are as you’re going through and coming out of a downturn,” Andrew Schardt, the firm’s head of direct credit, said in an interview. Private credit vehicles raised $57 billion in the first half of the year, buoyed by appetite for distressed strategies, according to research firm Preqin. Still, the opportunities has been limited thus far, in part due to the Federal Reserve’s unprecedented efforts to shore up liquidity. Second half earnings may shed light on whether there will be more deterioration that could lead to attractive investments, according to Schardt. “One of the challenges on the distressed side has been that if you’re too early, you’re wrong,” he said. “So it’s a fine line of balancing how you’re going to approach the market and the opportunity recognizing you need to have the capital ready to go, but be patient.” Uncertainty caused by the coronavirus outbreak may end up pushing private-debt dynamics in favor of lenders going forward, Schardt said. The asset class’s longer-term investment approach relative to public debt may also help boost returns as companies struggle to bounce back.

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Commentary: Why Investors Should Scrutinize VC Allocations in the COVID-19 Crisis

Brief: The coronavirus pandemic and ensuing capital markets volatility present a crisis of magnitude on par with prior historic events that have reshaped economies in lasting ways. As we begin to process the impact and reorient to the ongoing market turbulence, this uncertain period provides a valuable opportunity to evolve our ways of thinking and doing business. For investors and CIOs with exposure to venture capital, it means rethinking whether pre-COVID-19 allocation strategies continue to fit this precarious new environment. Heading into 2020, venture capital had never been better capitalized. The size of the industry quintupled in the last decade, according to Crunchbase projections, to $294.8 billion in 2019 from $53 billion of capital deployed into startups in 2008. For good reason, venture capital has provided access to investment opportunities in game-changing companies that have disrupted entire industries. Venture funds have distributed more capital to investors than called since 2012, breaking a prior 11-year streak. But with colossal market participants such as Softbank Group fueling an investment frenzy, capital oversupply led to inflated environments with significant pockets of dislocation supporting valuations that are often not based on a company's fundamentals or ability to drive true equity value.

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York Capital Seeking to Cut 40% of Space in NYC’s GM Building

Brief: York Capital Management is looking to cut about 40% of its Fifth Avenue office space as the pandemic prompts companies to rethink the need to occupy expensive skyscrapers. The hedge fund firm is seeking to sublet about 20,000 square feet of its space at the General Motors Building, according to people familiar with the matter. It currently rents about 50,000 square feet at the trophy property, which sits across from the Plaza Hotel and offers sweeping views of Central Park and beyond. A spokesman for York declined to comment. Wall Street banks and asset managers, among the largest employers in New York City, have been taking stock of their office space as it becomes clearer that many employees will work remotely for the foreseeable future. Commercial landlords, already hard hit by the economic impact of the coronavirus, have seen a slump in demand and lost revenue as some tenants have stopped paying rent. Many firms across industries are looking at reducing their occupancies. Sublease space in the city jumped to 13.6 million square feet in the second quarter, almost 40% higher than last year, according to Savills US. Financial services and insurance firms account for about 15% of new and expected sublets. York Capital, which runs about $18 billion, has about 150 employees over a few floors at the GM Building. The 50-story tower at 767 Fifth Ave. is owned by Boston Properties Inc. It has about 2 million square feet and its front plaza is occupied by an Apple store, adding to the skyscraper’s luster. 

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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 August 25, 2020:

  • In the United States, President Donald Trump defended his government’s handling of the coronavirus pandemic on the first night of the Republican national convention. “When the China virus invaded our country, we launched the greatest mobilization of American society since World War II, said President Trump. Two of the other key profile speakers on Monday night also blamed China – former South Carolina governor Nikki Haley and the president’s eldest son – Donald Jr. Elsewhere in the country, health officials are concerned when/if a vaccine becomes available - who will be the first to receive the vaccine? If a vaccine was approved for American use, there would not be enough doses immediately available for a national campaign. The country’s national vaccine committee is looking to publish a full report on their recommendations within a few weeks, but they are keen to make sure vaccine recipients are selected based on their need, and not their political stripes.

  • As the majority of Canadian children prepare to head back to classes in two weeks, health officials are concerned over the progress in the country’s testing for coronavirus. For instance, in the United States, five saliva-based tests have been approved so far by a government agency. Health Canada has yet to approve one. Researchers and Canadian public health officials have been calling for COVID-19 based saliva tests, saying that asking school aged children to spit into a cup is much simpler and less evasive than the current, uncomfortable nasal swab test. 

  • The United Kingdom government is calling on companies to launch regular workplace testing to test staff for COVID-19 as they return to the workplace and in order to keep the economy going through an expected winter surge in infections. The Financial Times is reporting meetings have been taking place with business leaders and government officials even suggesting some employers could be allowed to stay open even if new lockdowns are introduced, as long as they are conducting regular testing of their staff. The question from the business community is who pays for the testing and if the company is on the smaller scale, can they afford it after already taking a significant hit due to the pandemic? 

  • In order to help curb the spread of COVID-19 in its country, Spain has enlisted the help of the military to bolster their track-and-trace effort. Spain’s Prime Minister Pedro Sanchez said he would make 2,000 soldiers available to help with the government’s tracking efforts. This was also the first news conference the prime minster has held since his summer break. The country’s leader has taken criticism for being missing in action as Spain was experiencing the worst coronavirus rates in Europe over the past two weeks.

  • India continues to be the hotspot for the COVID-19 pandemic, reporting the highest number of new coronavirus cases globally for the 18th straight day. It took the country of 1.4 billion people six months to reach 1.6 million cases, a period in which the government imposed a strict lockdown. However, infections have surged by another 1.5 million in August alone. Despite this, India and its government leaders keep pointing to the comparatively low mortality rate – about 1.84% of cases, compared to the global mortality rate of 3.4% due to COVID-19.

  • The Washington Post is reporting a bizarre occurrence in Brazil. Even with the country experiencing the second most COVID-19 cases in the world, and its leader, Jair Bolsonaro seemingly doing everything wrong along the way, he has never been more popular among his people. According to the polling service Datafolha, President Bolsonaro’s approval rating over the last two months has risen from 32% to 37%, while his disapproval rating has dropped from 44% to 34%. The popularity bump has been attributed to the poorer population and Bolsonaro’s prioritization of the economy. That segment of the population couldn’t survive without working and some have been receiving emergency financial aid, an income they have never seen before. In some cases, the financial aid reached poorer people long before the pandemic did.

Covid-19 – Due Diligence And Asset Management

Hamptons Concert Slammed by Cuomo Raised Only $152,000 for Charity

Brief: Spinning records on that sultry night in the Hamptons: DJ D-Sol, better known as David Solomon of Goldman Sachs. Among the thousands paying up to $25,000 to attend the outdoor concert: the Winklevoss twins, Cameron and Tyler, and the hedge fund mogul Kenneth Griffin. The payoff for the charities that were promised to benefit: all of $152,000. Safe & Sound, as the July event was called, has gone down as the most tone-deaf musical moment of the Hamptons’ Summer of Covid. State health officials launched an investigation after Governor Andrew Cuomo excoriated the organizers and well-heeled revelers for “egregious social-distancing violations.” But the night’s real surprise turns out to be the sums that were raised for charity. To some, $152,000 is very un-Hamptons-esque. This, after all, is where a beachfront estate originally built for the Ford family was recently listed for $145 million. “I never would have gone if I knew how little it would be,” said Daniel Tannebaum, one of the Manhattan residents who’s been spending more time at the beach since lockdown, working remotely for a management-consulting firm. Others find $152,000 a fair amount considering the expenses of putting on such an event, and the scrutiny that has created legal and crisis-management issues as well as potential government fines. “I feel a little sense of relief,” said Southampton Town Supervisor Jay Schneiderman, who was born in Montauk and has lived on the East End full-time for more than 30 years. “I had the fear it would be zero.”

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JPMorgan Will Have Staff Cycle Between Office and Remote Work in a Move that may Remake Wall Street

Brief: With Wall Street preparing for more of its traders and bankers to return to offices next month, a shift underway at JPMorgan Chase may have lasting implications for the entire industry. Workers in the firm’s corporate and investment bank, an industry heavyweight with 60,950 employees, will cycle between days at the office and at home, keeping the ability to work remotely on a part-time basis, according to Daniel Pinto, head of the massive division and co-president of the banking giant. “We are going to start implementing the model that I believe will be more or less permanent, which is this rotational model,” Pinto told CNBC in a Zoom call from London, where he is based. “Depending on the type of business, you may be working one week a month from home, or two days a week from home, or two weeks a month.” The coronavirus pandemic forced Wall Street to send most of its employees home in March, and apart from skeleton crews that never left the trading floor, that is where most of them stayed. Now, banks are preparing for more people to return after Labor Day, according to executives at lenders and technology vendors. At Citigroup, some managers have begun sign-up sheets to gauge demand for a September return, according to people with knowledge of the situation.

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U.S. Bank Profits Down 70% from Year Prior on Coronavirus Uncertainty

Brief: U.S. bank profits were down 70% from a year prior in the second quarter of 2020 on continued economic uncertainty driven by the coronavirus pandemic, a regulator reported Tuesday. Bank profits remained small as firms build up cushions to guard against future losses and business and consumer activity dropped, according to the Federal Deposit Insurance Corporation. Bank deposits climbed by over $1 trillion for the second straight quarter, and the regulator said the industry has “very strong” capital and liquidity levels. Tuesday’s report marks the second straight quarter that banks have seen their profits reduced to a fraction of record levels they experienced in 2019. The FDIC similarly reported a 70% decline in profits in the first quarter of 2020, although industry profits were actually up slightly in the second quarter. Banks continued to set aside huge amounts of cash to guard against future loan losses — in the second quarter firms reported a 382% increase from a year prior in how much they had reserved for potential credit losses.

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Larger Share of Commitments Going to Megamanagers During Pandemic

Brief: Mega alternative investment managers' ever-expanding roster of client types comes at a time when overall alternative investment fundraising has slowed as a result of the pandemic, but has not reduced the percentage of capital committed to the largest funds. Despite the slowdown, the largest managers continue to get bigger. The percentage of capital raised by the largest managers in the first half of 2020 increased. In real estate alone, megamanagers accumulated 75% of the total capital raised in the second quarter and 45% of the aggregate capital raised in the six months ended June 30, Preqin data shows. The pandemic is proving to benefit megamanagers' accumulation of assets at the risk of newer and smaller managers, said David Conrod, co-founder and CEO of placement agent firm FocusPoint International Inc. Managers with existing limited partner relationships are getting capital commitments, he said. It's harder to raise capital with new limited partners during the current pandemic, he said. "Creating new relationships without seeing people in person will take longer," Mr. Conrod said. Meanwhile, investors see their managers seeking capital from new sources.

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Central European Private Equity Firms Hit Lowest Confidence Level Since the Financial Crisis, but They are More Optimistic than in 2008

Brief: Central Europe’s private equity (PE) firms’ confidence hits lowest level since the global financial crisis, as a result of the COVID-19 impact, but deal-doers are more optimistic than during the 2008 crisis, according to the latest Deloitte CE Private Equity Confidence Survey. The confidence index, which has been decreasing since the end of 2017, is now at 62, the second historical lowest after October 2008, when it reached 48. Seven in ten professionals in Central Europe private equity houses forecast a decline in market activity and worsening economic conditions, given that the regional economies, which are largely consumer-driven, are expecting significant GDP contraction in 2020 amid demand shrink caused by unemployment rise. The survey results also indicate a noteworthy proportion of believers in a quick economic recovery, as 13% of respondents actually expect conditions to improve.

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Private Equity Firms Risk Becoming Chief Villains of the Pandemic

Brief: Having been cast as the chief villains of the global financial crisis, the banks have so far avoided serious further damage to their reputations during the pandemic. Instead it is private equity firms that are in danger of sinking lower in the public’s estimation (if that were possible). The industry has scored a spectacular own goal over the issue of government-backed coronavirus bailout loans. Given the level of public suspicion of the industry you might think it was obvious that private equity firms should steer clear of anything that could be viewed as a taxpayer subsidy. It would be asking to be pilloried by the Daily Mail if firms that had piled debt onto their investments in order to minimise their tax bills and maximise their returns then came crying to the government when the going got tough. But that is just what some firms are doing. Worse, the industry is working with the government to find ways around EU state aid rules that would seem to disqualify some heavily-indebted companies from accessing the loans. The predictable result is an outcry in the media including a hostile editorial in the FT and a thundering commentary in the Daily Mail that concluded: “The idea that some morally bankrupt private equity companies — which have for so long made themselves rich at everyone else’s expense — should now benefit from that government largesse is abhorrent.”

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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 August 24, 2020:

  • In the United States, the Financial Times reported the Trump administration is considering bypassing normal regulatory standards to fast-track an experimental coronavirus vaccine from the United Kingdom. The drug in question is a vaccine being produced in partnership by AstraZeneca and Oxford university. The article states one option being explored is to have the US Food and Drug Administration award the UK vaccine, “emergency use authorization”, which would speed up the process. The AstraZeneca study has enrolled 10,000 volunteers, but American government scientific agencies require studies of 30,000 people to pass authorization protocols.

  • Research from a Canadian university is setting off red flags to the numbers we are currently seeing for confirmed COVID-19 cases. The study from Brock University surveyed over 450 Americans ranging in age from 20 to 82. What they found was that 34% of people with the virus had denied symptoms when asked and 55% said they concealed their symptoms on some level. Also found in the study: 25% lied about how much they followed government health protocols and those with COVID-19 were even more likely to lie about it. Doctoral student Alison O’Connor who worked on the study noted, “one of the consequences is the potential difficulty in accurately tracking the pandemic. It reminds us that these numbers and the data are dependent on people telling the truth.”

  • United Kingdom Prime Minister Boris Johnson is calling on parents to allow their children to return to school next week. The resumption of school is seen as critical to the government’s plan of boosting the economy. With children back in school, parents can return to work. The prime minister also seems to have the support of the country’s chief medical officer as Chris Whitty stated over the weekend that children were more likely to be harmed by not returning to school than if they were to catch the virus.

  • As badly as the UK wants children to return to school, a look south towards Germany might show them what lies ahead. The country reported over 2,000 new cases in a 24-hour period over the weekend and over 40 schools in Berlin have recorded infections since reopening after the summer break two weeks ago. Due to the situation, Chancellor Angela Merkel has ruled out any further limiting of coronavirus restrictions, noting that the country is still in the middle of a pandemic.

  • Italy, one of Europe’s hardest hit nations by COVID-19, is launching human trials of its COVID-19 vaccine on Monday. Rome’s Lazzaro Spallanzani institute, a hospital specializing in infection diseases, will conduct the study on 90 volunteers over the coming weeks. If all goes well, the country hopes to have a domestically made vaccine by next spring. Earlier trials on animals had delivered positive results.

  • After seeing a streak of triple digit coronavirus cases for over a week now, South Korea has ordered masks to be in worn in both indoor and outdoor public places in its capital city of Seoul for the first time. The government reported 397 new virus cases on Sunday, the highest since March 7th and are warning that the country is at a risk of a “massive nationwide outbreak”.

Covid-19 – Due Diligence And Asset Management

Real Estate Investors Skip Paying Loans While Raising Billions

Brief: Some of the largest real estate investors are walking away from debt on bad property deals, even as they raise billions of dollars for new opportunities borne of the pandemic. The willingness of Brookfield Property Partners LP, Starwood Capital Group, Colony Capital Inc. and Blackstone Group Inc. to skip payments on commercial mortgage-backed securities backed by hotels and malls illustrates how the economic fallout from the coronavirus has devalued some real estate while also creating new targets for these cash-loaded investors. “Just because a prior investment didn’t work out doesn’t necessarily mean that should tarnish the reputation for future endeavors,” said Alan Todd, head of U.S. CMBS research for Bank of America Securities. “It’s not like something was done in bad faith.” While cutting losers to buy winners is an age-old investment proposition, the Covid-19 pandemic may create even more openings than the past crises that became bonanzas for real estate investors. The mass exodus of Americans from public spaces has hammered already-weak retailers and their landlords, crippled business travel, crushed restaurants unable to fill all of their tables, and sown chaos for office towers whose tenants may never need as much space again.

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Asset Managers Are Still Hurting From the Covid-19 Crash – Even if Stocks Aren’t

Brief: Stocks may be back up, but revenue is down at publicly traded asset managers, according to analysis by Casey Quirk. The Deloitte-owned asset management consultant reported that median revenue fell 6.4 percent in the second quarter among listed traditional asset management firms. Compared with this time last year, median revenue slid 7.1 percent. According to Casey Quirk, this decline was driven in part by investors moving assets to cheaper bond and cash funds amid continued uncertainty about how the Covid-19 pandemic would impact the economy. Fee discounting also contributed, with average realized fees declining 2.2 percent in the second quarter and 3.7 percent year-over-year. “Capital markets are mostly returning to pre-pandemic crisis levels, yet asset manager financials are still feeling the impact from the brief and severe slump earlier in 2020,” the consulting firm said in a statement Monday. Operating margins also continued a “a mostly downward trend” for listed asset managers, according to Casey Quirk. The consultant reported that median margins in the second quarter were 27 percent, compared with 29 percent in 2019.

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FCA Investigates Over 150 Covid-19 Related Scams

Brief: The Financial Conduct Authority (FCA) is investigating more than 150 Coronavirus-related scams since the outbreak began, according to official figures. The data, obtained under the Freedom of Information (FOI) Act by the Parliament Street think tank’s cyber research team, reveals the extent to which financial services organisations and banks have been targeted by financial criminals during the pandemic. The total number of suspected scams reported to the FCA over the last five months is 165. The types of scams that have been circulated during this time include email, phone calls, text messages, letters, and social media.  In one of the scams, fraudsters pretended to be from HM Revenue and Customs (HMRC) and targeted company owners seeking Covid-19 relief grants to help manage their finances throughout the crisis. Other scams included a targeted effort to steal the log-in credentials of HSBC customers with business accounts, and seeking to obtain the passport details of financial services workers. Experts have warned that the rise in sophisticated Covid-19 related scams could leave financial services firms open to the risk of financial crime, especially with increasingly stringent Anti-Money Laundering (AML) legislation in the pipeline.

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MUFG Plans to Offer Covid-19 Bonds to Individual Investors

Brief: Japan’s biggest lender is planning to raise funds from individual investors to help smaller companies and hospitals tackle the Covid-19 pandemic. Mitsubishi UFJ Financial Group Inc. intends to issue sustainability bonds totaling as much as 150 billion yen ($1.42 billion) in September, after receiving requests from retail investors, according to Isamu Murofushi, a spokesman. The pandemic is boosting global sales of notes that aim to help governments, companies and other institutions get through the pandemic. Proceeds of MUFG’s debt sale will be used to help small-to-mid sized companies and hospitals fight the virus impact, as well as drugmakers developing vaccines and medicines, Murofushi said.

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Goldman Says Almost a Quarter of Temporary Virus Layoffs in U.S. to be Permanent

Brief: The rehiring of temporarily laid-off workers will continue to bolster the U.S. labor market’s recovery in the months ahead, but Goldman Sachs Group Inc. expects almost a quarter of those layoffs to become permanent. In the early months of the pandemic, employers shed more than 22 million people from their payrolls. The staggering figure had a small silver lining: the majority of those layoffs were billed as temporary. More than 18 million people were classified as temporarily unemployed in April, the most on record. When state economies began to reopen, the rehiring of many of those workers helped drive the labor market’s rebound in May, June and July. And with more than 9.2 million unemployed still on temporary layoff, “the labor market seems poised for additional large job gains later this year,” Joseph Briggs, an economist at Goldman Sachs, wrote in a research note on Friday. In some ways, the staggering number of temporarily laid off workers could be a tailwind for the recovery. These workers tend to face better hiring prospects, and transitions to permanent unemployment remain relatively low. In fact, Goldman expects rehires to account for most of the 5.6 million net job gains they anticipate later this year.

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An Extremely Niche Column on Asset Management Sales

Brief: Last week, Institutional Investor held a virtual roundtable for healthcare funds. As always, we polled the audience on business practices, portfolio moves, and their expectations for the future. One question focused on the article of dogma that I’ve encountered nearly every day since the East Coast locked down March 12: Allocators will not place capital with managers they had not physically met. Here’s what we asked: “In terms of allocating assets to new managers, what best describes your expectations for an extended Covid-19 travel lockdown?... Contrary to conventional wisdom — and, the data show, the pre-Covid reality — nearly 60 percent of healthcare investors believe that we are about to enter a time where mandates will flow to managers that allocators and consultants have not met in person.

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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 August 21, 2020:

  • In the United States as Joe Biden accepted the Democratic party nomination for president on Thursday night, he used a portion of his speech to take direct aim at current President Donald Trump and his government’s handling of the coronavirus. Biden called the United States response to the pandemic, “by far the worst performance of any nation on earth.” Former Democratic presidential candidate Michael Bloomberg took aim at President Trump saying he downplayed the threat, ignored science and recommended quack cures. Condemnation on the handling of the pandemic also came from the other side of the political aisle as dozens of former Republican national security officials came out in support of Biden, accusing President Trump of spreading misinformation and “wallowing in self-pity”. The president and the Republicans will get their chance to respond next week when they hold their convention.

  • The Canadian federal government outlined their plan on how they will navigate out of their Canada emergency response benefit (CERB) on Thursday. The government will extend the plan by one more month, meaning it will now be in place until September 27th. In its place will be a collection of benefit reforms that will be aimed at helping Canadians through the transition as the economy reopens at a price tag of around $37 billion. Self-employed or gig workers can apply for a benefit of up to $400 a week for up to 26 weeks if they have stopped working or had reduced incomes due to COVID-19. A second benefit will provide 10 days of paid sick leave for any worker in Canada who falls ill and has to self-isolate due to COVID-19. The third benefit will support Canadians who must stay home to care for a child under 12, or another dependent because their school, daycare or the program facility is shut down due to COVID-19.

  • The travel industry in the United Kingdom is calling on the government to stop what they call its “stop-start” strategy of quarantining countries with high COVID-19 rates. Each week the UK government has been revising its travel advice according to changes in the number of infections within certain countries. The government then gives British travellers as little as two days to return from those affected countries if they want to avoid the expected 14-day quarantine once back on home soil. “There is a ridiculousness to [these changes to travel advice] because holiday operators can’t stop-start at the rate that the government can, said the chief executive of an online travel company.

  • The coronavirus epidemic is “out of control” in parts of Spain, according to the director of the country’s Centre for Health Emergencies. This is definitely not welcome news as Spain is now in a race against time before students return to school and citizens back to work next month following the summer holiday season. Figures published by the European Centre for Disease Prevention and Control indicated Spain’s 14-day COVID new case total was about 145 per 100,000 of the population. Apart from the small island nation of Malta, no other European country had a ratio above 100. During that same time period, France’s was 51 per 100,000, while the UK was 21 per 100,000. National and regional officials have blamed the virus resurgence on uncontrolled groups of youths drinking and socializing, along with large family gatherings.

  • A New York Times article is citing a United States intelligence report that top officials in Beijing, China were kept in the dark for weeks in early January regarding the coronavirus. The report says officials in the city of Wuhan and in Hubei Province, where the outbreak began late last year, tried to hide information from China’s central leadership. American officials say it isn’t uncommon for local authorities to withhold information from Beijing and the Chinese Communist Party in fear of reprisal.
  • After securing a deal for a potential COVID-19 vaccine earlier this week, Australia’s Prime Minister wants all 25 million of its citizens to get the potential shot. Prime Minister Scott Morrison said the government would make the vaccine free for its citizens and speaking at a radio station said the vaccine would be “as mandatory as you could possibly make it”. Later in the week, Prime Minister Morrison backtracked slightly, saying he would take measures to “encourage” citizens to be vaccinated. The country’s health minister though seemed to echo the prime minister’s earlier thoughts, stating, “he wouldn’t rule out” making mandatory vaccinations for travellers entering the country, including returning nationals.

Covid-19 – Due Diligence And Asset Management

Fed Has Used Only a Fraction of its Main Street Lending Facility

Brief: The Federal Reserve has used only a fraction of the $600 billion in an emergency lending program for small and medium businesses struggling with the Covid pandemic, according to a congressional watchdog report. Eligible lenders participating in the Main Street program have issued $496.8 million in loans, of which $472 million is Federal Reserve money, or about 0.07% of the central bank’s lending capacity as of Wednesday, according to the report issued Friday. “The Main Street Lending Program has seen modest initial activity thus far,” according to a monthly report from the Congressional Oversight Commission, the panel in charge of overseeing the Treasury Department and Federal Reserve responses to the coronavirus pandemic. “Some of the Main Street Lending Program’s modest activity may be because some businesses accessed the Small Business Administration’s (SBA) Paycheck Protection Program (PPP), while others are able to rely on existing credit lines or other sources of liquidity,” the report said. The watchdog panel noted several other reasons why businesses may not be seeking the funding: only 160 of the 522 lenders registered with the program have publicized that they are accepting loan applications with new customers; businesses are unfamiliar with the program; and that the eligibility rules are complex and may exclude some businesses that wish to participate.

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Wells Fargo Resumes Job Cuts After Pandemic Break

Brief: Wells Fargo & Co resumed job cuts in early August after it paused layoffs in March because of the COVID-19 pandemic, a spokeswoman said on Friday. The lender said in July it would launch a broad cost-cutting initiative this year as the bank braces for massive loan losses caused by the pandemic and continues to work through expensive regulatory and operational problems tied to a long-running sales scandal. Layoffs, branch closures and cuts to third-party spending are on the table, the bank’s executives had then said. “We expect to reduce the size of our workforce through a combination of attrition, the elimination of open roles, and job displacements,” a spokeswoman said in an email, adding that Wells Fargo was working to bring its expenses more in line with its peers and create a company that is more “nimble”. The bank will provide severance and career assistance to affected staff. Big U.S. banks had postponed decisions about staff cuts when the virus outbreak first began to take hold, with executives saying they are unsure how long the outbreak would hurt the economy and worried about being unprepared if business suddenly snaps back.

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NYC Landlords Press Finance Bosses to Speed up Return-to-Work and Save City

Brief: The skyscrapers are mostly empty, the tourists are home and talk of New York’s decay is back. For the city’s real-estate barons, it’s time to put an end to it. A loose coalition of New York’s top property owners and managers is busily working the phones, pressing many of the city’s biggest employers -- including powerhouses like Goldman Sachs, Blackstone and BlackRock -- to speed up the return of workers. Their argument: It’s safe, and the eateries and shops that make Manhattan special can’t hold out much longer. Some are calling it the patriotic thing to do. “I’ve been really pushing the CEOs to bring people back into the office,” said Jeff Blau, the head of Related Cos., the developer behind the Hudson Yards project. “I’ve been using a little bit of guilt trip and a little bit of coaxing.” The reaction for now has been lukewarm. Behind the desperation lies fear of a vicious spiral. The longer commuters stay home, the more local businesses will disappear, and the less reason there is for anyone to return. Executives and firms who’ve made a fortune developing and owning the city’s towers are facing the prospect of a significant slump in demand and prices for offices and residential units. But the ramifications extend to all New Yorkers, Blau said. “I am watching the city decay as nobody is here,” he said. “Now is not the time to abandon the city and expect it to be in the same way you wanted it when you get back in a year from now.”

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REITs Struggle After Landlords Faced Toughest Ever Quarter

Brief: The pandemic has battered real estate investment trusts that focus on retail stores, with Bank of America Corp. analysts calling the second quarter the toughest ever for landlords in the modern era of REITs. Before the outbreak of Covid-19, store closings had been running at a slower pace than in 2019 — but now they’ve almost eclipsed last year’s total with still more than four months to go in 2020, the analysts said Thursday in a research report. The 9,544 of closures that Bank of America has tallied this year compares with 9,670 in all of 2019. The jump in shuttered stores is weighing on real estate investments tied to malls and strip centers. Even with rent collections ticking up last month, mall REITs lost 11.6 percent in the third quarter through August 19, the report shows, while strip REITs tumbled 10.3 percent. “Accelerated bankruptcies and store closings will still push occupancy lower into 2021,” the Bank of America analysts said in the report. “While near term investor focus is on rent collection, we look to leasing activity as a signpost of normalizing conditions.”

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Academics Attack ESG Failure to Outperform During Crisis

Brief: In the aftermath of March’s coronavirus crash, numerous fund managers and data providers determined that companies with high ESG scores outperformed during the rapid sell-off — and a surge of money followed into funds focused on environmental, social, and governance issues. A new academic study, however, raises questions about the link between ESG considerations and stock performance during crises. Researchers from Canada’s University of Waterloo, Tilburg University in the Netherlands, and New York University’s Stern School of Business challenged the “widespread claims by fund managers, ESG data purveyors, and the financial press” that companies with high ESG scores were better situated in the pandemic. In particular, the authors — Elizabeth Demers, Jurian Hendrikse, Philip Joos, and Bauch Lev — cited reports from BlackRock, Morningstar, and MSCI, which all found that ESG funds outperformed during the crash. BlackRock, for instance, reported its sustainable funds achieved better risk-adjusted returns during the first quarter, while 24 of 26 ESG-tilted index funds tracked by Morningstar also outperformedtheir “closest conventional counterparts,” according to the analytics firm.

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Investor Who Scored Big in Coronavirus Rout and Now says Stock Market ‘Environment Presents… Largest Set of Tail Risks We’ve Seen’ in 15 Years

Brief: That is Jeffrey Talpins, the founder of Element Capital, in an Aug. 18 letter to his clients, cited by the Financial Times (paywall), explaining his decision to reposition his $16 billion hedge fund for a potential downturn in the market after an unprecedented rebound in equities in the U.S. and Europe since March. Talpins wrote that “less aggressive fiscal and monetary support” will eventually help lead to a slump from the stratospheric moves that stock benchmarks have enjoyed thus far since March. Bearish investors have pointed to a lack of political will for additional coronavirus relief for embattled American workers and a market that has gotten well ahead of its skis, in terms of equity valuations set against expectations for corporate earnings in the coming months and years. On Thursday, U.S. initial weekly jobless benefit claims rose in mid-August and topped 1 million again, potentially pointing to an increase in layoffs after a summer surge in the coronavirus epidemic or perhaps to more people applying for benefits after President Trump temporarily added $300 in extra federal payouts through a controversial executive order. Despite signs of weakness in the economy, the stock market has been primarily led higher by a handful of technology and e-commerce-related stocks that have enjoyed a boost from the COVID-19 pandemic, helping the broader market defy gravity.

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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 August 20, 2020:

  • In the United States, as students return to college and university campuses, CNN is reporting at least 15 states have academic institutions with positive cases of COVID-19. Some of the universities reporting cases are The University of Notre Dame, University of Georgia, University of North Carolina and the University of Connecticut. It’s not all bad news though. A Trump administration physician overseeing coronavirus testing is seeing new cases declining, which he attributed to safety protocols such as masks and social distancing. According to data, from Johns Hopkins University, cases over the past week averaged about 47,300, down from a peak average of 67,317 on July 22nd.

  • While many countries have been reopening their international borders, Canada has decided to keep its borders locked. The country has three separate orders in place: a ban of foreigners entering from the United States, bans on all other foreigners from visiting Canada – unless travel is considered essential or for work and the third – a 14-day self-quarantine for anyone entering the country. These restrictions in place since March have drawn the ire of travel and tourism groups that argued Canada could have safely reopened its borders. However, with the federal government making a move to postpone parliament until September 23rd after a cabinet shake-up, it doesn’t look like these restrictions will be lifted anytime soon.

  • The United Kingdom updated its travel quarantine restrictions on Thursday. The government’s transport secretary said that travellers returning from Portugal no longer have to self-isolate upon return. However, rules have been reimposed on those returning from Croatia or Trinidad and Tobago. As of Saturday, at 4 A.M. those entering the country from those locales must self-isolate for 14 days with even local walks prohibited. Elsewhere in the country, Barclays Bank figures show financial frauds made against UK customers has increased by two-thirds in the first half of the year. The numbers suggest that criminals seized upon the coronavirus lockdown to steal more from savers, noting the most recent cases being reported are criminals targeting customers looking to earn a better return on their cash.

  • France’s President and Germany’s Chancellor met on Thursday as Europe struggles with a resurgence of COVID-19 cases. French President Emmanuel Macron and German Chancellor Angela Merkel are seen as the leaders of the European block of countries and are trying to come up with a plan to help curtail the latest spread while not delivering another economic blow. On Wednesday, France reported 3,776 new cases, the largest daily increase in three months, while Germany daily infections were 1,000+ for the third day in a row. Despite this, President Macron said, “we cannot shut down the country, because the collateral damage of confinement is considerable.”

  • The World Health Organization’s (WHO) European office said it has begun discussions with Russia in order to try and obtain more information on the country’s touted Sputnik V COVID-19 vaccine. Last week, Russia became the first country in the world to license a coronavirus vaccine, which has already drawn interest from hard-hit countries such as Brazil and the Philippines. However, the vaccine has not yet passed the advanced trials most new drugs go through and although Russian officials claimed the Sputnik V vaccine would provide lasting immunity, they couldn’t provide the proof to back it up. WHO’s Europe director said the agency welcomes all advances in vaccine development but want every vaccine to submit to the same clinical trials.
  • Brazil’s Congress has pushed legislation through to make masks mandatory in closed places like commercial establishments, many workplaces, religious temples and schools. By doing so, the Brazilian Senate and Deputies Chamber overturned President Jair Bolsonaro’s veto on such requirements. The Congress also overturned Bolsonaro’s vetoes of a law that allows the federal government to protect the country’s indigenous people.

Covid-19 – Due Diligence And Asset Management

Money Managers Bracing for Upheaval With Stocks Near Record

Brief: Some of the biggest money managers are vexed by the same paradox troubling everyone else: U.S. stocks are near an all-time high, but the world still seems to be falling apart. Any number of looming threats could bring the historic rally in U.S. equities to a screeching halt, top hedge fund and mutual fund managers said. They include uncertainty over school re-openings, the November elections, tensions with China and the effect of monetary policy on inflation. While the S&P 500 has surged more than 50% from its March low, that happened with unemployment in double digits and the federal government struggling to contain Covid-19. The equity rally also has lifted the index’s price-to-earnings ratio to 26, compared with an average of 18 over the past decade. All of this leaves some market insiders wary of calling this a recovery. “There’s this massive disconnect between fundamentals and markets,” said Brian Payne, investment officer at the Teachers’ Retirement System of Illinois. “There’s just too much capital chasing investments, the Fed is flooding markets and that leverage isn’t going to the real economy. As we approach the election and concerns over a ‘blue sweep’ grow, that could be the inflection point where people’s bullish sentiment turns bearish.” Chris Rokos’s multibillion-dollar hedge fund is modestly bullish in the short-term but sees volatility ahead, as the market underestimates the potential for bigger moves over the next couple of months.

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UBS Revamps Wealth Structure to Free up Billions for Loans

Brief: UBS Group AG is overhauling the legal structure at its key wealth management unit in a move that will cut costs and free up billions of dollars for lending in higher-growth markets. The project -- known as Rigi after a famous Swiss peak -- will see the bank transfer large customer deposits out of its Swiss entity into the bank’s main UBS AG legal unit, people familiar with the matter said, asking not to be identified as the plans are private. The change will allow the bank to boost loans outside Switzerland, the people said. Rigi partially rolls back measures from the 2008 financial crisis, when Switzerland told UBS to create separate legal entities that would be insulated in the event of a surprise bankruptcy. Moving the deposits would help the bank toward its target of lending between $20 billion and $30 billion a year to wealthy clients outside its home market, the people said. “We are making changes to our legal entity structure in order to improve the overall efficiency of the Group,” a UBS spokesperson said in an emailed statement… In the aftermath of the financial crisis, UBS wealth-management clients who held their money in Switzerland, even if they lived elsewhere, had their funds placed at the bank’s ringfenced local entity. Most international clients with deposits in Switzerland will now be under UBS AG. That will spread deposits more evenly throughout the group and is said to satisfy regulators, one of the people said.

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Pandemic Makes Investors Like Hedge Funds Again

Brief: For the first time in years, the plurality of investors plan to put more money in hedge funds, not less. Forty-four percent of hedge fund investors surveyed by Preqin in June said they intended to increase their commitments to hedge funds over the next year — nearly double the proportion from a year ago. This group far outweighs the 28 percent intending to downsize their hedge fund allocations. These findings mark a sharp change from the last four years, when investors were more likely to lower their hedge fund allocations than raise them. “Volatile markets have increased appetite for hedge funds,” Preqin said in its mid-year report on alternative assets. But nearly half of surveyed investors were disappointed by their hedge fund managers’ performance over the last year. Forty-seven percent said their portfolios had performed worse than expected, while just 6 percent reported exceeding them. Despite this, investors were more optimistic about hedge funds than they were about any other alternative asset class. Thirty-nine percent predicted that hedge funds would perform better over the next year, compared to 28 percent who thought hedge funds would perform worse.

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Against Recommendations, Advisors are Spending More Time Playing Portfolio Manager

Brief: Financial advisors have been more involved in managing client portfolios since the spread of the Covid-19 pandemic, according to a new report, even though most probably shouldn’t be. The average team potentially capable of creating custom portfolios for clients has an average of nine people and those practices are often supported by a centralized investment group, according to Cerulli. The majority of wealth management practices lack the personnel to properly manage investment portfolios. More than half of all practices, or 55%, rely on their own investment research and portfolio or model construction. But only an estimated 7% are capable of doing that effectively, according to Cerulli Associates, a Boston-based research and consulting firm. TAMPs, or turnkey asset management platforms, which help wealth managers outsource some or all of their investment management responsibilities, have been (albeit, self-servingly) railing against ill-equipped advisors managing portfolios. “That is not where the business is going. And TAMPs are here to really make the advisors way more valuable to the end client, to the investor,” AssetMark CEO Charles Goldman told RIA Intel about the busy but little-known corner of financial services. But a new survey published Wednesday suggests that advisors are generally not heeding the recommendations of researchers and others. Some are relying even less on third-party model portfolios this year.

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Baillie Gifford Attracts £1bn Inflows in Record Month

Brief: Giant fund house Baillie Gifford saw its highest ever monthly inflows last month as investors piled nearly £1bn into its funds. Morningstar data, published yesterday (August 18), showed £991m was funnelled into Baillie Gifford throughout July in a sign its growth oriented house-style remained in favour with investors. Within their respective categories, many Baillie Gifford funds were among the very top sellers in the month too, as the asset manager’s popularity continued to grow. Philip Milton, chartered wealth manager at Philip J Milton & Company, said the firm’s popularity stemmed from the fact it had called the performance of US tech investments “so right”. He said: “It’s quite easy really. They are to be congratulated, though they are riding the ever extending index and it becomes more dangerous with every point.” Baillie Gifford was an early investor in US technology companies, backing the likes of Tesla, Amazon, Netflix and Alphabet (Google’s parent company) through a number of its funds. Such companies have boomed in the past few years and, more recently, thrived during the coronavirus-induced lockdown while other companies took a beating.

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Convertible Bonds “Thriving” as Coronavirus Caution Looms Over Fragile Market Recovery, says Man GLG

Brief: The convertible bond market is “quietly thriving” in the aftermath of the market shock brought about by the coronavirus crisis, says Man GLG, the long-running discretionary hedge fund management unit of Man Group. Convertibles’ primary market has seen record levels of new issuance this year – particularly in the US - with many first-time issuers entering the fray, while at the same time the asset has cheapened to levels not seen for some years, Man GLG said in a commentary this week. This flurry of activity offers investors “a potentially attractive entry point” into the market, boosting convertible bonds and broadening the opportunity set, according to Danilo Rippa, Man GLG’s head of multi-strategy credit and convertibles, and analyst Chris Smith. After the coronavirus crisis tore through global financial markets, converts are now seen to offer downside risk mitigation, a cheap entry point and improving liquidity, they said. Man GLG’s research noted that during the Q1 market meltdown, global convertibles fell 15.6 per cent, while global equities plummeted 33.6 per cent, with the decline in global convertibles equating to 46.5 per cent the fall in global equities. The subsequent market rally in Q2 saw global convertibles advance 17.5 per cent, as global equities surged 37.5 per cent. As a result, global convertibles were able to capture 46.7 per cent of the move higher in equities.

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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 August 19, 2020:

  • In the United States, Dr. Anthony Fauci, a leading member of the White House coronavirus task force said the understanding of the long-term effects of COVID-19 is a “work in progress”. Dr. Fauci points to the fact that many coronavirus survivors have reported of weeks, spanning into months, of symptoms after the first onset of infection. The common complaints are fatigue, muscle aches, and brain fog, along with some subtle, yet potentially dangerous side effects on the cardiovascular and nervous systems.

  • In Canada, a province once seen as the model in dealing with the coronavirus outbreak, is now experiencing its highest number of active cases since the pandemic began. British Columbia confirmed 83 new COVID-19 cases on Tuesday, bringing the active case total to 775. The country’s third largest province has extended its state of emergency to September 1st and health officials have urged British Columbians to not partake in unsafe parties or large gatherings. There are also a number of contrasts with the latest batch of cases. There is a significant increase in cases from people aged 20 to 40, but hospitalizations have dropped to some of their lowest levels during the pandemic.

  • The United Kingdom’s Office for National Statistics (ONS) says they plan to expand its coronavirus infection survey to five times its current state. As of right now the current sample size is 28,000, but by October the ONS wants to see it expand to 150,000 as the country prepares for a surge of cases in the autumn. So far, the survey has been too small to give strong confidence of its findings other than to signify a general downward/upward trend in infections.

  • Germany, Spain and Italy have all recorded their highest 24-hour increase in new COVID-19 cases in months. Germany reported 1,510 cases, its highest number since May. Chancellor Angela Merkel has blamed the rise on increased travel as people vacationed during the summer, along with more contact between people. Chancellor Merkel called on Germans to stick to regulations in place to help curtail the spread. Spain recorded 3,715 new COVID-19 cases on Wednesday, its highest increase since the end of their lockdown in late June. Finally, Italy recorded 642 new cases in the last 24 hours, which represents their highest increase since May 23rd.

  • Sweden appears to be balking another COVID-19 trend as the country remains one of the few European nations not to recommend using face masks when out in public. The Scandinavian country made headlines earlier in the pandemic for its less restrictive approach to COVID-19 for its citizens, which lead to a high death rate. Anders Tegnell, Sweden’s state epidemiologist said “It is very dangerous to believe face masks would change the game when it comes to Covid-19… face masks can be a complement to other things when other things are safely in place. But to start with having face masks and then think you can crowd your buses or your shopping malls – that’s definitely a mistake.” Tegnell pointed to countries like Spain who adopted a face mask requirement fairly early, but are now seeing a resurgence in cases.

  • Earlier this week, Japan reported that its economy shrunk at its fastest rate on record as they, like so many other countries, battle the reality of the coronavirus pandemic. The world’s third largest economy saw its GDP fall 7.8% from the previous quarter and 27.8% on an annualized basis. The latest data marks the biggest decline since comparable figures were made available in 1980 and slightly worse than what analysts had predicted.

Covid-19 – Due Diligence And Asset Management

Exclusive: Fed’s Bullard – Wall Street ‘About Right’ as U.S. Muddles Through Virus Risk

Brief: A stock market hitting record highs in a pandemic might seem out of touch, but St. Louis Federal Reserve President James Bullard says Wall Street has got it right and he expects the United States to do better than many forecasters anticipate as businesses and households learn to manage coronavirus risks. Though the situation seems chaotic, with federal, state and local officials laying out competing ideas about what activities are safe and under what conditions, Bullard said that shows adaptation in process, and will allow the country to fine-tune behavior and economic activity to what a “persistent” health threat allows. “I think Wall Street has called this about right so far,” he said, noting how firms like Wal-Mart, with its mandatory masking and other rules, have found ways to operate that others will copy. “There is a lot of ability to mitigate and proceed and most of the data has surprised to the upside...So I think we are going to do somewhat better,” Bullard said in an interview with Reuters. “I expect more businesses to be able to operate and more of the economy to be able to run...successfully in the second half of 2020.”

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Pension Giant Says Radical Post-Covid Changes to Hit Investments

Brief: Canada’s largest pension fund says some of the “radical changes” in consumer behaviors enforced during the pandemic lockdown are here to stay. The Canada Pension Plan Investment Board’s thought leadership lab sees permanent changes to consumer behavior as a result of the global pandemic. The era after Covid-19 will be defined by wider adoption of e-commerce among older consumers, as well as by long-term impacts on health-care and privacy policy, all of which will impact investment portfolios, it says. “The world will be different after Covid-19. For long-term investors, this will mean both new risks and new opportunities as we transition to recovery,” CPPIB portfolio managers Caitlin Walsh and Ruby Grewal wrote in the report. Gains in adoption of e-commerce have been patchy, according to the report. While the U.S. and Europe appear to be rapidly catching up to China, not all merchants are reaping the benefits with big players like Amazon.com Inc. and Walmart Inc. having enormous advantages over smaller retailers with more limited selections and unscalable infrastructure, Walsh and Grewal said.

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Top Oil Fund and Exec to Face SEC Action

Brief: The world’s biggest exchange-traded fund tracking oil is facing U.S. regulatory action after it took a series of extreme steps to survive the historic crude selloff earlier this year. The Securities and Exchange Commission has issued the United States Oil Fund ETF, known as USO, with a Wells Notice about the intended measures, according to a filing on Wednesday. The fund was being probed over whether it had adequately disclosed risks to investors after it was forced to dramatically reshuffle the mix of futures contracts it tracked during the market turmoil. That helped protect the ETF, but meant deviating from its past investment strategy. The notice states that the SEC has made a preliminary decision to recommend an enforcement action against the ETF, its Chief Executive Officer John Love and United States Commodity Funds, the company which manages USO. The decision relates to disclosures made in late April and early May. USCF, USO and Love said they intend to vigorously contest any allegations. Judy Burns, an SEC spokesperson, declined to comment. It’s the latest dramatic twist in the story of USO, which was at the center of the storm as crude prices plunged earlier this year. As volatility swept the market, it issued six disclosures in less than two months announcing changes to the fund’s investment strategy, and temporarily halted new share creations -- potentially untethering itself from the contracts it was tracking.

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Why Oaktree is More Conservatively Positioned Than Usual

Brief: Oaktree Capital Management is being more conservative than usual with its credit portfolio — particularly after investors piled back into debt and equity following the government’s emergency support for markets during the pandemic. “We see reason to be cautious,” Armen Panossian, Oaktree’s head of performing credit, and Danielle Poli, who leads the product specialist group, said in the asset manager’s credit report for the second quarter. “It is easy to envision a panic scenario in which these investors are shaken by bad news around economic performance and therefore choose to quickly exit the markets.” Some countries and U.S. states are seeing alarming increases in Covid-19 cases after reopening their economies — with some regions reverting to lockdown, Oaktree pointed out. The firm worries that these “fits and starts” have caused companies to file for bankruptcy and said it expects many industries to see several years of stress as they reassess costs such as real estate. “Liquidity injected into the markets by central banks has allowed investors to look past the ‘valley’ of lost output during the pandemic,” Panossian and Poli wrote. “Today’s pricing of risk assets indicates an expectation for a quick economic recovery.” Oaktree, the Los Angeles-based investment firm cofounded by Howard Marks, is protecting capital in anticipation of market volatility while seeking to reserve capital should buying opportunities suddenly emerge, according to the report. In public markets, that means rotating out of companies and sectors that have outperformed.

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Big Banks Sit on $250 Billion of Murkiest Trades After Covid

Brief: The pile of the murkiest trades at global banks, long the bane of regulators, got much bigger during Covid-19. Lenders including Barclays Plc, Citigroup Inc., BNP Paribas SA and Societe Generale SA reported a surge of more than 20% in their most opaque assets during the chaotic first half of 2020, Bloomberg calculations show. The banks are now sitting on hard-to-value trades that they say are worth about $250 billion, including categories that gained notoriety during the financial crisis, such as complex debt securities. There’s no single, clear-cut explanation for the jump in these so-called Level 3 assets. For some, the surge was a natural consequence of pandemic turmoil: safer assets became difficult to price as markets froze, and risk managers had to shunt them into a different category, according to analysts and people familiar with the situation. Others are likely to have added to their riskiest bets after seeing the potential for a windfall in the chaos, said Jerome Legras, managing partner at Axiom Alternative Investments. “Banks need a little bit of complexity to actually make a lot of money,” said Legras, who oversees about 1.6 billion euros ($1.9 billion) at Paris-based Axiom, including bank debts. “Clearly, there is a link with record profits.” Either way, for many of the lenders, the increase since the end of December was the biggest in half a decade. As European banks don’t report quarterly Level 3 figures, Bloomberg News used six-month figures for comparison.

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U.S. Private Equity Giants Banishes Staff from the Office For 14 Days if they use Buses or Trains, over Coronavirus Fears

Brief: Employees at global asset manager Carlyle Group have been told to avoid public transport when offices reopen around the world. They must avoid public transport on their commute, and if they use public transport over weekends, they should work from home for 14 days, according to one report. Staff are expected to walk, bike or drive to the company’s offices, including in New York and Washington, D.C. as it looks to control the spread of the coronavirus and avoid staff outbreaks. Carlyle Group CG, -0.13% said that returning to its 31 offices globally would be “entirely voluntary” and the measures around public transport were to protect its staff. “Our global policy, which includes encouraging workers not to use public transportation, is designed to protect the health and well-being of every colleague,” it said. “As the situation continues to evolve, we are asking everyone to take an approach that works for their personal situation,” it added. Offices at many of the world’s biggest financial institutions have been near empty throughout the coronavirus outbreak, and many firms are looking at ways to permanently keep staff working remotely to some extent.

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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 August 18, 2020:

  • As millions of students and teachers are planning to head back to classes in just a few weeks, some welcome news might be on the horizon in the United States. Testing has long been a sore spot since the pandemic began in America, but SalivaDirect, a test that doesn’t require specialized supplies and can deliver results in less than three hours could be made available to the public in a matter of weeks. Elsewhere in America, Dr. Deborah Birx, a key member of the White House coronavirus task force, said during an interview on Monday she wishes the country had gone into a stricter lockdown earlier. “I wish that when we went into lockdown (in March) we looked like Italy”, said Dr. Birx. “When Italy locked down, I mean people weren’t allowed out of their houses (without a pass). Americans don’t react well to that kind of prohibition.”

  • The Canadian federal government made some major reshuffling on Monday night into Tuesday with the resignation of their finance minister and the announcement of his replacement. Bill Morneau is out and makes way for Chrystia Freeland, the country’s first female finance minister. Morneau said this would be the best time to let a fresh minister steer Canada through its post-pandemic economic recovery. Conservative opposition, however, sees a different picture – one where Morneau is the fall guy for the recent We Charity controversy (they wanted Prime Minister Trudeau to step down as well) and playing “musical chairs” with the cabinet will not allow the Liberals to overcome the government’s failures.

  • The United Kingdom will scrap Public Health England as an independent agency to make way for a new body responsible for dealing with pandemics and infectious diseases the government announced on Tuesday. Health Secretary Matt Hancock said Public Health England will be merged immediately with the NHS coronavirus “test and trace” program, along with the Joint Biosecurity Centre to form a new National Institute for Health Protection. The move was made as fears grow of the second wave of the pandemic hitting the UK in the autumn or early winter.

  • France has mandated the wearing of protective masks will be required in all enclosed and shared workspaces in the country as of September 1st. What this means is facial coverings will need to be worn in meeting rooms, corridors, changing rooms and open spaces. However, it does not apply to individual private offices. Masks have already been required in enclosed spaces such as shops and even local authorities have begun imposing the rule in the outdoors on busy streets and markets as France has experienced a surge in new COVID-19 infections in recent weeks.

  • Still reeling after the tragic explosion that rocked Lebanon’s capital city Beirut, the country has announced a countrywide lockdown following a surge of COVID-19 cases. The Lebanese caretaker government says the lockdown will go into effect on 6 A.M local time on Friday and last until 6 A.M. local time on September 7th. All private institutions, open markets, commercials companies, tourist facilities as well as restaurants, cafes and nightclubs will be closed. Restoration work and aid distribution to those still in need after the Beirut blast will be exempt from the lockdown.

  • Philippines President Rodrigo Duterte has decided to ease a mild coronavirus lockdown of its capital Manila, along with four outlying provinces. As of Wednesday, most businesses, including shopping malls and dine-in restaurants, along with church services will be allowed to resume with masks and social distancing required. President Duterte had reimposed the mild lockdown two weeks ago for the region of about 25 million people after health officials expressed concern that hospitals were being overwhelmed with COVID-19 patients. The Philippines have reported more than 164,000 cases, along with close to 2,700 deaths.

  • In Australia, an epidemiologist told an inquiry on Tuesday the latest COVID-19 wave that struck Victoria state can be traced back to returning travellers in two Melbourne hotels. Charles Alpern was “99%” sure the outbreak started with a family of four who returned from overseas on May 9th. At the height of the second wave, infections were as many as 725 new cases a day, along with as many as 25 deaths in a 24-hour period. However, there does seem to be some good news with Victoria state reporting their lowest amount of new cases since July 18th.

Covid-19 – Due Diligence And Asset Management

Citigroup and Brigade Square off in Court Over $900 Million Flub

Brief: Brigade Capital Management LP told a federal judge it can’t return $175 million that Citigroup Inc. says it paid as part of a $900 million error because the money went to other funds, while the bank says Brigade is the only one of dozens of lenders that has “flat out” refused to return the money. Citigroup, which sued the money manager on Monday, wired payments to about 40 funds that use Brigade as their investment or collateral manager, and knows Brigade itself isn’t one of the lenders and doesn’t have the money it’s seeking, Brigade said in a legal filing Tuesday. The bank has asked the court to order the firm to return its share of the $900 million it inadvertently wired to Revlon Inc. lenders, some of which are locked in a bitter fight with the struggling cosmetics giant. Citigroup has recouped less than half of the money, which it blamed on a clerical error, and some lenders are refusing to pay, saying Revlon was in default on a loan and should have repaid them anyway, according to people with knowledge of the matter. But at a hearing on Tuesday before U.S. District Judge Jesse Furman, a lawyer for the bank said Brigade is the only lender that has declined outright, while others have given the payments back and Citigroup is in talks with still others.

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S&P 500 Completes Recovery from COVID-19 Sell-Off, Hits Record High

Brief: The S&P 500 index hit an all-time high on Tuesday, completing its recovery from the stock market crash after the onset of the coronavirus crisis in February. The index was up at 3,394.99 points at 09:48 a.m. ET, topping the high of 3,393.52 hit on Feb. 19 and further underlining the disconnect between a rally driven by trillions in official stimulus and a recession-hit U.S. economy. The tech-heavy Nasdaq Composite in June was the first of the three major U.S. stock indexes to reclaim record highs as investors gravitated to stocks including Amazon.com and Netflix seen as stay-at-home winners from COVID-19 lockdowns. It has taken the benchmark S&P 500 about two months longer as surging COVID-19 cases sparked fears of another round of shutdowns that would again cripple business activity. On the day, the S&P 500 gained 0.4% putting it up about 55% from March’s lows. The Nasdaq gained 0.6% to hit a record high and the Dow Jones Industrials, which is still about 6% off its February highs, added 0.1%.

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Pimco, Amundi and BlueBay Stand by Big Bet on CoCos in Pandemic

Brief: Managers from Pacific Investment Management Co., Amundi SA and BlueBay Asset Management LLP are sticking with, or even adding to, bets on banks’ CoCos, after prices of the bond-stock hybrid whipsawed during the pandemic. Initial fears about the economic wreckage wrought by the coronavirus sent prices into free-fall in March, pushing yields close to a record 15%, according to a Bloomberg Barclays index. Since then the bonds, which are also known as Additional Tier 1 debt, have recovered to about 5.6%, rewarding portfolio managers that bought more of them during the market volatility. The securities’ appeal lies in their higher-than-average interest to compensate investors for the risk of holding notes that stand first in line for losses if the issuer goes bust. In an era of central bankers keeping growth on life support with base rates at, or even below, zero, more investors are prepared to consider buying them. At the same time, they’re not as risky as they once were. A decade-long drive by banks to build up capital buffers to absorb losses after the 2008-2009 financial crisis, has also attracted investors. “AT1s of European banks still look incredibly cheap,” said James MacDonald, a co-manager of BlueBay’s $1.16 billion Financial Capital Bond Fund, which invests in the bonds. “Banks have become much safer since the previous crisis, and that’s not fully reflected in spreads yet.”

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Starboard Seeks up to $345 Million for Blank-Check Company

Brief: Jeff Smith has become the latest activist investor to go on the hunt for a mystery company to acquire Smith’s Starboard Value launched a blank-check company Tuesday, and said it plans raise as much as $345 million to buy and fix up a company, leveraging its experience as an activist investor. Starboard Value Acquisition Corp. will seek to raise $300 million by issuing 30 million units at $10 apiece, according to a filing. The value may increase by $45 million if underwriters exercise an over-allotment option, the filing shows. The firm is following at least two other activist investors into the space. In July, Bill Ackman’s Pershing Square Capital Management raised $4 billion for a blank-check company. Dan Loeb’s Third Point launched one in 2018 and agreed to acquire payment provider Global Blue -- despite revising the terms of the deal in the wake of the Covid-19 crisis. Blank check companies, also known as special purpose acquisition companies, or SPACs, raise money on the public markets to make a purchase within a set period of time, usually about two years. They don’t identify a target until shares are trading.

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Hedge Funds Missed out as Small Vaccine Companies Surged

Brief: Even as hedge funds have increasingly invested in large vaccine developers since Covid-19 shut global economies in March, they’ve mostly sat on the sidelines as the stocks of small and mid-cap companies working on a vaccine rallied by more than 1,000 percent this year. Although hedge funds clearly missed out on a big opportunity, their lack of exposure to these stocks may also be a healthy show of restraint, according to Jon Caplis, CEO of hedge fund research and analytics firm PivotalPath. The research firm’s index of small and mid-cap vaccine developers has increased 1,191.1 percent this year through July. Hedge fund managers told PivotalPath that valuations of these stocks have been too high given that in the end there will be very few companies that win the vaccine race. Caplis said the intelligence he’s gotten from hedge funds has been consistent. Back in April and May, they said that the stocks had rallied so much that there was a lot of downside risk in betting on any one company’s success. PivotalPath’s quantitative analysis also showed that hedge funds held a negligible amount of these stocks.

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Schroders to Allow Home-Working Post-Covid

Brief: London-based asset manager Schroders has permanently embraced flexible working across its business. In a statement issued today, Schroder said that the move will allow employees to adopt working practices that “best meet client responsibilities, business requirements and their individual working patterns, while also ensuring that we still have face-to-face interaction to maintain our culture of collaboration, innovation and strong productivity”. The statement added that Schroders continues to see many benefits in people coming to the office and “this will remain an important part of our approach to flexible working”. Emma Holden, Schroders’ global head of human resources, said: “Schroders embraced flexible working long before lockdown and the investments we have made in remote-working technology over the years meant our business has not missed a beat since March. "But in the space of a few months, we have made 20 years progress in attitudes towards flexible working, and we are going to continue with this momentum.

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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 August 17, 2020:

  • In the United States, a CNN report says that COVID-19, a disease that didn’t exist a year ago, now ranks third for the cause of death in America in 2020 (170,000+ have died from complications due to COVID-19). Health experts are now concerned over what they see as decreased testing in large parts of the country just as students are either returning or getting ready to go back to school in a matter of weeks. Fifteen states conducted fewer test this past week, compared to the previous week and the positivity rates are still higher than the recommended 5% in more than 30 states, according to Johns Hopkins University.

  • In Canada, federal officials held a news conference on Monday to say a series of cyberattacks over the weekend that compromised the personal information of thousands of Canadians has been brought under control, with websites back up by Wednesday. However, the cyber attackers were able to obtain previous hacked usernames and passwords to acquire approximately 9,000 of the 12 million active accounts for the Canada Revenue Agency (CRA) and GCKey, a secure online portal that allows Canadians to access services such as employment insurance, veterans’ benefits and immigration applications. The CRA’s website has become a key tool for many Canadians applying for and gaining access to the financial support relating to the COVID-19 pandemic.

  • The United Kingdom’s Institute for Public Policy Research (IPPR) is saying 2 million jobs in the country are in jeopardy if the government cuts off the coronavirus jobs support program too early. The government’s furlough scheme is set to end in October with the IPPR stating three million workers will be still be relying on the plan when the time rolls around. The IPPR believe two-thirds of those worker’s roles would be sustainable if the help was extended into 2021. However, the government insists the plan that has cost £35 billion pounds so far, can’t stay indefinitely due to the high price tag.

  • In France, the government is sending riot police to the Marseille region to help enforce mandatory mask wearing after scattered incidents of violence have been reported of people refusing to do so. A government spokesperson said 130 police are being sent to the Marseille region with the country reporting 3,015 new cases on Sunday, one of the highest spikes since France lifted its two-month lockdown back in May.

  • Starting today, Italy has reinforced some measures on nightlife and entertainment activities as fears of overly relaxed attitudes to COVID-19 have emerged. Nightclubs will be closed, and face masks required at night, even at outdoor venues until next month as new cases have doubled recently, while the average age of those infected has dropped below 40 years old. Vacationers and club owners have protested against the decision saying the government are discriminating against their business and young people, which could lead to €4 billion in lost revenue.

  • South Korea has urged the residents of Seoul and surrounding areas to avoid travelling for two weeks as health officials try to curb the worst outbreak in the country in over five months. The restriction would curtail the movements of about half of the country’s 52 million people. The reduction of travel comes along with the closure of some public spaces and reductions in the size of school classes and religious gatherings as the new cases have been linked to markets, churches and retail chains. The Korea Center for Disease Control on Sunday reported 279 new cases.

  • New Zealand will be delaying their national elections for four weeks after experiencing a recent outbreak in Auckland, their capital city. Prime Minister Jacinda Ardern made the move on Monday, delaying the national election until October 17th. It was originally supposed to take place on September 19th. Prime Minister Ardern had the option of postponing the election under New Zealand law for up to two months, but said she wouldn’t consider delaying the election again no matter what was happening with any virus outbreaks.

Covid-19 – Due Diligence And Asset Management

Most Companies Plan to Give Raises and Bonuses in 2021: Survey

Brief: The coronavirus crisis has hurt earnings, spending, and caused never-before-seen unemployment levels in the U.S. But a new survey from advisory firm Willis Towers Watson finds that most companies are planning to give employees raises and bonuses next year. Willis Towers Watson surveyed U.S. industries about their 2021 compensation plans and found that companies are projecting salary increases of 2.8% on average — across all levels of employees, hourly and salaried. According to the survey, this year saw a 2.7% increase, slightly below the projected 3%. The standard over the past decade has been around 3%. This year 14% of companies elected not to plan pay increases, and many industries are tightening their belts this year. The financial services industry, Reuters reports, expects to see bonuses slashed and job cuts with only investment bankers doing well as companies scramble to raise money. However, Willis Towers Watson's findings indicate that only 7% of companies plan to forgo raises next year, which the company calls "an indication that many organizations are projecting a turn toward normalcy in 2021…

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Mark Mobius: Biden-Harris Win Will Be ‘Disastrous’, Trump Will Boost Stock Market

Brief: A Joe Biden and Kamala Harris victory in the US presidential election will be “disastrous”, veteran investor Mark Mobius has warned. Mobius, who left Franklin Templeton after more than 30 years in 2018 to set up Mobius Capital Partners, told Financial News that US President Donald Trump’s stance of lifting coronavirus lockdowns will kickstart economic recovery. “It [a Biden-Harris win] would be disastrous,” said Mobius. When asked whether a Trump win would boost the stock market, Mobius said: “Yes, definitely. His goal is to get people back to work, reduce unemployment and generally boost the economy.” Trump is somewhat losing ground to Biden, the former US vice president. Fifty per cent of US registered voters say they would vote for Biden if the election were held now, while 41% back Trump, according to the latest Wall Street Journal/NBC News poll. The coronavirus crisis has battered the world’s largest economies that froze into lockdown over the past couple of months. Last week, the UK stumbled into the “largest recession on record” because of the pandemic, which has killed nearly 47,000 people in the country. “Unless they [Britain] are able to end the shutdown policies and also end the erratic policy moves, the recession will continue and economic recovery will be difficult,” Mobius said. Meanwhile, the US economy shrank at a 32.9% annual rate between April and June — the country’s deepest decline since the government began keeping records in 1947.

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Former KKR Dealmaker Launches Healthcare-Focused Buyout Firm

Brief: Jim Momtazee, a former dealmaker at U.S. buyout firm KKR & Co Inc (KKR.N), has launched his own firm to pursue private equity deals in the healthcare sector. Momtazee, who spent 21 years at KKR and led its Americas healthcare team for a decade, said in a statement he formed Patient Square Capital together with Maria Walker, a former partner at consulting firm KPMG. The move comes as the outbreak of the novel coronavirus has strained some healthcare providers, while spurring growth in some sectors such as telemedicine and vaccine production. Patient Square Capital plans to look for deals across the healthcare industry, including technology-enabled services, biopharmaceuticals, the pharmaceutical value chain, medical devices, diagnostics, providers, digital health and consumer health, the statement said. “We’re going to be broad-based in our focus on all aspects of healthcare, bringing depth of knowledge, scale, expertise, and long-term view to our investments,” Momtazee told Reuters in an interview. Prior to leaving KKR last year, Momtazee worked on some of the buyout firm’s biggest healthcare deals, including the $33 billion take-private of U.S. hospital operator HCA Healthcare Inc (HCA.N), as well as the acquisition of contract research firm PRA International for $1.3 billion in 2013.

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Commentary: From COVID-19 to Climate Change, Fed Must Act to Address Systemic Risks

Brief: In mid-July, investors representing nearly $1 trillion in assets joined with a bipartisan group of former legislators, regulatory agency heads, investors and other leaders to call on the Federal Reserve and other financial regulators to address and act on climate change as a systemic risk. They wrote: "We call on you to immediately consider whether decisions being made right now could inadvertently exacerbate the climate crisis. Additionally, we ask you to implement a broader range of actions to explicitly integrate climate change across your mandates. Such actions are needed to protect the economy from any further disruptive shocks." The ongoing response to the COVID-19 pandemic has underscored the critical importance of financial regulators — particularly the Fed — in keeping the economy stable and resilient in the face of systemic disruptions. Yet, as the Fed has pumped trillions of dollars into keeping our markets afloat through efforts like the Main Street Lending Program and by broadening the tent of corporate bond purchases, there are growing questions about the climate impacts of these decisions and the embedded financial risks that they expose our markets to.

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A Crisis is Coming, and Americans are Woefully Unprepared

Brief: America is in bad shape. While the rest of the world seems to be moving past the Coronavirus, the US is still experiencing record deaths nationwide. Americans continue to struggle just to get bills paid, while Washington debates semantics surrounding mail-in voting. The disconnect between Main Street and Wall Street continues to grow larger, to the point that when (not if!) the stock market bubble pops, it will be nothing short of disastrous for the large majority of the population. Let’s start with what we know. President Trump recently signed four executive orders aimed at Coronavirus-related economic relief. Most notable are the orders that extend unemployment benefits and the federal eviction moratorium. Firstly, Trump’s unemployment order specifies USD44 billion in funding to extend enhanced unemployment benefits to a USD400 weekly payment for those already collecting state benefits. How soon this will be implemented or how many people stand to benefit remains unclear, as states must both request the assistance and have a system in place to deliver it. There are a myriad of issues concerning this requirement, most important being the fact that state systems are objectively not prepared for the volume that such benefit distribution would entail. Associations representing states have estimated that it will take at least five months to enact changes of this scale.

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GMO: The Market Looks Like Wile E. Coyote

Brief: The U.S. stock market looks like “Wile E. Coyote, running off the edge of a cliff,” according to asset manager GMO’s James Montier. According to Montier, the U.S. stock market has priced in all the good news it possibly can, which suggests little upside for value investors right now. This is a reversal from his and colleagues’ previously bullish position on the markets in March. “There is no margin of safety in the pricing of U.S. stocks today,” Montier, who works in asset allocation at GMO, wrote in a new white paper, adding that the U.S. stock market “appears to be absurd.” The rally narrative is that investors are linking the Federal Reserve’s balance sheet expansion and the equity markets, Montier wrote. By performing quantitative easing, the Federal Reserve would lower the bond yield, and as a result, drive up the stock market, as the thinking goes. Montier is skeptical, however, of a “clear link” between bond yields and equity valuations. Quantitative easing hasn’t previously lowered bond yields. He pointed to 10-year bond yields during three recent quantitative easing programs: January 2009 to August 2010, November 2010 to June 2011, and September 2012 through October 2014. During each of those time frames, yields rose.

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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 August 14, 2020:

  • Fresh off naming his vice-presidential running mate, United States Democratic Presidential nominee Joe Biden is calling on governors to implement mandatory mask mandates for the next three months. Biden, along with his running mate, Kamala Harris said by state leaders adopting these measures, wearing masks into the fall season could save up to 40,000 American lives. With over five million total cases and 167,000+ deaths due to the coronavirus, the pandemic has become the key focus in Democrats minds come the November election. In response, President Donald Trump said Biden and Harris shouldn’t be using the coronavirus as a political tool.

  • In Canada, the federal government announced on Friday that the land border with America will be closed for another 30 days until September 21st. The closure has been in place for months now, restricting traffic to essential workers. Although if they so choose, Canadians can still fly to American destinations, albeit a need to quarantine for 14 days upon returning. Elsewhere in the country, top health officials have laid out their plan for the upcoming fall season, and the prospects of the feared second wave. The Public Health Agency of Canada is hoping for a “slow burn” scenario for the upcoming season with the number hopefully remaining low enough not to cause the health system strain with an influx of patients.

  • United Kingdom residents hoping to enjoy some much-needed vacation, are now scrambling after Prime Minister Boris Johnson announced British tourists will be facing a two-week quarantine if they don’t return by Saturday at 4 AM from specific locales. The destinations added to Prime Minister Johnson’s list are France, Netherlands and Malta, which has affected hundreds of thousands of tourists who don’t want to face the prospect of being isolated at home for 14 days. The news sent travel stocks tumbling and the French government calling the move “regrettable” while indicating it will respond in kind, but without giving details.

  • The reason the UK made the snap move to a quarantine with France is because the country is making moves to help curb localized spreads of the virus. The French government declared tourist hotspots Paris, Marseille and its surrounding areas as high-risk zones for the coronavirus. Doing so grants local authorities’ powers to help stop the spread of COVID-19. On Friday, France reported more than 2,500 new cases for the third day in a row, which are levels last seen in mid-April when the country was in the midst of lockdown restrictions.

  • Experiencing the fastest growing resurgence of coronavirus cases in Europe, Spain will close all discotheques and cocktail bars, and will limit smoking in public spaces to help stem the current surge. The country’s health minister made the announcement on Friday, along with restaurants and other bars not being allowed to admit customers after midnight and needing to close by 1 AM. Spain reported nearly 3,000 new cases on Thursday, their highest total since April.

  • Australia is seeing a glimmer of hope of slowing down their second wave after Victoria state recorded their lowest single day rise in new cases in more than three weeks. Victoria state recorded 278 new infections on Thursday, down from 410 the previous day. The news is welcome after earlier in the week, the country confirmed 21 deaths in one day due to COVID-19, their deadliest day so far during the pandemic.

  • The news isn’t as good in neighbouring New Zealand, as they have extended the lockdown of their largest city for another 12 days. Friday was supposed to be the day Auckland’s temporary lockdown was released, but with the outbreak now growing to 30 people and outside the city borders, Prime Minister Jacinda Ardern made the move saying the extension will give health authorities time to get a handle on the cluster and isolate those infected.

Covid-19 – Due Diligence And Asset Management

CBI President Who Got Coronavirus: ‘Firms Should Test Staff for Covid-19 Every Week’

Brief: All UK companies should test staff for coronavirus every week in order to bring more people back to their offices, according to the boss of one of the UK’s most influential business lobby groups. Karan Bilimoria, the president of the Confederation of British Industry - the body which represents 190,000 businesses, together employing nearly seven million employees - told Financial News that the government should offer free Covid-19 testing to the UK’s entire population. The move would encourage more people back to the workplace, and help spur a recovery in the UK economy which plunged into its largest recession on record this week. “Even if the government offered free testing to every member of the population of a country of 66 million people every two weeks, that would be a fraction of what we're spending on all these other [coronavirus] measures,” Bilimoria, who is also the founder and chairman of Cobra Beer, told FN. The UK government has so far spent nearly £190bn to deal with repercussions of the coronavirus crisis, according to Treasury figures from July.

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Saudi Wealth Fund is Said to Repay $10 Billion Bridge Loan

Brief: Saudi Arabia’s sovereign wealth fund has paid back a $10 billion bridge loan two months ahead of schedule, according to people familiar with the matter. The Public Investment Fund has fully repaid the loan, which was due in October, the people said, asking not to be identified because the information is private. It had signed the loan last year to raise funds while it waited for the proceeds of the sale of its nearly $70 billion stake in Saudi Basic Industries Corp., which closed in June. Saudi Arabia has been pushed into a deep budget deficit by the coronavirus pandemic and oil-price slump, forcing the kingdom to hike taxes and increase the government debt ceiling to 50% of economic output. The PIF is a key part of a plan by Crown Prince Mohammed bin Salman to transform the economy and wean it off a reliance on petroleum revenues. A group of 10 banks provided the loan: Bank of America Corp., BNP Paribas SA, Citigroup Inc., Credit Agricole SA, HSBC Holdings Plc, JPMorgan Chase & Co., Mizuho Financial Group Inc., Mitsubishi UFJ Financial Group Inc., Standard Chartered Plc and Sumitomo Mitsui Banking Corp. A spokesman for the PIF confirmed it had been repaid ahead of schedule, without providing further details.

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Corporate Funds Face Higher Liabilities due to COVID-19

Brief: U.S. corporate defined benefit plans face higher liabilities in the coming months as the impact of the COVID-19 pandemic becomes apparent, according to a report from Moody's. The report released Thursday is one of a series of in-depth sector reports from the credit agency and says rising pension liabilities will put more pressure on cash flow in sectors hardest hit by the pandemic, particularly in the airline and auto industries. With discount rates plummeting to what Moody's said is an all-time low of 2.26% as of July 31, the 50 companies with DB plans sampled by Moody's will see their adjusted debts rise by $120 billion. The report also said that while the CARES Act provides some short-term relief for corporations with DB plans, the help is limited. The Coronavirus Aid, Relief and Economic Security Act, signed by President Donald Trump on March 27, provides companies the option of a one-year holiday from making 2020 pension contributions, with interest accrued, until Jan. 1, 2021.

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Private Equity Sees Late July Mini-Boom as Funds Gear up for ‘New Normal’

Brief: Private equity deals saw a late-July surge and whether this is part of a recovery or due to a backlog of deals that were impossible to close in April, May or June, EY Global is advising funds to make adjustments for the post-COVID world now to capitalize on the moment. To that end, Andres Saenz, private equity leader on EY Global’s markets leadership team, said the need to carry out a full-swing overhaul to step up digital transformation and rethink investments under the “new normal” are now part of nearly every conversation held with investors. Currently, there is US$2.6tn in “dry powder” private equity capital globally ready to release and a pool of private limited partners eager to the pull the trigger on investment as economies begin to exit the pandemic’s initial shock. Saenz was speaking Wednesday during Mexico’s annual private equity event, hosted virtually by Amexcap, which groups 120 member private equity funds with total committed resources of US$60bn, of which 54% has already been invested in projects and companies in sectors such as energy, infrastructure and real estate.

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Companies Shift Emerging Tech Investments Amid COVID-19

Brief: In the immediate wake of COVID-19, Global 2000 companies moved to slash funding for emerging technologies, such as automation, artificial intelligence (AI), blockchain, and 5G, according to new KPMG International research. However, many executives are optimistic emerging technology spending will likely increase in the next 12 months, as enterprises recognize COVID-19 creates a burning platform to accelerate digital transformation and stimulate long-term growth. Enterprise reboot, a new report from KPMG International and HFS Research, surveyed 900 technology executives* to explore the current and future state of emerging technologies and demonstrates a dramatic shift in how businesses are approaching emerging technology now versus just a few months ago before the onset of COVID-19. “This crisis isn’t affecting all industries equally, but for many of the industries facing crisis, managing the transition to a digital business model is imperative. However, doing so is made more complicated in a time where investments are critical, but cash must be preserved,” said Cliff Justice, KPMG global lead for Intelligent Automation and US lead for Digital Capabilities. Specifically, 59 percent of executives surveyed say that COVID-19 has created an impetus to accelerate their digital transformation initiatives, yet approximately four in 10 say they will halt investment in emerging technology altogether as a result of COVID-19.

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Wall Street’s Buyout Titans Have Been Sitting out the Credit Boom

Brief: Amid one of the greatest credit booms ever, a key player in the financial world has been conspicuously absent. Private equity firms that would usually jump at the chance to go on a debt-fueled buying spree are only just tip-toeing back to the market. In theory, business should be flourishing. Borrowing rates are close to record lows and investors are gorging on everything from rescue loans to shareholder payouts due in large part to historic support from the Federal Reserve. Banks are also ready to open the checkbooks after selling billions of dollars of debt for buyouts and acquisitions they feared they’d be stuck with as credit markets froze in March. Yet sponsors that slammed the brakes on deals, citing too much uncertainty on how long the coronavirus outbreak will last, have been sitting it out until now. “Two months ago, most of our clients who would have been thinking about acquisition financings, whether they’re corporate or sponsor, were tending to their own existing portfolios,” said John McAuley, head of North American leveraged finance at Citigroup Inc. “Now these companies and sponsors are looking at the opportunity set and being more proactive.”

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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 August 13, 2020:

  • In the United States, the director for the US Centers for Disease Control and Prevention is calling on Americans to do four simple things to battle the coronavirus: wear a mask, social distance, wash your hands and be smart about crowds. Not following these recommendations, Dr. Robert Redfield warned could make this, “the worst fall, from a public health perspective, we’ve ever had.” Dr. Redfield said in addition to the four protective measures, people should also get a flu vaccine. Elsewhere in the country, the number of Americans applying for state unemployment fell below one million for the first time since the pandemic began in March. The total number of Americans claiming employment benefits decreased to 15.5 million in the week ending August 1st, the lowest since early April.

  • In Canada, an anti-vaccination advocacy group has filed a lawsuit in an Ontario based court against the country’s pandemic response measures. Vaccine Choice Canada, and seven individuals filed the legal action stating compulsory face masks, the closure of businesses and the enforcement of physical distancing infringes on their rights as outlined in Canada’s Charter of Rights and Freedoms. The plaintiffs are suing the governments of Canada, Ontario, City of Toronto, and media organization CBC, as well as several other entities.

  • A major antibody study in the United Kingdom has found around 3.4 million people, or 6% of the population have contracted the coronavirus. The survey of 100,000 people – which the government says is the biggest of its kind in the world suggested the extent of the outbreak varied widely between different areas and population groups. For instance, in London, 13% of people had antibodies (double the national average) while people from the Black, Asian and other minority ethnic groups were among the most likely to be infected.

  • Italy’s Prime Minister Giuseppe Conte and several other ministers have been formally told by prosecutors that investigations into the government’s response to the coronavirus pandemic were opened. Judicial sources have confirmed prosecutors have investigated the ministers on accusations including manslaughter, creating a pandemic, and curbing Italians’ political rights. However, Prime Minister Conte’s office released a statement that the Rome-based prosecutors have concluded that the accusations were groundless, and the case should be dropped.

  • Just over a week after an explosion rocked Lebanon’s capital city, the country is overwhelmed with COVID-19 cases. According to the World Health Organization (WHO) 11 foreign medical teams in Beirut summoned to help with the aftermath of the blast, had to change course and instead try to help contain the coronavirus. The devastating explosion left three major hospitals unable to function, along with more than two dozen clinics.

  • After India added close to 1,000 deaths due to the coronavirus in the last 24 hours, the country has now surpassed the United Kingdom for fourth most deaths in the world. India now only trails the United States, Brazil and Mexico for the overall number of deaths, while their 2.4 million cases has them behind only the U.S. and Brazil. Bloomberg is reporting the country’s epicentre for the virus has also shifted; from the major cities of Mumbai and New Delhi to the country’s outskirts, where most of the population lives and medical infrastructure is notably weaker.

  • The Philippines have officially signed up for Russia’s Sputnik V vaccine. President Rodrigo Duterte’s spokesman declared on Thursday that trials of the vaccine would begin in October and if they were successful, the Sputnik V would be registered for public use by April 2021. The spokesperson also said President Duterte would be administered with the vaccine by May 1st at the earliest, thus confirming a statement the outspoken leader made earlier in the week that he would be one of the first people to be injected with the potential cure.

Covid-19 – Due Diligence And Asset Management

Brookfield Raises $23 Billion, Expects to Ramp Up Pace of Deals

Brief: Brookfield Asset Management Inc. said it raised a record $23 billion during the second quarter and expects to accelerate the pace of investments after the disruption caused by Covid-19. The Toronto-based alternative asset manager said it has $77 billion in cash, securities and other available capital, including uncalled capital commitments from clients. That figure includes $12 billion raised in its latest distressed debt fund by its Oaktree Capital Management unit. When that fund is closed, it should be the largest ever raised for distressed debt investing, Brookfield Chief Executive Officer Bruce Flatt said in a letter to shareholders. “While we do not expect full recovery of the global economy until well into 2021, we believe the worst is over, and our own businesses are slowly recovering,” said Flatt. “We have been keeping our powder dry, waiting for opportunities we believe will come.” Flatt said that while the quarter was busy for raising capital, its three flagship funds are now 50% committed and that the firm expects to start raising money again for their next vintages in 2021. “We are being patient with our capital, but we expect the pace of investment to increase over the next 12 months as opportunities present themselves,” Flatt said.

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Lockdown Lands Domestic Abuse on British Financial Sector Radar

Brief: Some of Britain’s biggest financial and legal firms have stepped up support for staff and customers suffering domestic abuse after the coronavirus lockdown shed new light on the scale of a problem affecting millions nationwide. Legislation now progressing through parliament suggests this is costing Britain 66 billion pounds ($86 billion) a year, with official figures estimating around 2 million people, mainly women aged 16 to 74, suffer some form of domestic abuse. The Domestic Abuse Bill will introduce a statutory definition that includes physical violence but also emotional, coercive and economic abuse, after extensive lobbying by the charity Surviving Economic Abuse and the financial sector. As the coronavirus pandemic forces millions to work from home and calls to helplines surge, Lloyds Banking Group (LLOY.L) and NatWest Group NWG.L have teamed up with charities SafeLives and Surviving Economic Abuse to offer financial as well as practical aid to victims. And with remote working increasing social isolation, some firms are also striving to help staff.

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State Street Doubts Economy Survives Without Covid Treatment, or Vaccine

Brief: State Street Global Advisors thinks that the economy can only outlast and outwit the new SARS coronavirus for so long. It’s going to take agreed-upon medical treatments greenlit by the FDA, or a vaccine, to put this pandemic to bed. “It will be challenging to sustain investor confidence through the end of the year unless (there is successful) development of a vaccine or an effective, scalable medical treatment...so that the most vulnerable populations can benefit by the end of 2020 or early 2021,” says State Street Global Advisors global CIO Richard Lacaille. “There will be no complete recovery without a medical solution to Covid-19.” He defines the recovery stages in three phases, with the first two all backstopped by unprecedented global stimulus from Treasury and central banks everywhere. We are now in phase two. For phase two to be successful, lockdowns have to be lifted, meaning restrictions have to be removed. The longer restrictions remain, the longer doubts remain; and the longer doubts remain, the less likely it is that businesses will rehire and reinvest. Foreign investors in the U.S. would also cash out if this continues.

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Banned From Travel, Allocators Lean on Relationships – And Sneaky Office Trips

Brief: An outdoor lunch meeting felt like a major event recently for venture capitalist and former endowment chief Carrie Thome, even though, as she joked, their only exposure was eye contact. Months in the pandemic, institutional asset management remains in effective lockdown. Consultants — perhaps the top road warriors of all — were banned from work travel by company edict as of mid-July, a sampling told Institutional Investor recently in a private poll. Two-thirds of pension funds, endowments, foundations, and other allocators’ offices remained totally closed. Even among those allowing some staff in, all but a handful had strict capacity restrictions in place. A few executives — those with keys and young families at home — have guilty confessed to sneaking into their officially shuttered offices, just to get some work done in the peace and quiet. “No one else is here… I had to get away from my kids,” one pension chief told II. “Plus my desk has multiple monitors set up, which really helps productivity.” And visits from outsiders? Forget about it. Just a single respondent — an allocator in the already-distanced state of Hawaii — said their office is open and, pending a temperature check, conducting in-person meetings. But nearly 90 percent of the 57 respondents couldn’t visit anyway: organizations banned work travel.

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Investors Expecting Big Returns Despite Covid-19 Uncertainty

Brief: Covid-19 hasn’t dampened investors’ return expectations over the next five years, according to a global survey from New York–based Schroder Investment Management Ltd. The survey found that investors were expecting an average return of 10.9% over the next five years. Investors in the Americas had the highest expectations, predicting returns of 13.2%. Europeans were less optimistic, predicting returns of 9.4%. By country, investors in the U.S. were the most optimistic, expecting an average return of 15.4%, followed by investors in Indonesia (14.8%) and Argentina (14.6%). Japanese investors were the least optimistic, expecting an average return of 6%, followed by Swiss (7%) and Italian (7.9%) investors. Globally, investors didn’t appear particularly concerned about the lasting economic effects of Covid-19. Only 6% expected the economic impact of the virus to persist for more than four years, while 21% expected the impact to last more than two years. The pandemic did, however, cause many investors to make changes to their portfolios. Twenty-eight per cent said they made substantial changes, while 25% said they made some changes.

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What’s Driving the Alternative Asset Markets Today?

Brief: The coronavirus pandemic has led to an unprecedented slowdown in the global economy. The U.S. gross domestic product (GDP) fell by 33% on an annual basis in the second quarter, more than triple its previous worst quarter. The eurozone fared even worse: Its GDP contracted by 40% on an annual basis during the second quarter. In the midst of this global slowdown and ongoing geopolitical uncertainty, the alternative assets industry remains healthy. Yield-hungry investors are continuing to pour capital into alternatives with assets under management now exceeding $10 trillion according to Preqin, the alternative assets industry's foremost provider of financial data and analytics. In a survey conducted last November by Preqin, the majority of alternative asset investors said they were satisfied with their portfolio’s performance last year. Nine out of 10 (87%) private equity (PE) investors said their investments met or exceeded their return expectations last year. About the same percentage (86%) of PE investors said they intend to commit at least the same amount of capital to PE this year as they did last 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 Wednesday August 12, 2020:

  • In the United States, multiple media sources are reporting the government is weighing new rules that would temporarily bar American citizens and legal residents from entering the country in order to control the coronavirus surge. The proposal would affect people who are suspected to having been exposed or infected with the virus. The rule would affect all entry points, including airports and borders with Canada and Mexico. United States President Donald Trump has previously praised his administration’s travel bans as being key to help curb the spread of the virus, but so far citizens and lawful residents have been exempt from the travel restrictions for entering the United States.

  • In Canada, a federal opposition leader has threatened to trigger a fall election if Prime Minister Justin Trudeau, his chief of staff and finance minister don’t resign. Bloc Quebecois Leader Yves-Francois Blanchet made the threat on Wednesday after the Liberal government created a self-made controversy in the midst of the COVID-19 pandemic for failing to recuse themselves from cabinet talks of a contract to a charitable organization, despite having family ties to it. If the Bloc Quebecois leader tables a motion of non-confidence and it gets passed with support of the other political parties, it would trigger an election campaign. “Which is more dangerous – the management of the crisis or taking the time to change the people who are managing the crisis,” said Blanchet.

  • According to the United Kingdom’s Office for National Statistics, the economy shrank 20.4% in the second quarter of 2020. The country suffered the worst second quarter drop among the G7 economies and the worst quarterly slump for the UK since record keeping began in 1955. The over 20% drop, combined with a 2.2% contraction in the first quarter means the country’s economy is now officially in a recession.

  • In an interview with German radio, the country’s health minister has expressed scepticism about Russia’s COVID-19 vaccines, saying they haven’t been adequately tested. Speaking to Deutschlandfund radio, health minister Jens Spahn said, “It’s not about being first, it’s about having a tried, tested and safe vaccine which will be given – and that’s the important part – to hundreds of millions, maybe even billions of people.” Spahn lists Russia’s lack of a phase 3 clinical trial and questionable transparency for his skeptical attitude towards the Sputnik V vaccine.

  • While Germany may have its doubts, other countries like Brazil and the Philippines seem to be jumping on board with Russia’s touted medical breakthrough. Brazil’s Parana state is scheduled to sign an agreement with Russia, according to a statement from the Russian Embassy. Under the rumoured agreement, some vulnerable groups in Brazil, such as health professionals and teachers would be the first to receive the vaccination. Meanwhile Philippine President Rodrigo Duterte seemed eager for the trials, even volunteering himself in an address to the nation earlier this week. President Duterte said the Russian vaccine was good for humanity and that hopefully by December, the Philippines would be COVID-free. President Duterte also believed his strong relationship with Russia would mean the island nation would get priority access to the vaccine.

  • New Zealand has taken preliminary steps to delay next month’s general election after the country discovered its first COVID-19 cases in more than three months. Prime Minister Jacinda Ardern said she was suspending the dissolution of parliament, which was due to make way for an election scheduled to take place on September 19th. The country’s health officials are tracking the source of four new cases, all within one family in Auckland, the country’s largest city. The breakout led Ardern to reimpose lockdown measures in Auckland, which requires people to stay home unless for essential trips. The restrictions for now will be in place until Friday, while the rest of the country is placed back into slightly lesser restrictions.

Covid-19 – Due Diligence And Asset Management

Amadeus Capital Plans to Raise $400 Million for Three New Funds

Brief: Venture capital firm Amadeus Capital Partners is planning to raise three funds with a combined target of about $400 million for tech investments in industries including enterprise software, artificial intelligence and cybersecurity, people with knowledge of the matter said. The two largest funds have targets of $150 million each, said two people familiar with the plans, who asked not to be identified because the fundraising isn’t yet public. They are in the pre-marketing stage and the British firm will start raising money in the autumn, one of the people said. The pan-European Scale Fund, led by managing partner Andrea Traversone, will look for investments in cybersecurity, enterprise software, health tech and artificial intelligence, with a particular focus on companies using AI to uncover new types of materials, one of the people said. Amadeus has a track record in these areas, including its recent exit from an early investment in cybersecurity company ForeScout Technologies Inc., now listed on the Nasdaq with a market value of $1.44 billion. The Latam Sustainable Growth fund will focus on Latin American companies in the fintech, edtech and software-as-a-service sectors, the person said. The fund will be headed by Pat Burtis and newly hired partner Kai Schmitz. The firm already has an office in Bogota and portfolio companies, Creditas and Descomplica, in Brazil.

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U.S. Companies Should Consider Slavery Reparations, Vista Equity CEO Says

Brief: The COVID-19 pandemic has hit Black Americans especially hard after decades of social and economic injustices, but it also presents an opportunity for systemic change, said financier Robert Smith, the wealthiest African-American according to Forbes. In a video interview with Reuters, the CEO of private equity firm Vista Equity Partners said companies that profited from the Transatlantic slave trade should consider making reparations to African-Americans. “I think that’s going to be a political decision that’s going to have to be made and decided upon. But I think corporations have to also think about, well, what is the right thing to do?” Smith said in a video interview. Corporations “can bring their expertise and capital to repair the communities that they are directly associated with in the industries in which they cover,” he added. “I think that has to be a very, a very thoughtful approach. But I think action needs to be taken.”

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Big Brother is Watching Traders at Home in the Coronavirus Era

Brief: The pandemic has created an unexpected boom in one corner of finance: surveillance. As traders continue to work from home, banks are beefing up their efforts to monitor staff and root out any misconduct, according to NICE Actimize, which makes compliance, risk and financial-crime software. There’s been a surge of interest in advanced technology, such as machine learning, that can help employers catch unusual employee behavior, said Chris Wooten, an executive vice president at the company. “With employees shifting to remote work, there was an increase in both the types of communications to be monitored and the types of behavior that could raise concerns,” he said in an email. “We saw communications channels expand from what was traditionally just office phones and trading turrets, to include personal mobile phones and unified communications platforms such as Microsoft Teams.” Of 140 financial institutions surveyed by NICE Actimize, 76% of respondents said they expect monitoring and surveillance will increase over the next three years. Almost 20% said those measures would apply to all employees. “Clearly this reflects the investments that financial institutions are making now, or will be making in the future,” Wooten said.

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Gundlach Says Trump Will Win, Calls Harris too Charismatic

Brief: Jeffrey Gundlach said he thinks Donald Trump will win re-election because polls showing otherwise don’t reflect the true support for the president.
“Will Joe Biden beat Donald Trump in November? I don’t think so,” Gundlach said during a webcast Tuesday for his company’s closed-end funds. “I’d bet against that. I think the polls are very, very squishy because of the highly toxic political environment in which we live.” On Biden’s choice of Senator Kamala Harris as his running mate, Gundlach said she is “a little too charismatic.” “I don’t think it’s a good pick,” he said. “She might be a little bit dominant with her personality.” Gundlach said much can happen between now and Election Day. “I think there’s a lot of time here, there’s going to be a lot of twists and turns,” he said. Gundlach, who predicted Trump’s win in 2016, has criticized Biden’s electoral chances -- and that of other Democratic candidates. In January, he said he didn’t think Biden would win the Democratic nomination and in March he called him “unelectable.”

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Impax Asset Management Outlines Winners and Losers in the Push to “Build Back Better” From Covid-19

Brief: Impax Asset Management says there will be “winners and losers” in the economic transition to a more sustainable economy, as trends continue to be accelerated in the post-pandemic rebuilding process. In a new report, the asset management firm notes that policy makers are unlikely to return to the “old normal” as they move from lockdown to rebuilding. As a result, Impax says that investment opportunities will open up in industrial automation advances, digitalisation acceleration and health, safety and well-being. Risks associated with human capital management, diversity, climate change and biodiversity are “becoming relevant to fundamental analysis across sectors”. The report also identifies four structural changes that will continue to disrupt business as we know it. These include a heightened awareness of systems-level risks; the exposure of supply chain vulnerabilities; social distancing measures changing behaviour; and an acceleration towards a digital economy.

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Layoffs, Shrunken Bonuses Coming in Asset Management

Brief: Employees in the asset management industry can thank the broad market recovery for saving their compensation from the deepest cuts, but there still will be plenty of paycheck pain. Year-end incentive pay at traditional asset managers and hedge funds is expected to fall between 10 percent and 15 percent compared to 2019, according to consultant Johnson Associates’ second-quarter analysis, Private equity staffers will fare better, especially at the large brand-name firms, which benefit from economies of scale. Bonuses for such employees is expected to decline 5 percent to 10 percent relative to last year. But the smaller and mid-sized PE firms will likely make deeper cuts in comp, lopping 15 percent or more from year-end bonuses. While traditional managers have suffered as investors move to lower-fee products like bond funds, hedge funds are still reeling from net outflows on the back of disappointing performance. The largest private equity funds have enormous amounts of cash to invest, but face portfolio company defaults. Alan Johnson, head of the compensation and consulting firm, said PE outfits benefit from leverage when markets are up. “Now they’re on the other side of leverage and it hurts,” Johnson told Institutional Investor.

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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 August 11, 2020:

  • A recent report by Kaiser Health News (KHN) service and The Associated Press states that 49 state health officials in the United States have resigned, been fired, or retired since the beginning of the COVID-19 pandemic. Another high-profile ouster was made on Sunday in California as public health director, Dr. Sonia Angell was fired after a technical mishap caused the delay of over a 100,000 test results. In New York, Dr. Oxiris Barbot recently resigned over spats with the New York Police Department and the mayor’s office. Tom Frieden, former director of the Centers for Disease Control and Prevention has said "the overall tone toward public health in the U.S. is so hostile that it has kind of emboldened people to make these attacks.”

  • Since April, non-medical masks have been mandatory when boarding a plane in Canada. A federal travel order now states that passengers flying on Canadian airlines must have medical proof that they are unable to wear a mask due to an underlying health condition. There will still be exceptions to the rule for young children and those who are unable to remove their masks without assistance. The change comes as previous flights were allowing passengers to go without a mask if they had “breathing problems unrelated to COVID-19.” The rule now states a mask is considered to be “any non-medical mask or face covering that is made of at least two layers of tightly woven material such as cotton or linen, is large enough to completely cover a person’s nose and mouth without gaping and can be secured to a person’s head with ties or ear loops.” Correction: In yesterday’s briefing an error was made stating that Canada had nearly 200,000 total cases of COVID-19, the actual total number of cases as of Tuesday is 120,000.

  • In the United Kingdom, over 700,000 jobs have been lost since the beginning of the COVID-19 pandemic in March. The Office for National Statistics said Tuesday that workers most effected by the job losses were in the over 65, and under 24 age categories. In numbers not seen since the economic crisis of 2008-09, people receiving unemployment benefits, which includes those who lost the majority of their working hours, skyrocketed to 2.7 million in July. With the U.K. experiencing their worst period of economic growth in almost a century, and fears of Brexit turmoil still weighing on the minds of Britons, the economy will be top priority when separation negotiations are finalized at the end of the year.

  • India has recorded at least 50,000 cases of the novel coronavirus since July 30th. This has prompted Prime Minister Narendra Modi to change his course of action. He suggested in a news conference on Tuesday that if India can control the surging virus in the countries 10 most populous states, then they will be able to overcome the virus for the whole of the country. The 10 states have accounted for over 80 per cent of the infections nationwide and over 45,000 deaths. Recently, multiple high-profile Indian politicians have contracted the virus including former President Pranab Mukherjee, who had to be placed on a ventilator after undergoing surgery.

  • Russia became the first country to officially approve a coronavirus vaccine on Tuesday. The vaccine affectionately named Sputnik V, a reference to the first satellite launched by the Soviet Union, has come under criticism by scientists world-wide who contend that the process in developing it was rushed and crucial steps had been missed. According to Russian President Valdimir Putin, one of his daughters had already been inoculated with the vaccine and had a rise in temperature but was “feeling well.” The Kremlin and the Russian Direct Investment Fund have suggested that over 20 countries are currently attempting to order the vaccine, along with a handful of American companies.

Covid-19 – Due Diligence And Asset Management

Family office investment and allocation to venture capital on the rise

Brief: SVB Financial Group (NASDAQ: SIVB), the parent company of Silicon Valley Bank, today released the "Family Offices Investing in Venture Capital - Global Trends & Insights Report" in partnership with Campden Wealth Research. The report looks at family offices' investment levels, performance, expectations, barriers toward venture investments, and their expectations for how the market will evolve amid COVID-19. "In the last decade, family offices have emerged as a significant source of capital fueling innovation globally. They are increasingly more open and active in venture, particularly in early-stage companies through direct investments and funds," said John China, President of SVB Capital. "Our research with Campden Wealth shows that family offices are seeing favorable returns in the asset class, and they are acting as strategic advisors and champions to the startups they invest in. We expect to see more family office investors in the venture ecosystem, collaborating and syndicating with like-minded investors and providing a differentiated pool of capital to founders." "We are facing uncertain times due to COVID-19 and an encroaching global recession. In response, family offices are showing their strength as nimble, responsive, and patient investors, often with cash reserves to carry them through turbulent times," said Dr. Rebecca Gooch, Director of Research at Campden Wealth.

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Crisis management: Credit hedge fund Palmerston’s Jesse McCormick discusses Covid-19’s impact on business functions

Brief: From the historic stock market sell-off and volatility surge that wreaked havoc on investment portfolios during March to the continued working-from-home practices which have thrown up various operational obstacles spanning technology, cybersecurity and infrastructure, the coronavirus crisis has upended all corners of the hedge fund industry. For hedge fund chief operating officers, the pandemic has brought its own unique set of challenges. Managers of all sizes and strategies implemented extensive business contingency plans for home working in order to continue operations. But as firms slowly begin to return to the office following more than four months of lockdown, the concept of a “new normal” continues to be somewhat vague and undefined.

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Global banks lost nearly US$1 trillion in market value in the pandemic's first wave — and there's another one coming

Brief: During the depths of the coronavirus crisis in Europe in late March, Sergio Ermotti remembers sitting in his home study in Lugano, Switzerland, reflecting on the latest financial meltdown to engulf his career as a banker. “If I go through my last eight years, we had a lot of mini-earthquakes, but never of the magnitude of what we are seeing now,” the 60-year-old UBS Group AG chief executive says. “This is a crisis that is driven by fear in a different way…this time it’s not just about people losing their assets or savings, it’s about their life, it’s about their families. It’s so profound, so different.” Switzerland’s largest bank is weathering the crisis relatively well, considering its share price is down only 10 per cent this year, a more modest fall than any other global lender apart from Wall Street’s Morgan Stanley. This is no accident. Both have built wealth management arms that boast more than US$2 trillion of client assets, generating consistent fees from the wealthy and super-rich desperate for advice on how to trade the pandemic.

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Private Equity in the aftermath of Covid-19

Brief: While the amount raised and invested by private equity funds capped six years of unprecedented growth in 2019, the health and financial crisis brought about by Covid-19 has put paid to the idea that the good times might continue into the new decade. Certain trends – such as increasingly picky LPs and the incorporation of ESG, P2P, buy and build and extension of share ownership – should intensify in the aftermath of the pandemic, while others – the surge in the value of multiples, jumbo funds, increase in leverage – are likely to fade or disappear completely. It might seem like an age ago, but back before the coronavirus – and its attendant consequences for the world of investment – hit, the PE industry seemed to be in decent shape. But while capital amassed remained at a high level, a plateau had, in fact, been reached and the industry was almost certainly entering the end of a cycle.

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Healthcare hedge fund Rhenman eyes “intense” Covid-19 vaccine activity

Brief: Rhenman & Partners Asset Management, a Stockholm-based hedge fund firm which invests in global healthcare stocks, is optimistic about a post-US election market bounce, and points to “intense activity” among vaccine developers working on a treatment for Covid-19. The firm’s Rhenman Healthcare Equity Long/Short Fund – which trades a range of small, medium and large pharmaceuticals, biotechnology, medical technology and service company stocks – was down in July. But Henrik Rhenman, founding partner and chief investment officer, believes the traditional uncertainty that typically looms over the healthcare sector ahead of every US presidential election will give way to a strong uptick in November and December. Rhenman Healthcare Equity Long/Short slipped 3.7 per cent in July in its euro-denominated class and is down roughly 0.5 per cent for the year so far, while its dollar share class was up 1.1 per cent last month.

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Countries beating the coronavirus are getting ‘rewarded’ in the stock market, ETF analysts say

Brief: Trading the Covid-19 curve can prove challenging. With global case counts still rising, investors should consider buying into countries that have gotten a better handle on the virus than others, ETF Trends CEO Tom Lydon told CNBC’s “ETF Edge” on Monday. “Take Europe,” Lydon said. “Areas like Italy are not doing well with the coronavirus and their markets aren’t doing well. [In] contrast, northern Europe, the Nordic regions, are actually doing really well.” The iShares MSCI Denmark ETF (EDEN), for one, is up nearly 18% year to date. That fund is heavily weighted toward health-care and industrial stocks, with pharmaceutical play Novo Nordisk accounting for more than 18% of the portfolio.

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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 August 10, 2020:

  • Over 97,000 students tested positive for COVID-19 in the U.S. during the last two weeks of July, according to a study by the American Academy of Pediatrics and the Children's Hospital Association. The study directly contradicts President Donald Trump’s assertion that children are “almost immune” to the virus. In Florida, one of the hardest hit states, nearly 20 per cent of people tested have been confirmed positive, however, the majority of the state will be opening schools for in-person classes this week. The decision is being made despite recent reports of two teens dying from the virus in Florida last month.

  • Canada’s total number of COVID-19 cases has reached nearly 200,000 with total fatalities reaching almost 9,000. The country reported 195 new cases of the virus on Sunday along with 5 new deaths. The majority of new cases came from Quebec, the hardest hit province in Canada, where there have been 5,695 deaths recorded. Across Quebec protests have erupted with parents threatening legal action as schools are set to reopen in the upcoming months. In Canada, over 86 per cent of those who contracted the virus have since recovered and the number of new infections continues to decline.

  • In the United Kingdom officials are debating whether to continue with daily death toll announcements after Public Health England has come under scrutiny for their method of tracking new deaths from the virus. Health Secretary Matt Hancock has revealed that an investigation into the matter suggested that Public Health England was “exaggerating” the real number of fatalities. The country had paused its daily death toll announcements after academics had shown that agency had counted deaths from other causes. Officials are still debating whether to continue with daily updates or move to weekly updates in the future.

  • New Zealand has gone 100 days without a new case of COVID-19. The country is beginning to return to normal with no boundaries on social gatherings as patrons flock to bars and sports fans return to packed stadiums. “It was good science and great political leadership that made the difference,” Michael Baker, an epidemiologist at the University of Otago, said. New Zealand’s Prime Minister Jacinda Ardern had taken drastic steps at the beginning of the pandemic to lock down the island nation before the virus could spread significantly throughout the population. Now facing an election on September 19th, Ardern is the favorite by a large margin after being praised globally for her response to the pandemic.

  • Meanwhile, in Australia strict lockdowns have been put in place in Melbourne and parts of the southeast as the country had its deadliest day on record. 19 more Australians succumbed to the virus on Monday, but officials are optimistic as Victoria, the hardest hit state, recorded a two-week low with 322 new cases. Victorian Premier, Daniel Andrews is facing criticism for lapses in quarantine procedures that has allegedly allowed the virus to spread. Especially effected are long-term care facilities which have seen significantly more deaths than in previous years. National Treasurer Josh Frydenberg has said the government must explain the “serious failures” in quarantine arrangements.

Covid-19 – Due Diligence And Asset Management

GPT bleeds $520 million

Brief: Real estate investment trust GPT Group has bled $519.1 million after tax for the first half of the year, pointing to COVID-19 related negative property movements for the heavy losses. All properties in the trust were independently valued during the period, resulting in a devaluation of $711.3 million, GPT said. "We have had all our assets revalued during the period with our retail assets revalued by independent valuers in May and again at the end of June as the effects of the pandemic were becoming more apparent," GPT chief executive Bob Johnston said. "The independent valuers have made allowances for both the near-term impacts of the pandemic and also the effects that it is expected to have on the broader economy." Government imposed lockdowns also saw rental collections drop sharply during the first half of the year, with GPT providing relief to both tenants impacted by the government's commercial tenancy Code of Conduct as well as those not eligible for assistance.

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L&G expects pension risk transfer activity to continue apace

Brief: Legal & General Retirement Institutional has announced that despite COVID-19, 2020 is expected to be the second largest year on record for the pension risk transfer (PRT) market. Longevity imageUK PRT is expected to transact £20bn to £25bn, which demonstrates the resilience of this marketplace. Since L&G’s market entry in 2015, their US business has written more than $3.9bn of PRT with 56 clients, which includes four transactions being made in H1, 2020. The success of L&G’s half year results could be down to them being the only insurer who provides PRT directly to pension plans globally. In May, during the height of the UK lockdown, they undertook the first international PRT transaction for IHS Markit. This transaction secured benefits for both their UK and US pension plans.

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Currencies Likely To Reflect Countries' Pandemic Strategy Success

Brief: During the height of the pandemic-induced market turmoil in March, currencies performed mostly according to how they moved with equities - their equity beta, or how risk-on or risk-off they were. That is now changing. Increasingly, currencies will start to reflect how well countries are dealing with the coronavirus pandemic. We look at which currencies could benefit from that dynamic. Each currency can be placed on the spectrum between risk-on (cyclical) and risk off (defensive). Risk-on currencies do well when equity markets rise. The opposite is true for risk-off currencies. During 2020, this equity beta explained the fate of developed and emerging-market currencies very well. The traditional safe havens of the Japanese yen, Swiss franc and U.S. dollar were the big winners during the height of the coronavirus-induced market turmoil in March.

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Coronavirus punishes Warren Buffett as Berkshire Hathaway takes big writedown

Brief: Berkshire Hathaway Inc on Saturday announced a $9.8 billion writedown and 10,000 job losses at its Precision Castparts aircraft parts unit, as the coronavirus pandemic caused widespread pain at Warren Buffett's conglomerate. Despite the writedown, Berkshire said second-quarter net income surged 87% because of gains in stock investments such as Apple Inc as markets rebounded. Operating profit fell 10%, cushioned by a temporary bump at the Geico auto insurer, as the pandemic caused "relatively minor to severe" damage to most of Berkshire's more than 90 operating businesses. "The writedown was prudent," said Cathy Seifert, an equity analyst at CFRA Research. "It's a recognition of what the market has long believed, that the purchase price was rich, and the integration not as smooth as many would have hoped."

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Some office space could get permanently cut during the pandemic. Here’s how companies will cope

Brief: Working from home has become the norm during the coronavirus pandemic, and Morgan Stanley predicts that office tenants across Asia will permanently give up between 3% and 9% of their existing office space. That will result in rent declining between 10% and 15% over the next three years, a recent report by the investment bank estimated. Big tenants from the financial and IT industries, which have well established business continuity plans or work-from-home infrastructure, could give up even more office space — at 10% over the next three years, said the report. Below is the projected rental impact from June 2020 to December 2022, according to the report which assessed the rental impact on key financial centers in Asia Pacific.

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It’s Lonely Trying to Kill This Covid-19 Diagnostics Deal

Brief: Davidson Kempner Capital Management LP doesn’t usually conduct activism in public by itself. Its attempt to kill the $12 billion takeover of Qiagen NV, a European company that makes instruments that detect Covid-19, was a high-profile place to start. The hedge fund says a bid from U.S. diagnostics group Thermo Fisher Scientific Inc. is too low given the testing business will become stronger due to the pandemic. Its campaign has helped secure a justified 10% bump on the opening bid, to 43 euros ($50.71) per share. It still wants more. Judged on near-term valuation multiples, the deal can be seen as cheap despite the sweetener. It’s worth 22 times the $2.28 earnings per share Berenberg reckons the company will make this year. (Qiagen says it will make “at least” $2 per share.) That’s substantially lower than the earnings multiples on which diagnostics peers trade. It’s also at the bottom of Qiagen’s trading range prior to a shock sales warning in October that pummeled the shares and led to the sudden replacement of its chief executive officer.

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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 August 7, 2020:

  • In the United States as the overall coronavirus case total closes in on five million, a new model suggests the country could almost double their death toll in just under four months. The model from The University of Washington suggests coronavirus deaths could hit 300,000 by the beginning of December. America’s death toll currently sits at just over 160,000. As dire as these numbers look, experts behind the model say 70,000 lives could be saved off that estimate if people would wear a mask every time they walk out their front door.

  • The latest numbers from Statistics Canada shows steady progress as the country emerges from its coronavirus lockdown, but still have a long way to go. July’s job gain added 419,000 to the tally dropping the unemployment rate to 10.9%. Over 1.6 million jobs have been recovered since May, but Canada’s economy still has 1.3 million fewer jobs than it had in February before widespread lockdowns gripped the country.

  • With coronavirus cases growing in neighbouring nations such as France, United Kingdom chancellor Rishi Sunak announced on Friday the country would not hesitate to reintroduce mandatory 14-day quarantine requirements. Sunak stated the list of countries subject to the two-week quarantine are under constant review with Belgium, Andorra and Bahamas added to the list on Thursday. Boris Johnson’s government is also under pressure to extend the job furlough scheme that has currently supported 9.5 million jobs. Currently the plan is for the program to end in October, but the Scottish National party would like to see it extended into 2021.

  • Reuters is reporting Germany and France have quit talks on reforming the World Health Organization (WHO) in frustration at attempts by the United States to lead the negotiations, despite announcing its decision to leave the organization just a few months ago. A senior European official involved in the talks was quoted as saying, “Nobody wants to be dragged into a reform process and getting an outline for it from a country which itself just left the WHO.”

  • India’s highest daily coronavirus numbers to date pushed the country’s total case count past two million on Friday. The Health Ministry noted 62,538 cases in the past 24 hours as India now joins the United States and Brazil as the only countries that have surpassed the two million mark. To make matters worse, CBC in Canada is reporting 900,000 female workers who have served the country as door-to-door contact tracers went on a two-day strike citing months of harassment, underpayment and lack of protection from infection as reasons for doing so.

  • Australia’s Victoria state reported 450 new coronavirus cases on Friday. Out of those 450 cases, 139 are healthcare workers prompting state Premier Daniel Andrews to urge residents to protect themselves from the virus, which in turn will help the nurses, doctors, paramedics and other hospital workers. The Financial Times is reporting 1,500 healthcare workers have contracted the virus in Victoria state. Premier Andrews also said they have expanded the door knocking program and conducted 1,150 recent checks on residences of people under isolation orders. Of those 1,150, 150 (13%) were not home.

Covid-19 – Due Diligence And Asset Management

KKR Makes Bet on Brooklyn Apartment Rentals in $860 Million Deal

Brief: KKR & Co. is betting on Brooklyn apartments as the pandemic rattles the housing market in New York City. The New York-based alternative asset manager is in contract to purchase a portfolio of newly developed rental buildings in Brooklyn from Bruman Realty in a deal that’s worth about $860 million including debt, according to people familiar with the matter. KKR is partnering with apartment operator Dalan Management on the deal and will provide the bulk of the equity, the people said, asking not to be named because the matter is private. Representatives for KKR and Bruman declined to comment. Dalan didn’t immediately respond to a request for comment. The deal would be one of the biggest commercial real estate acquisitions in New York this year. The market has largely been frozen as the pandemic roils the economy. Second-quarter apartment transactions dropped 70% in the U.S. from last year, according to Real Capital Analytics. Rental apartments have historically been considered recession-proof, performing well in times of economic turbulence as more people are priced out of owning homes. That thesis could best tested in the Covid-19 era with high unemployment and a sluggish recovery landing hard on renters.

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The Savvy Symbiosis of GSO and Blackstone

Brief: In April, GSO and Blackstone’s Life Sciences division said they would provide $2 billion to Alnylam Pharmaceuticals to acquire drug royalties, develop new programs for the company, purchase common stock, and provide $750 million in financing from GSO. The transaction was one of the largest financings ever of a biotech company. Dwight Scott, global head of GSO, said the deal originated with Nicholas Galakatos, global head of Blackstone Life Sciences, but ultimately evolved into a comprehensive deal that included GSO, Blackstone Alternative Asset Management, Blackstone’s Tactical Opportunities Fund. “One of my core areas of focus for GSO over the last few years has been to establish tighter integration between liquid and private strategies and across Blackstone. In this quarter, we showed exactly why this has been valuable,” said Scott, speaking in his first interview since the Covid-19 crisis began. In the first half of the year almost 40 percent of the private originations that the firm did were related in some form to the rest of Blackstone’s business. It’s easy to see how GSO would benefit from doing more with colleagues in private equity, real estate, or BAAM, the largest hedge fund business in the world. In the second quarter, assets under management in credit were up by about 6 percent to $129 billion, with inflows of $6.5 billion.

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Oaktree’s Marks Praises Fed, Even as Distressed Debt Shrinks

Brief: Oaktree Capital Group Co-Founder Howard Marks says the Federal Reserve’s intervention at the peak of the pandemic was necessary to keep companies afloat and avoid a potential economic shutdown, even if that’s giving his firm fewer distressed-debt targets. “If they had not done the things they did, we would be talking about a much more serious economic event, we may even be using the word depression,” or perhaps global recession, Marks said during an interview with Bloomberg TV Thursday. Global credit and equity markets have staged a dramatic rebound since March, when the Fed first took unprecedented steps to steady the economy. But the central bank has fueled such a rally that distressed debt, which approached $1 trillion outstanding at the height of the pandemic, has since fallen dramatically, presenting fewer options for firms like Oaktree to put billions of dollars to work. Distressed-debt specialists have raised record amounts of cash through the coronavirus outbreak as companies falter and bankruptcies mount. But for many corporations, additional liquidity spurred by the Fed has pushed borrowing costs to near record lows, taking the lowest-rated junk bonds out of distressed territory this week for the first time since late February. Los Angeles-based Oaktree is one of the largest distressed-debt investors in the world, with more than $19 billion committed to credit from troubled companies. The fund has thrived most in times of economic stress, when prices on bonds of companies in danger of defaulting fall to deep discounts.

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Is There an ESG Silver Lining to Covid?

Brief: The pandemic has certainly not dampened enthusiasm for sustainable investing. In the US, for example, Morningstar reported almost $10bn (€8.5bn) of inflows to sustainable open-end mutual funds and exchange-traded funds in Q1 2020 – over half the total for the whole of 2019.Of course there is always an argument that money follows transitory themes and because ESG portfolios avoid the oil/energy sector – then relative strong performance (as we have seen in recent months) is a given. But is there more to the story than ESG funds simply doing better (and attracting greater interest) because they conveniently don’t invest in hard-hit sectors? Philippe Zaouati, chief executive at Mirova, an asset manager specialising in sustainable finance, insists there is. “We have seen outperformance against the benchmark for several years – with last year a particularly good year. There is a Covid impact – but we were well positioned anyway.” Since the beginning of the year, the pandemic has led to oil price slumps and Zaouati does not see this a short-term pricing anomaly with ‘normalisation’ – so to speak – soon reversing this trend. “I think we are witnessing a cultural change. Covid is a long-term crisis and it is a crisis that is happening at a time when we need to decarbonise the economy. Oil companies’ capex in the near future is going to be low and the sector at a global level is already at a plateau – it won’t go up strongly again.” Which begs the question will we ever see a return to a high demand for oil? After all, the EU Green Deal is spearheading a lot of the recovery efforts and it is prioritising infrastructure and investments that don’t target oil and gas sectors.

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Insurer AXA says 1 Billion Euro Asset Sale Collapses, Income Slides

Brief: French insurer AXA said on Thursday the planned 1 billion euro ($1.2 billion) sale of its AXA Life Europe unit to Cinven had collapsed, and that it would make no fourth-quarter shareholder payouts after net income fell 40% in the first half. AXA, led by chief executive Thomas Buberl since 2016, also dropped 2020 earnings target following a hike in COVID-19 related claims. The second-largest European insurer after Allianz said first-half net profit fell to 1.43 billion euros from 2.33 billion a year before. Overall revenues fell by 10% to 52.4 billion euros. Underlying earnings at the property and casualty business were down 72% to 544 million euros, largely due to COVID-19-related claims stemming from business interruption contracts and event cancellations. “In the context of the material estimated impact from Covid-19 on underlying earnings in 2020, AXA’s management has withdrawn its Ambition 2020 underlying earnings per share and adjusted return on equity targets,” the insurer said. AXA said its board of directors had decided it would not propose an exceptional distribution of reserves to shareholders in the fourth quarter, following discussions with regulators.

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Aviva Investors sees Operating Profit Nearly Halve

Brief: Aviva Investors, the asset manager owned by insurer Aviva plc, saw its operating profit tumble in the first half of the year to £35 million from £60 million in the same period of 2019. The firm said this was due to capital market weakness, de-risking of asset strategies by internal clients and lower levels of private assets investments. But Aviva Investors said it had diversified its third-party client list and “maintained the positive customer momentum” seen in the second half of last year. Flows from external clients were £1.3 billion compared to outflows in the first half of 2019 and were driven by the UK and North America. At the group level, financial performance was described as “solid”, with an operating profit of £1.25 billion, which was down from £1.39 billion in the same period last year. Amanda Blanc, who has been CEO of Aviva plc for a month, said “we must transform our business” and that this would focus on the UK, Ireland and Canada, places where Aviva has the size and “brilliant customer service”. “I have been CEO for one month and I am confident we have many of the ingredients to make Aviva a winner. From this moment on, we must deliver. Nothing else will do. My focus is making sure it happens and at pace”.

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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 August 6, 2020:

  • In the United States, Democrat and House Speaker Nancy Pelosi rejected the idea of a possible short-term extension of federal jobless benefits. Meanwhile, Republican and Senate Majority Leader Mitch McConnell said the Senate won’t adjourn for its scheduled August recess as planned for today. Instead, they will continue negotiations for the next COVID-19 stimulus package. However, Senator McConnell made it clear they won’t wait forever and will adjourn for August if Democrats aren’t willing to cut a deal.  Elsewhere, the World Health Organization (WHO) said on Thursday they hope the United States and President Donald Trump reconsiders its decision to withdraw from the WHO. President Trump made the decision to withdraw back in May and the director general for WHO said the problem with America leaving isn’t financial (likely not true, since America was their largest donor), but a lack of solidarity between global leaders.

  • In Canada, Nova Scotia Premier Stephen McNeil announced on Thursday that he plans to step down as leader of the province. McNeil said he made the decision to resign prior to the coronavirus pandemic, but obviously once it hit, along with the worst mass shooting in the country’s history, his priorities changed. McNeil still plans to act as premier and Liberal Party leader until the party choses a replacement, which could still take months.

  • In the United Kingdom, the Financial Times is reporting senior British officials are lobbying Boris Johnson’s government to relax restrictions on travel to the United States. Their reasoning is that the blanket enforcement of quarantine measures risks harming UK business. Currently anyone who travels to the United States must quarantine for 14 days. The talk leaves a stalemate in the Johnson government with some officials wanting the measures to stay in place to keep the virus under control, while the other side hopes a relaxation will help smooth the path of a trade deal currently being worked on between the UK and United States.

  • Germany reported 1,000+ new cases of coronavirus on Thursday, the first time the country has surpassed that number since May 7th. The Robert Koch Institute, the country’s main public health authority, has stated previously any figure above 1,000 a day makes it much harder for local authorities to carry out effective tracking and tracing. The increase in infections coincides with the start of the school year in several German regions, along with citizens returning from vacation travel destinations. Due to the increase, as of this Saturday, Germany is introducing mandatory testing for all those who are returning from high-risk areas, such as several regions in Spain.

  • Similar to Germany, France and Spain have recorded their largest daily spikes in new COVID-19 cases in months, which is sparking concerns that continental Europe might be experiencing the second wave of the Pandemic. France recorded 1,695 new cases on Wednesday, their largest jump since May 30th while Spain announced 1,772 cases, its largest increase since lockdown measures were lifted in June. The increase in cases also means the likelihood of 14-day quarantine measures being reintroduced for those who have traveled to both countries.

  • The Philippines now have the distinction they never wanted: the coronavirus hotspot of southeast Asia. With over 3,500+ new cases reported on Thursday, the Philippines surpassed Indonesia for most cases in the region (119,000+). This is significant as Indonesia has twice the population of the Philippines. The news comes on the same day that the country’s economy has slipped into a recession, following a record 16.5% contraction. This now puts pressure on President Rodrigo Duterte and his government to somehow find a balance of getting the pandemic under control, but also regain some form of economic stability.

  • As coronavirus cases start to surge in Japan, many are wondering where their national leadership has disappeared to. When it appeared the country had the coronavirus pandemic under control in May, Prime Minister Shinzo Abe acclaimed the country’s response as a world model. However, after lifting a seven-week state of emergency, the number of cases has steadily increased, especially in the Tokyo region, and Prime Minister Abe has gone silent. According to a poll earlier in the week, Japanese citizens are seemingly losing faith in Prime Minister Abe with 61% disapproving of the cabinet’s handling of the pandemic, while the leader’s approval rating has dropped to a record low of 35%.

Covid-19 – Due Diligence And Asset Management

BlackRock Employees Can Choose Where They Work for Rest of Year

Brief: BlackRock's 16,000 employees may continue to work remotely for the remainder of the year wherever they are located, even as the firm reopens offices around the world in the midst of the COVID-19 pandemic. "Given the uncertainty in many of our locations and to help you plan ahead, we will continue providing all employees the option of working from home for the rest of 2020. When your office is available for use, you can decide to work from the office, work from home or split your time between the two," said an Aug. 3 employee memo obtained by Pensions & Investments. Where BlackRock reopens offices based on local conditions and government guidelines, it will use a split-team model for the time being to "ensure social distancing," said the joint memo from Robert S. Kapito, director, co-founder and president; Lawrence Knafo, managing director and chief security officer; and Manish Mehta, managing director and global head of human resources. Going forward, BlackRock will increase office occupancy in areas where COVID-19 conditions have improved or reduce an office's in-person head count if pandemic conditions worsen.

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BlackRock Joins Crescendo of Inflation Warnings Amid Virus Fight

Brief: BlackRock Inc. has joined a growing chorus of investors and analysts warning of resurgent inflation risks, as the global battle against the coronavirus crisis creates a convergence of ultra-easy monetary policy and expansionary budgets. The world’s largest asset manager pointed Thursday to a potential pickup in U.K. price pressures after the Bank of England held record-low interest rates and maintained its asset-purchase program. Last week, Goldman Sachs Group Inc. highlighted growing concerns over the U.S. inflation outlook, which the bank said could even threaten the dollar’s reserve-currency status. While the world’s nations are unleashing unprecedented spending to counter the economic shock from the pandemic, central banks are maintaining ultra-loose monetary conditions to cap the costs of such fiscal largess. This policy combination is now fueling fears of a spike in consumer prices down the line as more money chases fewer goods. Market-implied price expectations have climbed globally in recent months, fueling a rally in gold, and Wall Street’s heavyweights from Pacific Investment Management Co. to AllianceBernstein Holding LP have cautioned in recent months that inflation is a problem that’s bound to return.

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COVID-19 Vaccine Approval Could Stall Tech Stocks Boom: Goldman

Brief: Approvals for a potential COVID-19 vaccine later this year could threaten the recent surge in speculative investment in big U.S. technology companies and pull investors back towards more traditional growth-linked cyclical stocks, according to analysts at Goldman Sachs. Seen as "stay-at-home" winners in the coronavirus lockdowns, shares in Apple Inc (AAPL.O), Facebook Inc (FB.O), Amazon.com (AMZN.O) and Alphabet (GOOGL.O) have surged this year and now account for nearly a fifth of the S&P 500's .SPX stock market value. Bumper results from the iPhone maker last week pushed it past Saudi Aramco (2222.SE) to become the world’s most valuable publicly listed company and heading towards a $2 trillion valuation. In a global markets research note sent to clients, Goldman analysts said the current rally could last until Labor Day in early September, but would be threatened by updates on vaccines. “Approval could ... prompt the kind of rotation that started and petered out in May and early June, supporting traditional cyclicals, steeper curves and banks, and challenging tech leadership,” they argued.

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Covid-19 Revealed Income Inequality and Funds are Expected to Act

Brief: The fund management sector looks set to swoop on the topic of social inequality once markets emerge from Covid-19. By now you may have read ample articles (like this) that say not only is ESG (environmental, social, governance) investing not dead, but that Covid-19 will reinforce it and, importantly, give more impetus to the ‘social’ dimension. “Whereas climate change put environmental issues front and centre, the pandemic has elevated urgency on social issues,” says Thomas Kuh (pictured below), head of ESG at Truvalue Labs in San Francisco. “Covid-19 has exposed serious, systems-level problems like inequalities of income and wealth that need to be addressed,” he says. After analysing data on information flows between January and April, Truvalue found ESG issues such as access and affordability were prominent in the context of the pandemic. Maarten Bloemen of Franklin Templeton Investments’ global equity group, echoes the finding, saying: “The coronavirus has brought a spotlight on several issues in the ‘S’ category of ESG, including social stability, employment, infrastructure, data security and keeping employees and customers safe – whether they are physically interacting or not.”

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Rallying Stocks Captivate Hedge Funds Even as Clients Grow Wary

Brief: The relentless rally in American equities is emboldening hedge funds at a time their own clients are getting worried. Professional managers that make both bullish and bearish equity bets last month pushed their long positions on stocks up above their short ones by a ratio of almost 1.9-to-1, the highest reading in more than a decade, according to data compiled by Morgan Stanley’s prime brokerage unit. The S&P 500 rose 5.5% during the period, its best July since 2010, and has rallied in the first three days of August. Meanwhile, the firm’s survey of hedge fund investors showed roughly three quarters of the respondents expect the S&P 500 to finish the year lower than 3,300. The benchmark closed on Wednesday at 3,327.77, about 26 times annual earnings. People are choosing sides in a year like no other, when rebounding shares have pushed valuations to two-decade highs even as a pandemic rages. While investors in the Morgan Stanley survey cited everything from the health crisis to a weak economy and November’s presidential election as the top market risks, the people paid to ride the wave are afraid of missing out. For now, the disagreement hasn’t prompted clients to exit. In fact, interest in investing with long-short hedge funds last quarter increased to the highest level in at least two years, Morgan Stanley data showed. “Investors felt hedge funds performed well in 2Q, despite missing part of the market rally,” the firm wrote in the note to clients last week. About “90% of investors felt HF performance was in-line or better than expectations.”

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COVID-19 Will Cause a Decline in Assets Under Management, but Create Opportunities for Managers

Brief: COVID-19 and the associated economic crisis are set to cause the first decline in global asset management industry assets under management in a decade, according to Cerulli Associates’ latest report, Global Markets 2020: A Sharper View of the Asset Management Sector. However, moving beyond 2020, the global analytics and consulting firm expects the global asset management industry to recover and grow, fueled by increasing demand in developing countries, particularly Asia. Advances in technology and product will give global asset managers more ways to access growing investor segments. “As the coronavirus pandemic continues to impact the global economy in the second half of 2020 and beyond, asset managers will need to find ways to keep investors in their products and prevent a widespread flight to cash,” says André Schnurrenberger, managing director, Europe at Cerulli Associates. “Managers should dedicate resources to investor education on how to handle a market correction, implementing scenario analysis from the last significant global drawdown in 2008.” These resources will be especially useful in those countries where emerging middle-class investors have entered the market within the past decade and had not experienced a substantial correction before COVID-19.

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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 August 5, 2020:

  • Videos were quick to surface of an apocalyptic blast occurring at a dock in the Lebanese Capital of Beirut on Tuesday killing at least 135 and injuring thousands more. The death toll is expected to rise with many people still unaccounted for. The source of the explosion was 2,750 tonnes of ammonium nitrate kept at the docks for years, said the Lebanese Prime Minister. The tragedy only compounds the many issues Lebanon was dealing with during the coronavirus pandemic. Lebanon’s unemployment rate sits at 33% while close to half of their people (45%) live below the poverty line. Prior to the pandemic, the country was also dealing with an economy in crisis due to a corrupt government and excessive borrowing.

  • In the United States, the White House and Democrats are hoping for an agreement on coronavirus aid by the end of this week. Currently both sides are locked into their respective corners with many lawmakers skeptical that a deal could be made by Friday. The last unemployment payments under the old agreement were paid out last week. President Donald Trump has teased the idea of using his executive authority if no deal is reached by the two sides.

  • The Canadian Federal government announced on Wednesday they have struck a deal with pharmaceutical company Pfizer and biotechnology firm Moderna on millions of doses of a potential COVID-19 vaccine. However, the government isn’t saying how much they have spent to secure the doses, or an exact number of how many doses of either vaccine Canada will get. Their reasoning is they are also in talks with other domestic and international firms to secure doses of their experimental vaccines as well. Both Pfizer and Moderna have made it clear they seek to make a profit off of their vaccines, while companies such as Johnson & Johnson have said they wouldn’t price their vaccine candidates for profit, at least not in the first phases of the pandemic.

  • United Kingdom Prime Minister Boris Johnson previously promised a public inquiry into the government’s handling of the coronavirus pandemic. Following a cross-party panel of lawmakers report, he may be regretting that decision. The House of Commons Affairs Committee said the March 13th decision to remove all restrictions of movement of people arriving in the UK could have imported as many as 10,000 cases of the coronavirus. The move came at a time when many other European counterparts were doing the exact opposite and tightening their border controls. The committee called the government’s decision “inexplicable”.

  • India has reported more than 50,000 new COVID-19 cases for the eighth straight day as the country closes in on two million confirmed cases. However, the health ministry is pointing to the fatality rate, which is now 2.10%, the lowest since the outbreak began. The country of 1.4 billion is also trying to minimize the economic impact as authorities in the financial hub of Mumbai allowed shops in malls to reopen after four months of lockdown.

  • In Australia, a Victoria state government website crashed on Wednesday as it was overwhelmed by employees in essential services applying for permits that would allow them to leave home for work. Starting Thursday, non-essential businesses will close their doors officially (some had already started when the announcement was made on Sunday) for the next six weeks as the state engages Stage Four of its lockdown protocol. The move forces 250,000 people out of work in Melbourne, the country’s second largest city, which usually accounts for 25% of Australia’s economic activity. Victoria state set a new daily record of 725 COVID-19 cases on Wednesday.

Covid-19 – Due Diligence And Asset Management

Allianz Faces SEC Information Request for its Structured Alpha Funds

Brief: Allianz said on Wednesday that it was fielding a request for information from the U.S. Securities and Exchange Commission over a series of funds that suffered sharp losses amid the coronavirus-led market meltdown earlier this year and are the subject of an investor lawsuit. The funds in question are Allianz’s “Structured Alpha” hedge funds managed by Allianz Global Investors. Allianz made the disclosure in its earnings report. In July, the Arkansas Teacher Retirement System filed a lawsuit in a Manhattan court to recover losses of least $774 million in the first quarter of 2020 for the funds. Allianz said the case was “legally and factually flawed”, but that it expects that other investor suits may emerge. Allianz said it was fully cooperating with SEC’s request for information about the Structured Alpha funds.

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Some U.S. Activists Post Double-Digit Gains but Many Nurse Losses

Brief: A handful of corporate agitators pushing for change at companies scored double-digit returns in the first half of 2020, but panic selling and bargain hunting left the average activist investor nursing big losses. Several experienced activists and newer managers reported a surge in returns even as the coronavirus outbreak led economic production to collapse and sent unemployment rates soaring. William Ackman’s Pershing Square Capital Management gained 35% while Jason Aintabi’s Blackwells Capital climbed 27% and Glenn Welling’s Engaged Capital returned 17% in the first seven months of the year, investors said… Others saw positions in financial, food and retail and industrial conglomerate stocks drop as the pandemic reshaped the world. Legion Partners lost 3.8%, Third Point’s Offshore Fund lost 7.3% and Trian Fund Management lost 13% in the first half, investors said. Trian’s concentrated portfolio includes Sysco, which fell 37% this year. Representatives for the firms declined to comment.

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Insight Investment: COVID-19 Could Trigger the End of the USD Bull Market

Brief: The US dollar [USD] will suffer as global growth rebounds from the Covid-19 crisis, potentially triggering the end of its bull market run, however any weakness will be muted in comparison to the multi-year downtrend that followed the global financial crisis. This is the view in new research, “COVID-19: The Trigger That Ends the US Bull Market?” published by Insight Investment, a global investment manager with $909bn under management. Francesca Fornasari, author of the research and Head of Currency Solutions at Insight Investment said, “During the global financial crisis, the US dollar surged as investors fled to the deepest and most liquid market. But, as equities bottomed in March 2009, the USD peaked and embarked on a multi-year downtrend. As the global economy faces another severe downturn, caused by Covid-19, so the USD has moved to historic highs. However, this time around the underlying structural support of many currencies is much weaker than 10 years ago. We expect a more muted rebound and greater differentiation amongst currencies with a high beta to the economic cycle.

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A Beleaguered Asset Manager Was Poised for a Turnaround. Then the Pandemic Hit

Brief: Before the coronavirus pandemic hit, investment firm GAM Holding’s turnaround strategy seemed to be working. But its results for the first half of 2020 show that the pandemic — and subsequent market volatility — may have stymied GAM’s immediate comeback efforts after its 2018 bond fund liquidation. During the first half of 2020, the company’s outflows grew while its 2019 profits turned to 2020 losses. Prior to this year, following the implementation of some of its turnaround plan, GAM’s 2019 second-half net outflows had declined and its profits, compared to the first half of 2019, had improved. As for the first half of 2020, GAM’s earnings results, published on its website Tuesday, show that its underlying loss before taxes was CHF 2 billion (US$2.1 billion). This is compared to the first half of 2019, when the firm brought in CHF 2.1 billion, its presentation shows. Meanwhile, GAM reported outflows of CHF 8.5 billion outflows for the first half of the year, driven by its specialist fixed income strategies, which lost CHF 5.7 billion, its half-year 2020 report shows. According to that report, net outflows in the second quarter were lower than those in the first — CHF 2 billion versus CHF 6.5 billion.

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Virus Will Spur a ‘Tsunami of Fraud’ in the U.K., KPMG Warns

Brief: The coronavirus is likely to trigger a tsunami of U.K. fraud cases when courts and law enforcement get back to full strength, accounting firm KPMG warned. Although there have been fewer fraud cases compared to previous years, that will change as the courts get back on their feet, KPMG said in a report released Tuesday. “The Covid-19 environment has led to increased financial pressures on individuals and organizations leading to more opportunities to commit fraud,” Roy Waligora, KPMG’s head of investigations in the U.K., said in an emailed statement. “This is likely to lead to further risk of financial misreporting and of misconduct and fraud in traditional hot spots.” The backlog of criminal cases in England and Wales stood at 37,434 at the end of 2019 and likely has grown considerably during the outbreak, when several courts closed their doors and others scaled back operations. Several cases may stem from the government’s job-retention program, the accounting firm said. KPMG says the U.K. tax authority received as many as 1,900 reports of furlough fraud in May. Last month, revenue and customs officials made their first arrest in relation to the program, which paid 80% of wages up to a cap of 2,500 pounds. “We are likely to see a lot more HMRC activity where government aid schemes have been abused,” Waligora said. “We are likely to see a tsunami of Covid-19 related fraud cases.”

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Fed is Headed for a Clash with Hedge Funds, Other Shadow Banks

Brief: The Federal Reserve and other central banks are heading for a collision with shadow lenders -- the firms with a sinister nickname that are increasingly dominating global finance. Even as policy makers struggle to reopen their economies in the midst of the coronavirus pandemic, they’ve launched a review of what went wrong with markets in March, when a worldwide dash for cash by investors nearly crashed the financial system and forced unprecedented rescue actions by central banks. Their focus is on loosely regulated money market and hedge funds, mortgage originators and other entities. Already, some watchdogs have pointed to highly leveraged trades involving U.S. Treasuries as one source of the turmoil. “In many cases they have reached systemic importance,” Bank for International Settlements General Manager Agustin Carstens said of the non-banks. He added that it’s time to move toward more regulation. There’s a lot at stake should the scrutiny lead to tougher oversight. The alternative financiers are major providers of credit to households and companies, making their smooth functioning critical to the health of financial markets and the economy. Non-banks are marshalling their lobbyists in Washington to argue that casting blame on the industry is misplaced. A point in their favor is that unlike Wall Street banks a decade ago, shadow lenders didn’t cause the recent meltdown. Instead, the financial-market stress was triggered by a health crisis.

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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 August 4, 2020:

  • In the United States, President Donald Trump had a sit-down interview with Axios that aired on Monday night. In response to the interviewer’s question regarding the government’s handling of the coronavirus pandemic and its lack of apparent control, President Trump responded: Well, what’s your definition of control? I think it’s under control.” The interviewer countered that COVID-19 can’t be under control when 1,000 Americans are dying a day. The President’s response was the following: “They are dying. That’s true. And you – it is what it is… But that doesn’t mean we aren’t doing everything we can. It’s under control as much as you can control it.”

  • In Canada, public health officials and researchers are concerned about the growing online movement around disinformation regarding the COVID-19 pandemic in the country. For instance, conspiracy theories may lead more and more Canadians to avoid important safety measures, such as social distancing or wearing a mask. The CBC article noted a study from Carleton University back in May that 46% of Canadians believed in one of four unfounded COVID-19 theories: That the virus was engineered in a Chinese lab; the virus is being spread to cover up the effects of 5G wireless technology; drugs such as hydroxychloroquine could cure COVID-19 patients and that rinsing your nose with a saline solution could protect you from infection.

  • A study from the University College London and the London School of Hygiene and Tropical Medicine said the United Kingdom could face a second wave of COVID-19 twice as widespread as the initial outbreak. The study points that this result could happen without a more effective test-and-trace system in place as students are set to return to school in the fall. The study concluded a second wave could be prevented if 75% of those with symptoms were found and tested, along with 68% of their contacts being traced.

  • France’s medical officials are also sounding similar warning bells for the potential second wave. The country’s council of scientific advisers have warned that it’s highly probable a second epidemic wave will be observed in the fall or next winter. The infection rate in France has climbed back to levels last seen before a strict lockdown started to be lifted in May and government officials admit the situation is controlled, but fragile.

  • In the Philippines, tens of millions of people find themselves back in lockdown as the country struggles to contain the spread of COVID-19. Stay-at-home orders are now in place in Manila, along with four surrounding provinces on the island of Luzon for two weeks. The orders mean citizens in the area must stay home except for going out to buy essential goods, or exercise outdoors. Public transport has been suspended and domestic flights grounded. With only 24 hours notice of the new lockdown restrictions, many people found themselves stranded in the capital without any transportation to return to their hometowns.

  • Australia’s hard-hit Victoria state has put in more measures to try and help curb the spread of COVID-19. Victoria Premier Daniel Andrews’s government has banned people who should be self-isolating from exercising outside of their homes and introduced tougher fines for people infected with the coronavirus, but still continue to go to work. Failure to self-isolate will see fines rise from $1,652 AUS to $4,957 AUS. The most serious cases could be taken to court, where the fines could reach $20,000 AUS. The premier said military and health teams have knocked on the doors of more than 3,000 homes in the region, only to find more than 800 people who should been home awaiting a test result, or had tested positive for the coronavirus were nowhere to be found.

Covid-19 – Due Diligence And Asset Management

Record Cybersecurity Attacks Strike ‘Particularly Vulnerable’ Hedge Funds

Brief: Cybersecurity companies are warning that they’ve seen an exponential rise in attempted “phishing”, banking-email compromises, and illegal cryptocurrency mining. And it’s hedge funds that may be most vulnerable. “We’ve definitely seen an increase in phishing and crypto-mining, and an uptick in hacking attempts,” Ed Cowen, CEO of Remora, a cyber security consultancy which specialises in hedge fund and asset manager clients, told Financial News. “It’s part of an overall trend that has been accelerated by the digitisation of business and the evolution of crime. ”Soaring cases of cyberattacks have been plaguing every sector of the financial industry as the pandemic-driven lockdown forced workers to scatter beyond the firewalls of secure offices. But it’s an especially acute issue for hedge funds, given that many firms in the sector tend to lack the large-scale, in-house security of bigger firms. The rewards for crime are also high: hedge funds manage billions in assets, making them more exposed. “The real challenge for funds is that many of them are large micro-businesses,” Cowen said. “They have to look, talk and feel like they’re large corporations, but typically they’re between 10 and 20 people ... I don’t think funds and businesses in the UK are fully aware of the scale of cyber fraud. If a bank gets robbed, people talk about it; if the [hedge fund] office gets robbed, no one talks about it.”

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Investors Are Clinging to an Outdated Strategy – At the Worst Possible Time

Brief: Despite the longest economic expansion in U.S. history, the gap between the present value of liabilities and assets at U.S. state pensions is measured in trillions of dollars. To make matters worse, pensions are now faced with the reality that standard diversification — including extremely low-yielding bonds — may no longer serve as an effective hedge for equity risk. While I was at CalPERS, concerns arose in 2016 about the effectiveness of standard portfolio diversification as prescribed by Modern Portfolio Theory. We began to recognize that management of portfolio risk and equity tail risk, in particular, was the key driver of long-term compound returns. Subsequently, we began to explore alternatives to standard diversification, including tail-risk hedging. At present, the need to rethink basic portfolio construction and risk mitigation is even greater — as rising hope in Modern Monetary Theory to support financial markets is possibly misplaced. At the most recent peak in the U.S. equity market in February 2020, the average funded ratio for state pension funds was only 72 percent (ranging from 33 percent to 108 percent). That status undoubtedly has worsened with the recent turmoil in financial markets due to the global pandemic. How much further will it decline and to what extent pension contributions must be raised — at the worst possible time — remains to be seen if the economy is thrown into a prolonged recession.

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Four Shut Franklin Schemes Hit by Defaults

Brief:Four among the six shuttered debt schemes of Franklin TempletonMutual fund saw a fall in their Net Asset Values or NAVs after two entities - Nufuture Digital (India) Ltd (NDIL) and Future Ideas Co Ltd (FICL) – defaulted on payments. The net asset value of Franklin India Income Opportunities Fund fell by 4.73% on Friday. The NAV of Franklin India Credit Risk Fund also saw a dip of 2.28%, Franklin India Short Term Income Plan’s NAV dropped by 1.75% and Franklin India Dynamic Accrual dropped saw a fall of of 1.343%. “Due to default in payment, the securities of FICL and NDIL will be valued at zero basis AMFI standard hair cut matrix and interest accrued and due will be fully provided. Securities of RTVPL will continue to be valued at 75% basis recommended valuation,” Franklin Templeton MF said in a note. "This is a bad news for sure. A debt mutual fund investor has capital protection on his/her mind always. A 4.7% dip in NAV is huge. And when you can't pull out your money or do anything, it is worse. I believe this may lead to further fear psychosis in the minds of debt investors. In such situations, debt investors may report to redeeming from other debt schemes as well, which is not good," says Babu Krishnamoorthy, Chief Sherpa, FinSherpa InvestmentServices.

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ESG Funds Crowned Winners of COVID-19 Crisis

Brief: Australasian sustainable funds attracted inflows worth more than $207 million in the second quarter of 2020, with Australian Ethical and Dimensional reaping the majority of these rewards. Morningstar's latest Global Sustainable Fund Flows report, which examined 3432 sustainable open-end funds and exchange-traded funds (ETFs) across the globe in the second quarter of 2020, found that sustainable funds outperformed following the March market sell-off. Assets in Australasian sustainable funds increased substantially during the second quarter, up 18% from $14.9 billion (US$10.6 billion) at the close of the first quarter to $17.7 billion (US$12.6 billion). At the end of June, sustainable assets recorded one of their highest levels, only outpaced by their peak at December 2019. Morningstar found there are now 108 strategies in the Australasian sustainable fund universe, up from 86 at the close of the first quarter 2020. Interestingly, the Australian sustainable funds market is relatively concentrated, with the top 15 funds accounting for 60% of all assets in the sustainable fund arena.

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European ‘Zombie’ Companies Have Three to Six Months’ Runaway Before Defaults Rise, says Aviva Investors

Brief: Concern is growing over a likely spike in defaults among so-called ‘zombie’ companies that have stayed afloat during the coronavirus pandemic by relying on government stimulus and increasing their debt loads, but will struggle to keep servicing loans as government schemes roll back. ‘Zombie companies’ are indebted businesses that only generate enough cash to cover operational costs and interest payments on their loans, but not the debt itself. In the UK, financial services industry body The City UK estimates that businesses may build up GBP100 billion of debt by next March which they would be unable to repay, with 780,000 SMEs in danger of insolvency. A global forecast by fund manager Janus Henderson for overall corporate debt predicts a jump to a record USD9.3 trillion in 2020. Jub Hurren, senior portfolio manager of AIMS Fixed Income at Aviva Investors, says that many companies won’t fail immediately, thanks to supportive monetary policy: “The fact that interest rates are going to stay at extremely low levels means that even companies with low earnings can probably survive longer than they would otherwise because of the reduced burden in terms of servicing debt.”

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Property Fund Investors Should Wait Months for Cash to Avoid Exodus: UK Regulator

Brief: Investors in property funds should wait up to six months before they can get their money back to avoid a stampede for the exit leading to widespread suspensions in rocky markets, Britain’s Financial Conduct Authority proposed on Monday. UK-regulated open-ended property funds offer daily redemptions to entice investors, but nearly all those targeted by Monday’s proposal are suspended following market volatility in March due to the pandemic, trapping more than $7.5 billion in assets. Policymakers have warned that property funds should not be viewed like a bank account that can be tapped at will, given they contain “illiquid” assets such as commercial real estate that can take several months to sell even in normal market conditions. Concerns over daily redemptions began when several property funds were suspended after Britain voted in June 2016 to leave the European Union, as investors pulled out money. The Financial Conduct Authority (FCA) proposes that property funds publish a “notice period” or irrevocable pre-agreed gap of between 90 and 180 days from the request for a redemption to the return of cash. It would affect new and existing customers, but also mean that property funds don’t have to hold as much cash as they do now, the FCA 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.

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