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Covid-19 Diligence Briefing

Our briefing for Thursday October 29, 2020:

  • United States House Speaker and Democrat Nancy Pelosi is continuing a push towards a coronavirus stimulus package agreement with the Trump administration. Pelosi has been negotiating with Treasury Secretary Steven Mnuchin and has tried to make her pitch via the media – stating she sent a letter to Mnuchin for responses as talks toward a deal have stalled since Senators left the capitol ahead of the general election in a matter of days. In the letter she cited a number of differences that were not resolved during the pre-election scramble talks, including a national testing strategy, state and local government relief, enhanced unemployment insurance, along with several other areas for credit/relief for Americans. The Treasury Department did not immediately respond to media’s requests for an answer to Pelosi’s demands.

  • In Canada, the two most populous provinces – Ontario and Quebec continue to deal with surges of new cases. Quebec reported more than 1,000 new cases on Thursday, but government officials at least received some good news after hearing a group of gym owners backed off their threats to reopen in spite of lockdown orders. The counter threat from government officials stating not only the owners of the gym, but clients as well, would be fined was enough to get the gym owners to back off for now. The province hardest hit by COVID-19 was also expected to receive 30,000 COVID-19 rapid tests, which was their first batch. Meanwhile, Ontario reported 934 new cases on Thursday, pushing their seven-day average to nearly 900. Canada’s largest city – Toronto set a new record with 420 cases beating their previous record of 330 by a considerable margin.

  • In the United Kingdom, the Financial Times is reporting more than 500,000 companies are showing signs of “significant financial distress” due to the coronavirus pandemic. Significant distress is defined as those businesses with minor county court judgement (an order for a company to pay off its debts) of less than £5,000 filed against them, or which have been identified by a credit scoring system. The rise comes even as rules around insolvency and closing down have been relaxed and the government pouring in billions of dollars through the job furlough scheme. However, many of those schemes are coming to end this year, which are sparking concerns of more corporate failures to come in 2021.

  • In a televised address, France’s President Emmanuel Macron announced a new coronavirus lockdown Wednesday evening. The President admitted a curfew for Paris and other major cities imposed two weeks ago hasn’t been able to halt the second wave. Therefore, starting Thursday evening bars, restaurants and non-essential businesses will be forced to close and written statements will be required for people to leave their homes. The latest enforcements are expected to be in place until at least December 1st.

  • In Spain, the parliament has approved another six-month state of alert. The move gives the central government emergency powers aimed at putting a dent in the rapid spread of COVID-19 through the country. Earlier in the week, Prime Minister Pedro Sanchez’s government imposed a nationwide curfew between 11PM to 6AM and allow regional governments to close their borders and ban meetings of more than six people. Spain has been one of the hardest hit countries in Europe becoming the first to surpass one million total cases of the coronavirus in the EU bloc.

  • Philippines President Rodrigo Duterte said he would favour a government-to-government deal for the purchase of future COVID-19 vaccines as a way to prevent corruption. “Let me tell everybody that we will not beg, we will pay”, said Duterte in a pre-recorded address earlier in the week. President Duterte has repeatedly said he has received assurance from China that his country would be a priority when a vaccine becomes available, but is looking more like a mid-2021 release and not the December 2020 timeline Duterte pitched in previous messages. During his announcement, Duterte also ordered the extension of the quarantine in Metro Manila, along with six other areas in the country until the end of November.

Covid-19 – Due Diligence And Asset Management

Credit Suisse Shutters Funds in Asset Management Review

Brief: Credit Suisse Group AG is closing down funds and laying off employees at its alternative asset management business after several of the strategies struggled to perform in the volatility caused by the Covid-19 pandemic. The bank’s actions include shuttering a quantitative fund and taking a 24 million Swiss franc ($26 million) charge on seed capital in a U.S. real estate fund in the third quarter, Chief Financial Officer David Mathers said in an interview, declining to name the funds or detail the extent of the layoffs. Asset managers are facing challenging market conditions amid the pandemic, with hundreds shuttering or in the process of closing down, including AJO Partners, a $10 billion quantitative fund manager, and macro hedge fund firm Tse Capital Management. Credit Suisse earlier this month said that Aventicum Capital Management, a joint venture with the Qatar Investment Authority, will close two groups of funds and return capital to investors. “We have seen some of these funds struggling in this environment -- their strategies have not succeeded in the volatility that has happened with Covid-19,” Mathers said Thursday. “The credit business is doing fine, it’s some of the smaller ones.”

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“A Better Way to Invest”: Big Society Capital’s Sir Harvey McGrath says Structural Change is Coming to the Asset Management Industry

Brief: At a time when governments around the world are burning through billions attempting to rescue citizens from the financial pain of coronavirus, which has created severe crises in healthcare and employment, Big Society Capital says there is a crucial opportunity to use private money to fund social causes.Big Society Capital was one of the first institutions to champion impact investing in the UK. It was established in April 2012 as a private company with the purpose of building the social impact investment market, under a pledge made by former Prime Minister David Cameron. “There's no doubt that the Covid crisis has really reinforced the momentum that was already there,” says its chairman, Sir Harvey McGrath, adding that there has been a “fairly strong flow” of recent inbound inquiries from investors. Some of this interest is “directly a function of the crisis”, but McGrath also considers this to be part of a broader paradigm shift taking place in the finance industry at large, as generational change boosts demand for value-aligned money management.

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Investors Pull $2.5 Billion from Junk Debt, Most Since September

Brief: U.S. high-yield bond funds suffered the biggest outflows since the end of September, as investors sought to limit their risk exposure amid growing coronavirus infections across the world and ahead of the upcoming U.S. election. High-yield investors pulled $2.5 billion out of retail funds during the week ended Oct. 28, according to data compiled by Refinitiv Lipper. It’s the first withdrawal since the $3.59 billion yanked in the reporting period ended Sept. 30, and follows an inflow of $150.9 million last week. Investors fleeing the asset class to seek safety elsewhere are also taking out cash from high-yield exchange-traded funds. Two junk-bond sales were pulled from the primary market this week, and other borrowers are sweetening terms to get deals done. High-yield spreads had widened 47 basis points this week through Wednesday, the most since the week ended Sept. 25, according to Bloomberg Barclays index data. Junk bonds sold off alongside stocks and oil, which both fell to new lows this week.

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Companies are Planning for Remote Work Through 2021 Due to Covid, says ServiceNow CEO

Brief: ServiceNow CEO Bill McDermott told CNBC on Thursday that business leaders are making preparations for their employees to work remotely through next year due to the coronavirus pandemic. McDermott, whose company provides cloud-based software that automates IT and employee workflow, was responding to a question about his conversations with fellow chief executives as they seek to navigate a world upended by Covid-19. There will undoubtedly be a long-term shift with a larger percentage of employees who can work remotely doing so, McDermott said on “Squawk on the Street.” He predicated a “hybrid world,” where employees routinely split time between working in the office and at home. But more near term, he said, “the other thing I’m hearing is people are already preparing for working from home or working from anywhere through 2021, because even if you do get a vaccine, it’s obviously not going to get through the global population for somewhere upwards of a year, probably a year and a half from now.”

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BlackRock Defies Stock Chaos With Small-Cap Value ETF Launch

Brief: Few things divide opinion on Wall Street like the outlook for small-cap stocks or the fate of the value strategy. Yet most market players would probably agree it’s a tough time to launch a product combining the two. That’s exactly what BlackRock Inc. is doing with a new exchange-traded fund. The iShares Factors US Small Cap Value ETF began trading on the New York Stock Exchange under the ticker SVAL on Thursday. The fund screens for value-oriented stocks in the Russell 2000 Index based on liquidity, volatility, leverage and analyst sentiment and then weights securities equally. It’s an eye-catching arrival given the backdrop. Small-cap shares and value strategies have been battered anew this year as the coronavirus sparked an economic crisis. U.S. equities endured yet another bout of volatility this week, a broad selloff that has spared few sectors. Even after those declines, the S&P 500 Index has still gained 1.2 per cent year-to-date. The Russell 2000 Index, by contrast, is roughly 7.5 per cent lower and value stocks -- those that look cheap relative to fundamentals -- are down more than 15 per cent.

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Brace for a ‘Fairly Scary Time’ on Wall Street, Wells Fargo Warns

Brief: Wells Fargo Securities’ Michael Schumacher has a message for investors: Buckle up. The firm’s head of macro strategy warns Wednesday’s market turbulence may just be a preview of what’s ahead. “When you think about the U.S. elections, Covid worsening [and] all sorts of other news items coming out in the next couple of weeks, it could be a fairly scary time,” Schumacher told CNBC’s “Trading Nation.” On Wednesday, the S&P 500 and Dow had their worst days since June 11 due to growing fears over rising coronavirus cases across the nation. There’s speculation they could spark new containment measures and closures. While jitters over rising virus cases drove the latest sell-off, Schumacher warns election uncertainty has the potential to pummel stocks even more. “One thing we pointed to for a while at Wells Fargo is the chance the election results are delayed. In that case, it’s almost certainly risk-off. So, a lot of reasons to be concerned over the next week to ten days,” he said. “Right now, it seems the virus has the upper hand, but it’s a very close call. And, frankly, these things are intertwined.”

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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 October 28, 2020:

  • In the United States, Admiral Brett Giroir, who leads the government’s testing effort, says the country is at yet another critical point in the fight against the pandemic. With over 73,000 new cases reported on Tuesday, the new 7-day rolling average for COVID-19 cases is 71,832, a fresh new record and an increase of over 20% compared to a week ago, according to data from Johns Hopkins University. During an appearance on NBC Wednesday, Giroir emphasized that Americans, “can control the virus” by following public health measures such as social distancing, mask wearing, avoiding crowded gatherings and frequent washing of hands.
  • The Bank of Canada lowered its predictions of economic growth for 2021, cautioning that the effects of the coronavirus pandemic will be long-lasting. The Bank of Canada projected the country’s GDP to expand 4.2% next year, down from the 5.1% they projected back in July. However, Canada’s central bank does believe 2020 won’t end as badly as originally thought thanks to a stronger performance than anticipated over the summer months. The drop in 2020’s GDP for Canada is expected to be at around 5.5%, which is better than the earlier 7.8% estimate. The Bank of Canada’s outlook though is taking two major factors into account: that widespread lockdowns won’t be utilized again and that a vaccine or effective treatment will be widely available by the middle of 2022.
  • In the United Kingdom, new modeling from the government’s emergency scientific committee suggests Prime Minister’s Boris Johnson’s localized coronavirus lockdown approach will be redundant by mid-December. The reason being is the model suggests that the whole of England will likely require the toughest restrictions they have seen since the first initial lockdown back in the spring. The model is outlining more deaths than the first wave because while the peak will be lower, the cold winter months will allow the daily death toll to stay higher for longer. This is news Prime Minister Johnson definitely doesn’t need as he is struggling to find a balance between the demand of the scientists who wanted a “circuit breaker” shutdown and his Conservative party members who want to prioritize easing of rules to help the economy.
  • Germany’s federal and state governments have agreed on Wednesday to shut down parts of the economy and toughen restrictions on social contact. The new regulations to come into effect as of Monday, will see all restaurants, bars and most public entertainment to be closed until the end of November. The German professional football league, along with other professional sports will be played, but without spectators. Schools, daycare centers, hair salons and retailers can remain open. Chancellor Angela Merkel will meet with state leaders in two weeks for a reassessment in order to evaluate the efficiency of the measures and make any necessary adjustments.
  • Increasingly worried by the spread of the virus over continental Europe, the European Commission has unveiled plans to improve EU-wide coronavirus testing and tracing. The Commission plans to extend the linked network of contract tracing apps launched in Germany, Italy and Ireland last week to as many of the other 24 nation member bloc as possible. The Commission also proposed that member states should co-ordinate strategies for rapid testing, vaccination and travel around the bloc.
  • In Australia some good news out of Melbourne as the city emerges from its 112-day lockdown on Wednesday. The lockdown was one of the strictest the world has seen – enforcing home confinement, travel restrictions and closures of stores and restaurants. At its peak in July, Victoria state was experiencing 700 cases a day, the majority of those in Melbourne. Over the weekend, there were zero cases noted. State Premier Daniel Andrews praised the six million residents of the region: “Fundamentally, this belongs to every single Victorian who has followed the rules, stayed the course, worked with me and my team, to bring this second wave to an end.”

Covid-19 – Due Diligence And Asset Management

Blackstone Third-Quarter Earnings up on Strong Asset Sales

Brief: Blackstone Group LP said on Wednesday its third-quarter distributable earnings rose 9% year-on-year, as the world’s largest manager of alternative assets such as private equity and real estate took advantage of a rise in corporate valuations to cash out on some of its leverage buyout investments. Distributable earnings - cash available for paying dividends to shareholders - totaled $772 million, up from $710 million a year earlier. This translated into distributable earnings per share of 63 cents, surpassing analysts’ average estimate of 57 cents, according to data compiled by Refinitiv. Blackstone said its private equity portfolio appreciated 12.2% in the quarter, compared with an 8.5% rise in the benchmark S&P 500 stock index over the same period. Opportunistic and core real estate funds rose 6.4% and 3.5% respectively. Blackstone’s shares were down 2.9% in afternoon trading, in line with the broader market.

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Europe is Leading the Way Down in Markets Gripped by Covid Fears

Brief: Europe’s race to contain the pandemic is raising alarm bells across financial markets. Moves from stocks to the euro and Italian bonds show investors are grappling with the economic fallout from lockdown restrictions that are now some of the toughest in the world. While markets globally have taken a dip this week, the hit was most severe in Europe. The Stoxx Europe 600 Index sank as much as 2.7% on Wednesday, reaching the lowest level since May. In contrast, U.S. equities are only at a three-week low and Asian markets have barely budged. “A second lockdown could well be the death knell for a lot of businesses who just about survived the first lockdown,” said Michael Hewson, chief market analyst at CMC Markets. The selloff on Wednesday was sparked by news that German Chancellor Angela Merkel will propose closing bars, restaurants and leisure facilities for a month. France is also expected to announce new curbs after coronavirus deaths reached the highest since April. In Italy, Prime Minister Giuseppe Conte approved a plan to limit opening hours for restaurants and shut gyms. In Spain, the government has imposed a national curfew.

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Cash Builds for Property Debt Funds with Crisis Delayed for Now

Brief: Real estate debt investors are stockpiling cash, searching for opportunities to lend to commercial-property owners hurt by the pandemic. Property debt funds, including at Blackstone Group Inc., raised $14.1 billion from April through September, compared with $15.7 billion a year earlier, according to research firm Preqin Ltd. Yet the expected flood of deals has so far been just a trickle. Now there are signs of a thaw. On one side, competition is building to put that cash to work, motivating some lenders to take on higher risks. On the other, borrowers are growing desperate as loan extensions start to expire on malls, hotels and even some offices that are still struggling as Covid-19 continues to ravage the U.S. economy. “If you’re willing to do it, you’ll get a lot of deals, but you have to be willing to play in those sectors and take some risks,” said Mark Fogel, chief executive officer of Acres Capital LLC, a New York-based commercial property lender. He said he’s getting almost twice as many calls from borrowers looking to refinance their debt or get bridge loans to stay afloat than just a few months ago.

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Consolidation is Coming for the Asset Management Industry

Brief: Fee pressures, growing costs, and a desire for scale are signs that the fragmented asset management industry is ripe for more mergers and acquisitions, according to Morgan Stanley. The top 10 asset management companies hold just a 35 percent share of the $90 trillion market, Morgan Stanley said in a research report dated October 25. The only industry more fragmented, the bank said, is the capital goods sector. Although strong financial markets have helped assets under management swell, this growth has masked problems like outflows, fee pressures, and lower revenue growth, the report said. The market downturn and investor exodus in March revealed some of these problems, but after the market bounced back, they stabilized. Still, Morgan Stanley expects that the market crisis will accelerate these existing trends, motivating some asset managers to make M&A decisions more quickly.

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Japanese Insurers Look to Domestic Bonds as Yield Gaps with Foreign Peers Narrow

Brief: Japanese life insurers, among country’s largest institutional investors, are returning to the domestic bond market after many years of forays into foreign debt as the yield gaps between them have shrunk following the COVID-19 pandemic. Many of them plan to increase their holdings of domestic fixed income assets while planning to reduce those of foreign debt in the second half of the current financial year to March, officials said at news conferences or in interviews with Reuters. “We have long been investing primarily in U.S. dollar bonds but now that their yields have fallen to so low, we are not in a position to buy them aggressively anymore,” said Koichi Nakano, general manager for investment planning at Meiji Yasuda Life. Foreign bonds have been a major source of income for Japanese institutional investors who had been deprived of interest income at home due to the Bank of Japan’s hyper-easy monetary policy. The coronavirus outbreak and subsequent monetary easing around the world to shore up battered economies, however, knocked down bond yields in the United States and elsewhere, shrinking the yield gaps between Japan and the rest of the world.

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These Allocators Say They Are Sticking With Value Managers

Brief: Value managers have underperformed for over a decade — a trend that has only intensified during the coronavirus pandemic and run up to the U.S. presidential election. But they can count on at least one group of asset owners to stay committed to value strategies: private-sector pensions. Corporate and health care retirement plan investors surveyed by consulting firm NEPC have largely reported that they would maintain their current exposures to value stocks. The poll took place in September, a month when the Standard & Poor’s 500 value index fell almost 4 percent. Just under three-quarters of corporate pension investors said they would not reduce or increase allocations to value managers, as did 80 percent of healthcare plan respondents.  Of the 19 percent of investors who were considering changes to their value exposure, just 7 percent planned on cutting allocations to value managers. Nearly twice as many — 12 percent — wanted to rebalance from growth managers into value strategies.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Tuesday October 27, 2020:

  • After confirming the vote for Amy Coney Barrett as the latest judge to join the Supreme Court, United States Senate members have departed the Capitol for a pre-election break, thus making it almost impossible a coronavirus stimulus package will be passed anytime soon. The latest negotiations between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have the Trump administration at $1.9 trillion for a plan, while the Democrats are at $2.4 trillion. Besides the $500 billion gap on stimulus, both sides continue to bicker on the language of the bill. When Fox News pressed a White House spokesperson on Tuesday for the prospects of a deal, she said, “we’re hoping within weeks”.

  • In Canada, a survey from FP Canada, a professional organization for financial planners, found that more than two in five Canadians believe their finances won’t be able to withstand a second wave of COVID-19. The survey’s results revealed 30% of Canadians already worry they’ll never recover from the economic impact of the pandemic, while 42% don’t believe they could survive a second wave. Canadians also aren’t too optimistic their fortunes will be changing anytime soon – with just under 13% believing the country’s economy will strengthen in the next six months.

  • United Kingdom Prime Minister Boris Johnson’s coronavirus restrictions are even starting to get under the skin of his own party. More than 50 Conservative members of Parliament have demanded the prime minister show a clear path out of lockdown for parts of northern Britain, which helped give the Conservative party the majority they won in last year’s election. The large group of MPs’ are warning Johnson his localized strategy is seen as disproportionally targeting areas of the north, thus deepening the divide between the region and the wealthier south of England. 

  • Ahead of a key meeting on Wednesday, Germany’s Chancellor Angela Merkel is preparing to propose tougher restrictions on movement and contact in order to stem the surge of the coronavirus. Chancellor Merkel will propose measures such as closing restaurants and banning major events to Germany’s 16 state premiers. However, such as her other European counterparts, Merkel does not want to go back to a lockdown such as the spring – instead wanting to keep the economy running with schools and daycares remaining open, unless they are in regions with exponentially higher infection rates. 

  • In the midst of a pandemic, you would think a country would make sure their doctors are being paid – however this doesn’t seem to be the case in India. Hundreds of frontline doctors, along with other healthcare workers have launched an indefinite strike in Delhi over months of unpaid salaries. The physicians have been staging sit-in demonstrations and hunger strikes for weeks to demand the authorities release their salaries that are overdue by three months. Delhi is India’s national capital and has been one of the worst affected areas in the country during the coronavirus pandemic. 

  • According to the region’s Chief Executive Carrie Lam, Hong Kong is drafting a law that would make COVID-19 tests mandatory for people with symptoms and other specific groups. During a weekly briefing, Lam said the enacted law would mandate tests for known clusters and high-risk groups but didn’t elaborate any further. The government had mentioned earlier in the month it was studying legal framework for mandatory coronavirus testing. The news comes as Hong Kong plans to ease some restrictions this week such as allowing restaurants to operate at a 75% capacity (up from 50%) and masks won’t be required when exercising in indoor venues.

Covid-19 – Due Diligence And Asset Management

How Fund Due Diligence Has Changed During Covid-19

Brief: Private equity relies heavily on manager skill (alpha) with a large divergence between the strongest and weakest performers in a cohort. Studies have shown that it is possible for some investors to effectively navigate this disparate market and consistently add value, through careful fund selection. Robust due diligence processes, both investment and operational, are a critical part of successful fund/manager selection, but how has this changed during the pandemic? The most obvious impact is from travel restrictions preventing on-site, in-person due diligence meetings. Investors are aware that reviewing track records and strategy can only provide a certain amount of comfort. A large part of the investment consideration is around the people, team dynamics and culture. There is a lot that can be gained from seeing how a team interacts with each other, when visiting a private equity firm’s office - it is often the smaller clues or comments before and after the formal meeting that provide the most insight. Forming a view over a conference call with the team in multiple locations is hard: there is a lack of “vibe” and nuance that can only be gleaned when in-person.

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Brazil’s Coronavirus Splurge is Sparking a Rebellion in Markets

Brief: President Jair Bolsonaro’s stimulus spending spree won praise far and wide for saving Brazilians from the worst of the pandemic’s economic pain. But now, as the worst of the health crisis eases, anxiety is mounting in financial circles about how he’s going to pay for it. Investors have been unloading the currency and stocks, sparking routs that are almost unparalleled in the world this year, and they’re increasingly refusing to buy anything but the shortest of short-term government bonds. At $107 billion, Bolsonaro’s relief program looks more like the massive stimulus packages engineered by the world’s wealthiest nations than those cobbled together by Brazil’s junk-rated peers in emerging markets. Equal to 8.4% of the country’s annual economic output, it’s even proportionally bigger than the plans enacted by the U.K. and New Zealand. All of which turns Brazil into something of a Covid-19 economic case study: Can a mid-tier developing nation emulate the fiscal and monetary response of the world’s most credit-worthy countries and get away with it? Or will it sink into financial crisis?

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Demonstrating Control in a Crisis: How Covid-19 has Reaffirmed the Hedge Fund Allocator Shift to Dedicated Manager Accounts

Brief: In the 12 years since the 2008 financial crisis, many large institutional investors have adopted Dedicated Managed Account (DMA) structures in order to address the challenges in commingled hedge funds that were exposed during the crisis (click here for a brief refresher). These investors were well-prepared to more effectively manage their portfolios through the market volatility which has resulted from the Covid-19 pandemic while eliminating many of the structural risks that can be exacerbated during a crisis scenario. Let’s look at some of the ways that allocators in 2020 have been able to use the benefits of DMAs to more effectively manage through the market impact of Covid-19.

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Pharmaceutical Industry M&A Activity Grew by 17 Per Cent in H1 as Deal Values Drop 56 Per Cent

Brief: According to the research data analysed and published by ComprarAcciones.com, merger and acquisition (M&A) deal activity in the pharmaceutical sector rose by 17 per cent in H1 2020, disregarding the economic toll of the global pandemic. It saw a total of 41 deals during the period, but the Q2 2020 deal value total of USD3.3 billion was the lowest quarterly total since Q1 2018. According to PwC, the pharma sub-sector posted a drop of 56 per cent in deal value from H2 2019 to H1 2020. For the PLS sector as a whole (pharma, biotech and medical devices), the decline in deal value was a massive 87.2 per cent during the same period. Pharma and Life Sciences (PLS) M&A Total Deal Value Sank from USD272.9 billion to USD35 billion YoY. The total deal value for the pharmaceutical sub-sector in H1 2019 was USD100.1 billion. In contrast, its total deal value in H1 2020 was valued at USD7.7 billion.

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Listed U.K. DB Sponsors Issue Profit Warnings Over COVID-19

Brief: More than 60% of listed companies sponsoring defined benefit plans issued a profit warning in the first three quarters of the year as they worked to balance cash flows with meeting pension obligations. Of the 524 profit warnings from U.K. companies, 228, or 44%, came from firms that sponsor a DB plan. Many of the warnings cited the impact of the COVID-19 pandemic as a reason, showed analysis by Ernst & Young. Also, 48 sponsors of U.K. DB funds issued more than one warning in the nine-month period.  The sectors with the highest number of warnings were travel and leisure, industrial support services, construction and materials, retailers and household goods and home construction. While these sectors were the hardest hit, a third of all listed companies issued profit warnings in the nine months to Sept. 30.  However, in the third quarter, listed companies that sponsor a DB plan issued 32, largely COVID-19 related, profit warnings, down 25% from the same period in 2019.

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Mideast’s Top Private Equity Firm Ready to Pounce as Rivals Fade

Brief: The biggest private equity and alternative asset manager in the Middle East is on the lookout for deals after the economic fallout of the pandemic made companies cheaper to buy and scandals thinned out the competition. Investcorp Holding BSC, which manages about $34 billion, is looking to do more in the region across the health-care, transport, logistics and industrial sectors, said Walid Majdalani, the firm’s head of private equity for the Middle East and North Africa. The firm, which has channeled $1.4 billion into the region over the past decade and made a return of about 1.8 times on invested capital, is also facing less competition from other private equity investors, he said. Over the past four years, Investcorp helped sell three family-controlled companies in which it held stakes on the Saudi stock exchange. “We see a lot of opportunity to replicate what we have done already in Saudi Arabia -- the difference is now business owners are a lot more realistic about valuations,” Majdalani said. “Also, in terms of other people who do what we do and have teams on the ground, today we don’t see a lot of competition.”

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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 October 26, 2020:

  • “I think we are right now at the cusp of what is going to be exponential spread in parts of the country.” These were the words of United States Food and Drug Administration head (FDA) Dr. Scott Gottlieb via CNBC on Monday. Over the past seven days, America has recorded an average of about 68,767 new cases every day, the highest seven-day average recorded yet. The latest record is putting stress on local hospital systems and forcing new curfews and other restrictions in some parts of the country.
  • In Canada, the federal Conservative party’s plan B to probe the Liberal party’s leadership through the coronavirus pandemic now has the two largest parties at odds with one another. A parliamentary vote is expected to pass on Monday, which would direct the government to hand over to the House of Commons health committee a series of documents, emails and records. The Liberal government has pledged not to treat this motion as a confidence matter (won’t trigger a national election), as was the case last week, but nonetheless aren’t happy this is taking place. The federal government is arguing the release of these documents could jeopardize the ability to secure critical supplies such as personal protective equipment, rapid tests and vaccines in the future. The opposition Conservatives reject this theory has a form of “fearmongering” and counter they just want to make sure the government’s response to the pandemic is actually working.
  • In the United Kingdom, the Financial Times is reporting the vaccine being produced in coordination by AstraZeneca and the University of Oxford has produced a robust immune response in elderly people, the group at the highest risk from succumbing to the coronavirus. The vaccine seems to trigger protective antibodies and T-cells in older age groups. Elsewhere in the country on the vaccine front, health secretary Matt Hancock tried to lower expectations of an expedited launch of the COVID-19 vaccine before the end of the year, stating on Monday that bulk inoculation from an expected vaccine won’t come until the first half of 2021.
  • Just a few weeks ago, Italy was touting their response to the second wave of the pandemic. All of that changed though over the weekend as the government announced their strictest coronavirus enforcements since May. The new rules were not taken well by some who protested in large Italian cities and feuded with police over the weekend. Prime Minister Giuseppe Conte’s latest plan is to limit opening hours for bars and restaurants, while shutting down entertainment, gambling venues and gyms. Italians are also being urged not to travel with the restrictions in effect until November 24th.
  • Over the weekend in Poland, President Andrzej Duda tested positive for the coronavirus and is now in quarantine. A spokesman for the President said he is feeling well, but Duda did visit the National Stadium in Warsaw on Friday where local officials were transforming the area into a pop-up COVID-19 hospital. Last week, Poland registered a record number of COVID-19 four separate times, prompting the government to establish new coronavirus restrictions.
  • Dubai is planning to offer 500 million dirhams, or $136 million USD, of aid for businesses adversely effected by the coronavirus. The announcement was made via social media by Crown Prince Hamdan Bin Mohammed. The package will consist of rent breaks and elimination of government fees and fines for some businesses. Dubai is recognized as the financial hub of the Middle East and has been hit hard by the pandemic as they rely heavily on trade and tourism. The International Monetary Fund (IMF) expected the United Arab Emirates’ economic output to shrink 6.6% in 2020.

Covid-19 – Due Diligence And Asset Management

Hedge Fund Giants Lose Their Appeal as Havens in Global Turmoil

Brief: Investors have thronged the largest hedge funds since the last financial crisis as they sought safety in size. Now, they’re paying a hefty price. Supersized funds are failing their clients during a period of market upheaval that in theory should pose an unprecedented chance to make money. Instead of profiting, though, some of the world’s biggest hedge funds have barely managed to protect their investors from losses. A Hedge Fund Research gauge that gives more weight to larger players was down 4.4% this year through September, while all hedge funds on average managed to eke out a small profit. Gold-plated names that have slumped include Bridgewater Associates, quant powerhouses Renaissance Technologies and Winton, Michael Hintze’s CQS and Lansdowne Partners. The losses are largely hurting influential institutional investors -- pension funds, insurers and endowments -- that contribute most to the industry’s assets and back the biggest funds. A reckoning looms as clients accelerate their flight. Investors pulled $89 billion from hedge funds in the first nine months of the year, mainly from large firms, according to Eurekahedge data. “A very large portion of the assets invested in large hedge funds have not performed all that well and so it’s causing investors to reassess their objectives,” said Chris Walvoord, global head of hedge fund research at investment consultant Aon Plc. They’re asking, “Why am I invested in this? What’s the purpose?”

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Wall Street Tumbles as Virus Cases Soar, Stimulus Hopes Fade

Brief: U.S. stocks decline picked pace on Monday afternoon, setting the Dow for its worst day in more than seven weeks, as soaring coronavirus cases and a political deadlock over the fiscal relief bill raised doubts about the fate of the economy recovery. New infections have touched record levels in the United States, with El Paso in Texas asking citizens to stay at home for the next two weeks. In Europe, Italy and Spain imposed new restrictions. Travel-related stocks, vulnerable to COVID-19 related curbs, dropped. The S&P 1500 airlines index fell 5% and cruise line operators Carnival Corp and Royal Caribbean Cruises Ltd shed more than 9.5% each. “People are nervous about the expansion in cases,” said Christopher C. Grisanti, chief equity strategist, MAI Capital Management, Cleveland, Ohio. “The administration has said it does not want to slow down the economy yet as cases rise they may not have a choice.” Energy index tracked a more than 3% fall in oil prices. Other economically-sensitive industrials and financials sectors posted the steepest percentage declines among S&P sectors.

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COVID-19 Pandemic Deals Body Blow to Quant Models, Study Shows

Brief: The coronavirus pandemic has dealt a body blow to the quantitative model-based style of investing, with a majority of the firms using such strategies negatively impacted, a study by Refinitiv has found. In a report, financial data provider Refinitiv said 72% of such investors were hurt by the pandemic. Some 12% declared their models obsolete and 15% were building new ones. Machine-learning refers to the use of complicated mathematical models and algorithms based on historical data in order to make predictions without being explicitly programmed to do so. While such machine-driven models had success in the past as historical correlations among different asset classes held firm, they have suffered in the wake of the pandemic as these linkages have broken down. These quantitative models have also suffered in 2020 as the amount and complexity of the inputs that go into such algorithms to generate trading signals have exploded in recent years. “COVID-19 presented a large shift in many of the market dynamics and many institutions would have had to revisit a large portion of the models that they had in order to make them cope with what has been extreme market events,” said Amanda West, global head of Refinitiv Labs at Refinitiv.

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Bridgewater’s Prince Warns of Severely Limited Growth Post-Covid

Brief: Bob Prince, co-chief investment officer of the world’s biggest hedge fund at Bridgewater Associates, said an unusual combination of low interest rates and rising debt during the pandemic will “severely” limit potential growth rates in the aftermath of the pandemic. Fiscal policy will remain the primary source of stimulus, fueling the risk that government debts become too high and leading to pressure on exchange rates, he said. These problems will be more acute outside of Asia. “Global investors tend to be very Western-centric,” Prince said on Bloomberg TV. “The East is nothing like that. It’s not just China. A number of countries have done a much better job managing the virus without ballooning their fiscal deficits and printing money.”  Bridgewater’s Prince Says Bonds Are Risky in Zero-Rate World  Prince said his colleagues in China meet at the office without masks, whereas Bridgewater’s U.S. employees still work from home. “That economy is much closer to normal and the pricing of assets is much closer to normal,” he said. “There’s a substantial divergence occurring economically between East and West. As investors, you shouldn’t let yourself get completely locked into the West.”

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COVID Changing How Venture Capitalists Invest in IPOs

Brief: It takes a high degree of due diligence for investor capitalists to rifle through the mass number of investment opportunities to find that next big initial public offering (IPO). Just like how Microsoft was started in a garage, a lot these new generation IPOs will probably start in someone’s bedroom given the way Covid-19 has changed the world. According to a CNBC MakeIt article: “Another change toward a work-from-home world courtesy of Covid-19: Bill Gurley, who has invested in the likes of Uber and Zillow, says he’s now investing in start-ups that do not have a traditional office.” “We are now backing start-ups without offices, which isn’t something we had done before,” Gurley, who was a long-time investor with Silicon Valley venture capital Benchmark, said in the article. Furthermore, the article pointed out that “in a June survey by venture capital firm NFX, ‘60% of VCs said they were less likely to invest in start-ups that had the majority or all of its employees working remotely,’ the San Francisco Business Times reported.” “Remote companies are seen as more fragile, because employees can easily leave for the next remote job, NFX managing partner James Currier told the publication,” the article added. “And according to Trulia co-founder and NFX managing partner Pete Flint, being nimble and creative, as start-ups need to, is more easily accomplished when people are together in the same physical space.”

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COVID-19 Puts New Opportunities and Risks on the Agenda

Brief: The COVID-19 pandemic has changed the opportunity set and risks to which institutional investors are paying attention, with credit and potential bankruptcies high on the agenda. One challenge has been finding the right combination of the "least-worst" performing asset classes, said Troy Rieck, CIO of the A$13 billion ($9.2 billion) LGIAsuper, Brisbane, Australia, on a panel discussion Friday at the Pensions & Investments WorldPensionSummit conference. Mr. Rieck added that the super fund's executives do not try to second-guess forecasts related to political risks arising from elections or geopolitics when building the portfolio. Executives are trying to build portfolios with a focus on credit rather than equity, he said. Mr. Rieck added he is excited about infrastructure debt, real estate debt, regulatory capital arbitrage, high-yield and bank loans. "If it is credit-related, I want to own it," he said, adding that investors get "zero for cash and nothing for bonds. Besides those assets, "there is not much out there we like," he said. It could be a challenging decade if inflation does turn up, he said.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Friday October 23, 2020:

  • The United States hit a three-month high on Thursday, recording over 70,000 new cases of Covid-19. The staggering number of new infections marks the fourth largest single-day increase the country has seen since the pandemic began. According to The Atlantic’s Covid Tracking Project, hospitalizations in the country are up 33 per cent in October. The new infections are creeping across the Sun Belt, the Midwest and the northern states. A study conducted by the University of Washington's Institute for Health Metrics and Evaluation revealed yesterday that only 49 per cent of Americans report that they “always” wear a mask in public. Across the nation, only the state of Oregon is reporting a downward trajectory in new infections, while all other states are reporting increases.

  • In Canada, the reopening of schools has not been the disaster some had anticipated according to Dr. Michael Silverman, medical director of the infectious diseases care program at St. Joseph’s Hospital in London, Ontario. The decision to bring children back to the classroom was initially met with great resistance from parents who believed it was inevitable that the virus would run rampant through the schools. Just over 1500 cases have been reported in the Ontario public school system since classes began on September 5th, “for the vast majority of children and the vast majority of teachers, this has been a safe and effective intervention,” says Silverman. “That has led to children restarting their education, which has led to long-term benefits for all of us”

  • The United Kingdom is attempting a new method of pinpointing the spread of Covid-19 by processing wastewater in selected communities. The Department for Environment, Food and Rural Affairs began testing sewage in areas most affected by the virus in June and since then has been able to more accurately assess spikes in specific communities or institutions. The program has been largely successful, “particularly in areas where there may be large numbers of people who aren’t showing any symptoms and therefore aren’t seeking tests,” said UK Environment Secretary George Eustice. The information given to the National Health Service’s Test and Trace committee allows experts and community leads to take action to slow the spread of the virus in targeted areas.

  • India is no longer on track to pass the United States for the highest number of cases of Covid-19. While the virus is taking hold once more across the globe, India has seen decreasing numbers in October. The country’s top scientists believe that the virus had peaked in India in September and could potentially be under control by February of 2021. The news comes as roughly 100 Indian volunteers have signed up to be some of the first people outside of Russia to test the Russian Sputnik V vaccine. India has ordered over 100 million doses of the first registered coronavirus vaccine and has made arrangements with the Russian Direct Investment Fund and a local pharmaceutical company for the vaccines distribution when it becomes available. India has seen over 7.5 million cases of Covid-19 and has recorded over 115,000 deaths.

  • French Prime Minister Jean Castex has reinstated curfews for eight regions in country, admitting that the “second wave is here.” France and much of Europe have seen major increases in the virus over the last week causing the government to re-evaluate the current levels of regulation. The curfew will be introduced Friday at midnight is expected to last at least six weeks unless new cases vastly decrease during that time. With the daily number of new cases hovering around 30,000, the Prime Minister said that the virus is spreading less quickly than at the start of the pandemic, but its spread has become much more extensive. Castex on Thursday said, “the situation is grave,” with hospitals in Paris alone recording a 44 per cent occupancy rate and other parts of the country are seeing hospitalizations increasing at roughly the same pace.

Covid-19 – Due Diligence And Asset Management

Asset managers plan to outsource costly non-core work to focus on investing, poll finds

Brief: Asset managers plan to outsource functions such as data management and middle and back office operations in order to cut costs and focus on their core job of generating investment returns for clients, according to a survey by US manager Northern Trust. The poll found that 45% of respondents consider data management as the function most likely to be outsourced within the next two years. Some 40% are looking to outsource back room operations, and 38% at middle office functions. The survey of 300 asset managers, including 40% in Asia, was conducted in the first quarter of 2020. Respondents’ assets under management range between US$10 billion and $500 billion. According to Ryan Burns, head of global fund services at Northern Trust, asset managers are facing rising cost pressures, including those related to regulations and technology.

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Big Banks Moving Beyond COVID-19

Brief: Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Goldman Sachs (GS) are all fresh off earnings with the highly disruptive COVID-19 backdrop still festering. The headline numbers were fantastic with beats on both the top and bottom line for Citigroup, JPMorgan, and Goldman Sachs, with Back of America missing on top-line revenue but beating on bottom-line profit. Big banks are evolving to the COVID-19 landscape domestically and abroad despite the possibility of widespread loan defaults, liquidity issues, ballooning credit card debt, and stressed mortgages. To exacerbate these COVID-19 impacts, interest rates, Federal Reserve actions, yield curve inversion, and liquidity are critical elements. The business's customer side continues to be problematic as the pandemic's duration continues to drag on with no signs of slowing. A segment of the consumer base is faced with lost wages and the real possibility of not meeting their financial obligations, which will unquestionably have a negative impact on revenue and earnings.

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Billionaire Hedge Fund Manager Paul Tudor Jones Expects $1.7 Trillion Stimulus Deal In Next Six To 12 Weeks

Brief: In a Thursday morning appearance on CNBC's Squawk Box, billionaire hedge fund manager Paul Tudor Jones said he believes the next six to 12 months could be the most volatile period for markets he's seen in more than 40 years of trading, as a result of a blue wave election outcome that could pump trillions into the American economy. Tudor Jones, who founded Stamford, Conn.-based Tudor Investment Corporation in 1980, said he believes the U.S. presidential election will result in a victory for former Vice President Joe Biden and a blue wave in which Democrats gain control of the Senate and retain a majority of the House. That would allow for a "massive" $1.7 trillion stimulus in the next six to 12 weeks that would "undoubtedly benefit Main Street America," with an estimated $700 billion going toward another round of stimulus checks, the 66-year-old said.

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Goldman Sachs sends employees home after two Covid-19 cases on trading floors

Brief: Goldman Sachs has sent some employees at its Plumtree Court headquarters home after two staff on its London trading floors tested positive for Covid-19, as banks in the City keep some key workers in the office amid a spike in virus infections across the UK. In a memo to staff sent on 15 October, seen by Financial News, the bank said that one employee on the fourth floor of its London office and another on the fifth floor were self-isolating after testing positive with Covid-19. Equities trading is on the fourth floor, and its fixed income currencies and commodities unit is on the fifth, according to a person familiar with the matter. "If you have been identified as a close contact of these individuals, the Wellness team has already reached out to you to share guidance," the memo said.

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The Covid-19 Crisis Is Starting To Hurt State Bond Ratings. What Does This Mean For Your Investments?

Brief: Investors are losing trust in the Land of Lincoln. Illinois, the fifth largest state economy in the United States, is being forced to pay sky-high interest rates on its general obligation municipal bonds to compensate investors for the risk of lending the state money. The three largest credit rating agencies have not only classified Illinois debt as on the brink of junk, but they’ve also issued negative outlooks to boot. The Prairie State has plenty of company in this regard. Moody’s recently lowered the credit ratings of both New York State and New York City. New Jersey, despite being known as the state with the most millionaires per capita in the U.S., is considered a problematic bet—two credit rating agencies have it on negative outlook.

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Permanently remote workers seen doubling in 2021 due to pandemic productivity: survey

Brief: The percentage of workers around the world that is permanently working from home is expected to double in 2021 as productivity has increased during the coronavirus pandemic, according to a survey from U.S.-based Enterprise Technology Research (ETR). ETR in September surveyed about 1,200 chief information officers from around the world across different industries. The CIOs also expressed increased optimism about business prospects in 2021, as they see an increase in tech budgets by 2.1%, compared with a 4.1% decline this year due to the lockdowns triggered by the pandemic. The survey said information technology decision-makers expect permanent remote work to double to 34.4% of their companies’ workforces in 2021, compared with 16.4% before the coronavirus outbreak, a result of positive productivity trends.

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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 October 22, 2020:

  • In the United States, a university study issued a damning report on the Trump administration’s handling of the coronavirus. A report from Columbia University’s Earth Institute’s National Center for Disaster Preparedness found anywhere between 130,000 and 210,000 deaths from COVID-19 in America could have been prevented. The study points to insufficient testing, a lack of national mandate, and delayed overall response as reasons for the high death rate. When comparing deaths measured by per 100,000 population, the United States’ mortality rate is 78 times higher than South Korea, 50 times higher than Japan, and twice as high as their neighbours north of the border – Canada. The study reports that South Korea and the United States both confirmed their first case of coronavirus on January 20th. 

  • In Canada, the federal Liberal minority government lived to see another day after surviving a confidence vote in the House of Commons on Wednesday. A vote was cast on the opposition Conservative government’s request to create a new committee to probe alleged Liberal corruption. The New Democrats, Green Party and independent members of parliament sided with the Liberals - 146 voting for the committee and 180 against. This means a snap election won’t be held in the country as Canada experiences the second wave of the pandemic. The opposition Conservatives though seem to be undeterred saying an investigation is needed so that Parliamentarians can learn from the mistakes of the first wave. Conservative Leader Erin O’Toole points to the Liberal government’s slow response to the initial first wave, reluctance to close borders to travellers earlier and relying too much on advice from the World Health Organization as reasons the committee needs to be created.

  • In a news conference on Thursday, the United Kingdom’s chief scientific adviser Patrick Vallance noted while some COVID-19 vaccine doses may be available before Christmas, it will be awhile longer before a widespread rollout will be available. “I remain of the view that the possibility of a sort of wider use of vaccines isn’t going to be until spring, or so, next year by the time we get enough doses and enough understanding of the outputs to use them,” said Vallance. Elsewhere in the UK, Prime Minister Boris Johnson announced at the same news conference that the government has begun to roll-out “lateral-flow” tests to schools and universities. These tests don’t require a lab or machine and deliver results within minutes. 

  • France has announced the extension of a night-time curfew to curb the spread of the coronavirus to two-thirds of its population – or 46 million people. French Prime Minister Jean Castex said 38 more of the 101 departments/regions would be undergoing the 9PM-6AM curfew as of midnight on Friday. Nine of France’s largest cities – including Paris are already under the curfew. Government ministers said 44% of France intensive care beds are now filled with COVID-19 patients.

  • The Philippines on Wednesday lifted a ban on non-essential foreign trips by Filipinos. Travelers wishing to go to other countries are required to show confirmed roundtrip tickets, travel and health insurance, a declaration acknowledging the risks of travel and trip delays, and a medical test within 24 hours of departure that clears them of COVID-19. The Philippines immigration bureau said the move didn’t spark immediate large numbers of tourism and leisure, which isn’t surprising since either many nations still have travel restrictions of their own, or now experiencing a second wave of the coronavirus.

  • Brazil’s President Jair Bolsonaro has been fairly quiet for his standards since being diagnosed with the coronavirus himself back in the summer, but is now back with a vengeance. President Bolsonaro blasted a Chinese vaccine being tested in the country just one day after his third health minister during the pandemic announced a deal to purchase the potential coronavirus vaccine. Upon hearing the news, some of Bolsonaro’s most vocal supporters opposed the purchase of a vaccine from a foreign nation. Therefore, Bolsonaro took to social media with the following statement (capital letters included) “The Brazilian people WON’T BE ANYONE’S GUINEA PIG.” Bolsonaro added that billions can’t be spent on medication that is still being tested and his decision is not to acquire the aforementioned vaccine.

Covid-19 – Due Diligence And Asset Management

Investors Brace for Barrage of Covid Vaccine Data to Roil Market

Brief: The next month or two has the potential to wreak havoc in the health-care sector and the market as a barrage of Covid-19 vaccine test results roll in at the tail end of the U.S. presidential election. “The vaccine outlook will ultimately dwarf the election in terms of market impact,” Goldman Sachs’ strategists said. An earlier-than-expected vaccine would send equity values higher while a delay could send the market lower no matter what the election’s outcome, the bank’s analysis shows. With an emergency use authorization now expected around year end, the U.S. Food and Drug Administration is convening a meeting Thursday to set the stage. Mostly it will be the agency looking to get a public endorsement on their stance on Covid-19 vaccine safety guidance and to ease concerns over the politicization of an approval, SVB Leerink analyst Geoffrey Porges said in an interview. Results from vaccine front-runners, Pfizer Inc. and German partner BioNTech SE, are expected within the next few weeks. Moderna Inc. may follow closely behind in November. And the first late-stage data from a single-shot regimen, Johnson & Johnson’s vaccine, could have results before the end of the year. The study however, is currently paused.

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Harvard Posts $10 Million Loss with More Financial Strife Ahead

Brief: Harvard University posted a $10 million operating loss in fiscal 2020 and said it’s likely revenue will decline for a second straight year due to the Covid-19 crisis. That would be a first for the school since the 1930s, Harvard said in its annual financial report Thursday, adding that measures including coronavirus testing and tracing and reconfiguring classrooms and dorms have driven up costs. “The financial effects on Harvard from the onset of the pandemic in March of this year were significant and sudden,” Thomas Hollister, vice president for finance, and Treasurer Paul Finnegan said in the report. “The hardest part likely lies ahead with ongoing challenges” from the virus, they said. Higher education has been hit hard by Covid’s economic fallout as schools have been forced to empty campuses, offer courses remotely and close facilities. That has led to a sharp drop in enrollment across the U.S., especially among first year students. Yet even with the bleak outlook, Harvard said its net assets increased by $893 million to $50.2 billion as of June 30 due to the strong performance of the endowment under N.P. “Narv” Narvekar. The endowment, valued at $41.9 billion, returned 7.3% in the last fiscal year and distributed $2 billion of revenue for university operations, according to the report.

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Big Name Asia Hedge Funds Raise Billions, Startups Struggle

Brief: Established Asian hedge funds have attracted the lion’s share of new money this year, while startups have been hamstrung by global travel curbs that have made it impossible for face-to-face meetings with European and U.S. asset allocators. Well-known firms including Tribeca Investment Partners Pty, Pleiad Investment Advisors Ltd., Dymon Asia Capital (Singapore) Pte. and Sylebra Capital have drawn more than $3 billion of new money among them this year. That contrasts with the net $3.1 billion that flowed out of regional funds in the first eight months of 2020, according to Eurekahedge Pte. Meantime, the median raising for new Asia funds this year is just $20 million. “Asset raising has been possible this year, but it has been materially more challenging,” said Matthew Whitehead, chief operating officer of Hong Kong-based Sylebra…  With a shortage of local institutional allocators to hedge funds, Asian managers rely on U.S. and Europe sovereign wealth funds, university endowments, charitable foundations and pensions for stickier money. That makes them particularly vulnerable to the Covid-19 travel restrictions.

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Financial Crime Compliance Costs Top $42B in U.S./Canada

Brief: A new study of financial crime compliance costs found spending by American and Canadian financial institutions is up sharply in 2020, driven in part by the coronavirus pandemic. The True Cost of Financial Crime Compliance Study, released Wednesday and compiled by LexisNexis Risk Solutions, projected the cost of financial crime compliance at $42 billion across U.S. and Canadian financial firms this year. The costs break down to $35.2 billion for U.S. firms and $6.8 billion for Canadian firms. Total costs are up 33 percent over 2019, the report said. Survey respondents included 150 financial crime decision makers (120 American, 30 Canadian) polled via telephone during August. The individuals worked in financial crime compliance at banks, insurance companies, investment firms, and asset management firms. The total annual cost of compliance across firms was calculated using survey data on financial crime costs as a percent of total assets and secondary data that provides the total assets for all financial institutions in the United States and Canada. The spend amount was generated by multiplying the average percent allocated to financial crime costs by the reported total asset amount, according to the survey’s methodology.

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DWS Donates More Than GBP370,000 to UK-Based Covid-19 Research Effort and Relief

Brief: Earlier this year DWS announced it would donate EUR1 million (GBP905,000) to charitable organisations in countries around the world where DWS is active, and which have been particularly hard hit by the pandemic. In order to show commitment as a firm and to achieve the greatest possible impact, DWS also encouraged employees to make their own donations to these organisations. Nominated by DWS employees, GBP370,000 (EUR400,000) of this total has now been donated to three UK-based charities that provide services for socially disadvantaged people – especially the homeless and children, and a UK-based social enterprise to support research efforts to combat Covid-19 as well as other global epidemics and disease. “The Akshaya Patra Foundation UK” strives to tackle the issues of hunger, malnutrition and education by providing freshly cooked and nourishing meals to children in India and the UK. With the help of DWS, 170,000 meals and 5,250 dry grocery kits were distributed to vulnerable families, providing a total of 390,500 meals since the pandemic lockdown in India.

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Wall Street Forecasts More Asset Managers Will Merge to Survive

Brief: Asset managers are at a crossroads. Having faced the COVID-19 pandemic on top of years of pressure from shrinking fees and shifting investor preferences toward the industry's giants, money managers are debating whether to stick it out on their own or enter the deal market in search of scale or complementary products, Wall Street investment bankers, analysts and other experts say. All the while, the likes of BlackRock Inc. and Vanguard Group Inc. keep gobbling up assets.  "The stars seem to be lining up for more [deals]," said Mark Timperman, a managing director and head of asset management investment banking at Hovde Group who recently joined the Chicago-based company from Wells Fargo Securities LLC, in an interview. "After having been through a real scare with the COVID cycle, when there was another big market correction, people realized that it's time to think about where the industry ends up in five years." M&A has played a critical role in the investment management industry's evolution in recent years. Inexpensive passive investment vehicles and exchange-traded funds have driven down fees for the entire industry, with the race to the bottom going so far that some ETFs dabbled in paying investors, not the other way around. Asset managers have been buying up their peers in an effort to expand their offerings and asset bases so they can more competitively price their products.

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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 October 21, 2020:

  • In the United States, economists from Goldman Sachs are saying there is little chance Congress will pass economic stimulus before the November 3rd election. Though talks are continuing past House Speaker Nancy Pelosi’s self-imposed 48-hour deadline for a deal, both parties remain at an impasse over key matters such as aid to states and business liability protections. Republicans are looking for a smaller deal focused on payment to individuals and business loans, while Democrats want measures that would provide funding at the state and local levels. Goldman Sachs economist Alec Phillips noted progress is being made in smaller areas like testing and contact tracing when it comes to COVID-19.
  • In Canada thanks to their rising COVID-19 numbers, the country will now be removed from the European Union’s (EU) list of travel approved countries in the coming days. In July, the EU set up a so-called “white list” of countries whose citizens were allowed access for non-essential travel. Canada had been on the list since day one, along with several other countries. The United States for instance, due to their high volume of COVID-19 cases were never on the list. The decision doesn’t ban travel immediately for Canadians that want to travel to the EU as the measures aren’t necessarily strictly enforced when it comes to every EU block nation.
  • United Kingdom’s hospitality industry is supporting legal action due to the government’s recent coronavirus restrictions. Trade bodies across the industry have engaged lawyers and sent a pre-action letter to Prime Minister Boris Johnson’s government to back up the most recent round of restrictions with scientific data that proves COVID-19 is widely spread through the country’s pubs, bars and other social venues. If the government fails to respond to the letter, the hospitality industry would fast track the case to the High Court for judicial review. 
  • In Germany, the country’s health minister has tested positive for the coronavirus. The health ministry confirmed Jens Spahn tested positive on Wednesday, went into isolation, and has developed “cold-like symptoms”. The health ministry went on to say all those who came in contact with Spahn have been informed, though no members of Chancellor Angela Merkel’s cabinet will be self-isolating – despite having met with the health minister earlier on Wednesday. A government spokesperson stated: “The Federal Cabinet meets in compliance with hygiene and distance rules, which aim to ensure that even if a person who later tests positive were to participate, quarantining of other or even all participants would not be necessary.”
  • China is trying to use the pandemic to fill a diplomatic void promising preferential access to its eventual COVID-19 vaccines. Wang Yi, China’s foreign minister has led the effort reaching out to countries across Asia, Africa and Latin America. The country who first experienced the pandemic is now aspiring to be the world’s global vaccine supplier with four Chinese products now in phase 3 trials, which is considered the final stage to ensure safety and effectiveness has been met before mass public use.
  • In Brazil, drugmaker AstraZeneca has suffered another setback after the country’s health authority have claimed a volunteer in the coronavirus vaccine study has died. The Federal University of Sao Paulo, which is helping coordinate late-stage trials in Brazil said the volunteer was Brazilian. The University of Oxford who are partners with AstraZeneca in the making of their coronavirus vaccine said in a statement that after an assessment of the case in Brazil, both parties have no concerns about the safety of their clinical trial. Public sentiment though begs to differ with AstraZeneca’s shares taking a tumble in the market after news started to circulate. AstraZeneca’s trial was stalled in September when a UK participant suffered an unknown illness.

Covid-19 – Due Diligence And Asset Management

Fed’s Brainard Urges More Fiscal Aid in Dark Warning on Outlook

Brief: Federal Reserve Governor Lael Brainard said a failure by Congress to reach an agreement on further support for the economy is the biggest risk to the outlook aside from the coronavirus itself. “Premature withdrawal of fiscal support would risk allowing recessionary dynamics to become entrenched, holding back employment and spending,” said Brainard, viewed as a possible pick for Treasury secretary if Democratic presidential nominee Joe Biden defeats President Donald Trump next month. “Apart from the course of the virus itself, the most significant downside risk to my outlook would be the failure of additional fiscal support to materialize,” she told the Society of Professional Economists in an online speech Wednesday. U.S. central bankers next meet Nov. 4-5, immediately after election day. The U.S. economy is recovering from the severe recession triggered by the coronavirus pandemic, but the pace is showing signs of slowing and recent data has been mixed. Retail sales have picked up and sales of homes and autos also rebounded from the second-quarter lows. Still, the economy has recovered only about half of the 22 million jobs lost and non-farm payroll gains have slowed for three consecutive months.

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U.S. Banks Sweat Regulatory Exposure from Pandemic Loans

Brief: Banks that facilitated the U.S. government’s Paycheck Protection Program at first saw the effort as a small revenue booster with a patriotic bonus, shepherding $525 billion in loans to businesses slammed by the fallout of the COVID-19 pandemic. But as taxpayers begin to take on the cost of forgiving those loans, lenders like JPMorgan Chase & Co, Wells Fargo & Co and Bank of America Corp, are girding for what is likely to be years of regulatory scrutiny for their role in doling out the money, according to industry insiders, securities filings and government watchdogs. “The sense of anxiety is high,” said Vivian Merker, a management consultant to financial services firms at Oliver Wyman in New York. “They are gearing up for years of requests from regulators and there’s still reputational risk from PPP fraud even if they did all the right things to follow program rules.” Banks participating in the Paycheck Protection Program (PPP) issued more than 5.2 million loans, to be repaid by the government as long as borrowers demonstrated financial need and used most of the cash to make payroll.

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Nearly Two-Thirds of Canadian Companies Failed to Report Cyber Breaches During COVID-19

Brief: Sixty-four per cent of organizations failed to report cyber breaches this year, over fears of reputational damage at a time when more customers are seeking service online, a cybersecurity expert explains. According to a recent Canadian Internet Registration Authority (CIRA) survey on cybersecurity measures within companies, only 36 per cent of organizations that experienced a data breach reported it, a decline from the 58 per cent in 2019. Spencer Callaghan, a spokesperson at CIRA, said in an interview that some organizations don’t have to report breaches because of how the rules are framed in the Personal Information Protection and Electronic Documents Act (PIPEDA). “Some rules don’t apply evenly to all organizations, therefore there could be some variance in the data based on certain organizations that aren’t required to report,” he said. Sumit Bhatia, director of communications and knowledge mobilization with Ryerson's Cybersecure Catalyst, said in an interview that these numbers were a “reflection of how COVID-19 is truly impacting organizations.”

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Investor Interest in Hedge Fund Grows as Quarterly Inflows Surge Between July and September

Brief: Investor confidence in hedge funds appears to be on the rise, with allocators pouring in some USD13 billion between July and September, the first quarterly net inflow into the industry in two-and-a-half years. New data published by Hedge Fund Research shows the industry on the whole drew positive net inflows for the first time since Q1 2018, with third quarter allocations – dominated by macro and relative value strategies – bringing the total amount of industry capital globally to some USD3.31 trillion. HFR president Kenneth Heinz said the pick-up in inflows was driven both by defensive outperformance by hedge funds through the coronavirus-driven volatility in early 2020, as well as opportunistic gains through the uneven financial market recovery in the second and third quarters. Uncorrelated macro-focused hedge fund strategies led the pack in the three months between July and September as investors, keenly aware of continued macroeconomic uncertainty and growing trends across global markets, pledged some USD7.2 billion across a range of strategy types. That brought total macro assets to USD579.1 billion, with inflows split almost equally between CTA strategies and uncorrelated currency strategies, HFR said. Quantitative, trend-following systematic diversified CTA strategies drew USD3.2 billion of investor money, while currency-focused funds grew by USD3.1 billion.

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China’s Super Rich Got $1.5 Trillion Richer During Pandemic

Brief: China's super wealthy have earned a record $1.5 trillion in 2020, more than the past five years combined, as e-commerce and gaming boomed during pandemic lockdowns, an annual rich list said Tuesday. An extra 257 people also joined the billionaires club in the world's number-two economy by August, following two years of shrinking membership, according to the closely watched Hurun Report. The country now has a total of 878 billionaires. The US had 626 people in the top bracket at the start of the year, according to Hurun in its February global list. The report found that there were around 2,000 individuals with a net worth of more than 2 billion yuan ($300 million) in August, giving them a combined net worth of $4 trillion. Jack Ma, founder of e-commerce titan Alibaba, once again topped the list after his wealth surged a whopping 45 percent to $58.8 billion as online shopping firms saw a surge in business owing to people being shut indoors for months during strict lockdowns to contain the virus.

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Which Global Hedge Fund Strategies Have the Most to Offer in a Post-COVID World?

Brief: The opportunity set for many hedge fund strategies is the best it has been for a number of years. In response to the most challenging market environment since 2008, unprecedented fiscal and monetary responses from governments and central banks have created dislocations and distortions in many asset classes. Volatility has returned to equities, bond yields have fallen dramatically, and inflation fears have stoked demand for precious metals. That said, identifying hedge funds that will be successful is incredibly challenging in an industry with over 4,000 funds managing over $2.92 trillion of assets1. Furthermore, given the unconstrained nature of most hedge funds, dispersion within each broad-based hedge fund strategy is much higher when compared to the long-only world, where different strategies are typically benchmarked to an appropriate index. Manager selection is an increasingly important component when deciding which hedge funds are best placed to capitalise in a post-COVID world.

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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 October 20, 2020:

  • In the United States, the Food and Drug Administration (FDA) are holding an important meeting on Tuesday where potential COVID-19 vaccines will be top of mind. For instance, one of the topics on the agenda will be the criteria for allowing emergency use of  COVID-19 vaccines and plans to monitor its safety after a regulatory go-ahead. Drug companies such as Pfizer, Moderna and AstraZeneca could provide early analyses of late-stage trials by the end of this month, or sometime in November, which will force regulators to consider regulatory authorization. AstraZeneca’s United States trial has been on hold since September 6th after a participant in the UK fell ill, but media reports are noting trials are expected to resume as early as this week after the FDA completed its review. 

  • In Canada, the possibility of a snap election looms as the opposition Conservatives are proposing a creation of a parliamentary committee to probe the Liberal government’s pandemic response. The purpose of the probe is to gain a better understanding of the federal government’s response spending and possible ethical lapses. During a news conference on Tuesday, Prime Minister Justin Trudeau said that Canadians will go to the polls if his government loses a confidence vote on the Conservative motion. However, Conservative leader Erin O’Toole argued the creation of the committee to probe possible misuse of tax dollars during the pandemic would not be legitimate grounds for triggering a federal election. 

  • After talks fell apart on Tuesday, United Kingdom Prime Minister Boris Johnson says his government will place the Greater Manchester region under its strictest coronavirus restrictions. The move will mean pubs not serving substantial meals will close, along with other businesses, including casinos and betting shops. “Unfortunately, an agreement was not reached”, said Johnson in a televised news conference. “As I said last week, it would be better and would have been better for defeating the virus if we worked together.”

  • In a televised address on Tuesday, India’s Prime Minister Narendra Modi has cautioned his citizens to take greater precaution during the country’s ongoing festival season. Daily infections have dropped since hitting a peak one month ago, but health officials are concerned the country of over 1.4 billion people could see an increased risk of a new surge during the festival months ahead. Prime Minister Modi is calling on the Indian population to continue wearing masks in public and follow all social distancing norms. 

  • In the Middle East, the International Monetary Fund (IMF) released a report on Monday noting nearly all nations have been pushed into some form of a recession this year due to the coronavirus pandemic. The region obviously though isn’t alone as the IMF is predicting the global economy will shrink by 4.4% this year, marking the worst annual plunge since the Great Depression of the 1930s. The IMF projected Lebanon will take the worst hit from the pandemic in the Middle East region, seeing an economic contraction of 25%. However, while the report did show short-term pain for all in the region, it also recognized an expected rebound next year for all but two nations – the aforementioned Lebanon and Oman.

  • Japan, with help from a United States information security firm announced the country has seen its research institutions developing COVID-19 vaccines hit by recent cyberattacks. In what is believed to be the first of its kind in Japan, the U.S. firm didn’t disclose the names of targeted institutions, but believe China is behind the cyberattacks based on the techniques employed. The attacks involved sending emails attached with electronic files, which seemed to be related to the new virus but contained computer viruses. With the race to develop a COVID-19 vaccine a lucrative possibility, the news of cyberattacks isn’t surprising. In July, the United States, Britain and Canada alleged Russian hackers were trying to steal information from their respective country’s researchers.

Covid-19 – Due Diligence And Asset Management

Goldman Sachs Sends Some London Staff Home Following Positive Tests for COVID-19

Brief: Goldman Sachs GS.N has sent some staff home from its London office after two employees tested positive for COVID-19.  The U.S. investment bank sent a memo to staff at its Plumtree Court site in central London on Oct. 15 informing them of the positive tests and saying that people who had been in close contact with the staff members had been contacted by the bank’s “Wellness team”. “These two colleagues last worked in the office on Tuesday, 13 October and Wednesday, 14 October, respectively. They will remain in self-isolation as per firm guidelines,” the memo seen by Reuters said. Goldman Sachs is one of several banks that has encouraged groups of employees back into its London offices. London is currently categorised under the “high risk” level in the British government’s coronavirus alert system.

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Citi’s Mann Fears Virus Economic Hit Will Crimp Firms for Years

Brief: Bad news for central bankers trying just about everything to stoke inflation: Citigroup Inc. reckons companies’ pricing power is severely damaged. Catherine Mann, the U.S. bank’s global chief economist, fears the pandemic has left so much slack in the economy that firms won’t be in a position to demand higher prices for some time. That, not just rising wages, is ultimately necessary for generating inflation. In the euro area, consumer prices are falling, while a key measure of U.S. inflation rose in September at the slowest pace in four months. “We get back to a trajectory for growth, but we do not return to the trajectory of global GDP that we had in place in January, pre Covid,” Mann said during a panel discussion hosted by the World Economic Forum on Tuesday. Officials across major economies responded to the virus outbreak with record fiscal and monetary stimulus in a bid to prevent corporate insolvencies and ruinous levels of unemployment. The outlook is still bleak, however, and the International Monetary Fund this month warned of a tough recovery path ahead. “The implications of that for workers, and for different age-group demographics, and for convergence of growth rates in emerging markets are all very dire,” Mann said.

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UBS Gives Employees COVID Bonus of One Week’s Pay, Softens Career Exit

Brief: UBS UBSG.S is giving lower-ranking employees an extra week's pay this year in light of the COVID-19 pandemic and adding a financial softener for employees looking to exit finance, the world's largest wealth manager said on Tuesday. “As a sign of appreciation for their contribution throughout this challenging year, and acknowledging that the pandemic may have resulted in unexpected financial impact, the Group Executive Board has decided to award UBS’s employees at less senior ranks with a one-time cash payment equivalent to one week’s salary,” the Swiss bank said in a statement announcing its third-quarter results, adding the measure would add roughly $30 million in expenses in the fourth quarter. The bank also said it had modified its bonus policy so that eligible employees who wanted to make a career change under the strains and uncertainty of COVID-19, would be able to retain more deferred compensation than previously.

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BlackRock Says Scale of Restructurings Could Exceed 2008 Crisis

Brief: BlackRock Inc. says that the scale of restructuring needs globally could exceed the previous peak that followed the 2008 global financial crisis. “One big reason is the significant growth in sub-investment grade debt,” the company’s research arm, BlackRock Investment Institute, said in a note dated Oct. 19. The amount of outstanding debt with ratings below investment grade, including loans and private credit, has more than doubled to $5.3 trillion since 2007, according to the asset manager. As the overall cost of borrowing fell, companies loaded up on debt. This has left many vulnerable as their revenues came under pressure from Covid-19 related disruptions. BlackRock isn’t the only one warning of the risks of company failures. Despite low rates, U.S. corporate bankruptcies posted their worst third quarter ever. While supportive fiscal and monetary policies have helped companies raise capital and lower borrowing costs, “not all borrowers have benefited equally” and smaller firms have lacked access to the public markets, BlackRock said in the note.

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Biotech Investor Sees COVID-19 Drug Shaking Off Company’s Tarnished Past

Brief: Biotech investor Dale Chappell was looking to start Humanigen Inc. with a clean slate when his hedge fund assumed control in 2016, but things took longer than expected. The stock has swelled over 500% this year after positive early results from an experimental treatment for a potentially lethal side-effect of Covid-19. The shares have been volatile since July when it reached a more-than four-year high, though results expected this quarter from a late-stage study may be the ticket to keep Humanigen on track after a roller coaster ride. Chappell, who has a medical degree from Dartmouth College and served a fellowship with the National Cancer Institute, saw promise in the pipeline of Humanigen, then known as KaloBios, when he first took a stake in 2016. Investors may remember KaloBios as a company teetering on the edge of bankruptcy before the now disgraced and jailed Martin Shkreli swept in and took it over in 2015. Shkreli’s one-month stint as CEO left the company badly scarred before it fell into insolvency. That’s when Chappell and the fund he founded, Black Horse Capital LP, stepped in to provide financing to get the company back on its feet.

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Investors Rethink Roles of Certain Assets in Portfolios

Brief: Investors are rethinking the roles of certain asset classes in their portfolios due to the coronavirus pandemic and its impacts on markets. The pandemic has created the need for resilient investing, with new assumptions and new asset allocations, panellists at the Pensions and Investments WorldPensionSummit said, Monday. For some, that may mean moving away from assets that are traditionally seen as safe havens. As a result of aggressive monetary policy by central banks, the pandemic has led to the need to reframe the relationship that the State of Wisconsin Investment Board, Madison, should have with U.S. Treasury bonds, at the time when rates and yields are low, said Brian Hellmer, managing director, global public market strategies. The board manages $126.3 billion in assets. Bonds had provided hedging qualities and return generation before the pandemic but now only have one of those features. He said bonds are an insurance policy that have a cost without producing an ongoing, real return. “That’s a structural immediate to long-term challenge for us,” he said.  Mr. Hellmer said his fund has to consider exposure to the asset class at a time when it may seem counterintuitive to walk away from what some may perceive as being the safest asset class, because pricing has created an expectation of these assets giving no real return.

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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 October 19, 2020:

  • In a phone call with his campaign staff, United States President Donald Trump referred to health officials, including infectious disease expert Dr. Anthony Fauci as “idiots” and said the country is ready to move on from the coronavirus. President Trump seemed to focus mostly on Dr. Fauci claiming while he was a “nice guy”, he’s been a disaster with the pandemic, working in his role for far too long, and if it was up to Dr. Fauci, more than 500,000 would be dead from the virus by now in America. Ironically enough, while President Trump was letting his feelings be known, Dr. Fauci was being awarded the National Academy for Medicine’s first ever Presidential Citation for Exemplary Leadership. Elsewhere in America, in an attempt to ratchet up pressure on Republicans, House Speaker and Democrat Nancy Pelosi issued a 48-hour timeline on a stimulus package if it is to pass before the election.
  • In Canada, the country’s public safety minister announced in a tweet on Monday that the land border with the United States will remain closed until November 21st. “Our decisions will continue to be based on the best public health advice available to keep Canadians safe,” said Bill Blair. Prime Minister Justin Trudeau indicated in an interview last week that he would like to keep the border closed until the coronavirus is under control. Canada is closing in on 200,000 confirmed COVID-19 cases with provinces such as Ontario and Manitoba taking more measures to bring the latest surge under control.
  • In the United Kingdom, the impasse between the central government and local authorities in Greater Manchester continues. In an attempt to end days of deadlock, Chancellor Rishi Sunak said he would be willing to release tens of millions of dollars in order to get the Greater Manchester region through its tough times if it agrees to enter the government’s highest level of COVID-19 lockdown. Manchester Mayor Andy Burnham, staying along his Labour party political message, is in favour of a short national “circuit breaker” lockdown instead of focusing specifically on his area. 
  • Italy is following other European nations, opting for new restrictive measures, but trying to steer clear of a full-scale lockdown. As of Monday, Prime Minister Giuseppe Conte has granted powers to local mayors to close public areas, such as streets and squares by 9 PM in order to limit public gatherings. Bars and restaurants are allowed to be open until midnight (unless local leaders deem otherwise) if there is table service but must close by 6 PM if not. In a national televised address, Prime Minister Conte said: “we mustn’t waste time. The country can’t allow another lockdown that would severely compromise the entire economy.”
  • In winning the biggest share of the vote in more than 70 years, New Zealand Prime Minister Jacinda Ardern will use her second term mandate to rebuild an economy battered by the coronavirus and tackle social inequality. Prime Minister Ardern’s Labour party secured the first outright majority in parliament since the introduction of proportional representation back in 1996. Ardern’s one-two punch of empathy and crisis management has been needed as the country battles the coronavirus and tries to end its domestic spread for a second time in the nation of over five million.
  • Brazil’s Butantan Institute, one of the country’s leading biomedical research centers, offered China’s Sinovac Biotech some good news on Monday. Preliminary Phase 3 tests of Sinovac’s potential COVID-19 vaccine called Coronavac has proven to be safe after two doses were applied to 9,000 volunteers. Butantan’s director isn’t ready to give their official seal of approval just yet though as data on how effective the vaccine is protecting people against COVID-19 will not be released until it has been tested on all 15,000 volunteers in expanded trials. China’s Sinovac really needed Brazil as a testing ground since their confirmed COVID-19 case load sits at more than 5.2 million people, third most in the world behind the United States and India.

Covid-19 – Due Diligence And Asset Management

Golden Asset Managers Exceed USD100 Trillion as Large Managers Grow Market Share

Brief: Assets under management at the largest global asset managers have piled up to a record USD104.4 trillion, rising almost 15 per cent from the previous year, according to new research from the Thinking Ahead Institute. The money managed by the largest 500 asset managers has risen almost three-fold since 2000, when assets totalled USD35.2 trillion.  The market has been consolidating, with the 20 largest asset managers now accounting for 43 per cent of total assets. This has risen from 38 per cent in 2000, and 29 per cent in 1995.  The four largest players in the market by amount of assets are US fund managers BlackRock, Vanguard, State Street, and Fidelity, with German insurance fund Allianz coming in fifth. In the last decade, 232 asset manager names have dropped out of the ranking. Meanwhile, there has been news in October of further consolidation to come, with 19th largest fund management firm Morgan Stanley planning to acquire Eaton Vance. 

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Brookfield to Invest $2 Billion in Biggest Indian Property Deal

Brief: Brookfield Asset Management will buy an Indian developer’s commercial properties for $2 billion, the biggest real estate deal in the South Asian nation. The Canadian asset manager is acquiring 12.5 million square feet of rent-yielding offices and co-working spaces from RMZ Corp., the privately held developer said in a statement on Monday. The Indian firm said it will have zero debt after the transaction and will use the money to expand its portfolio. Large foreign investors are buying into the Indian office market in recent years. Since 2011, the segment has garnered $15.4 billion of equity investments, according to property research firm Knight Frank. Blackstone last week signed a non-binding agreement to buy some assets, a deal Bloomberg News previously reported could be worth $2 billion. RMZ said it plans to expand its real asset portfolio to 85 million square feet over the next six years from 67 million square feet. Some of the clients in RMZ’s technology and business parks include Accenture, Google and HSBC. It is selling properties in the southern Indian cities of Bengaluru and Chennai. A representative for Brookfield confirmed the contents of RMZ’s statement. The alternative asset manager, which says it owns and operates 22 million square feet of office properties in India, has picked banks for an initial public offering of its India real estate investment trust that could raise at least $500 million, Bloomberg reported in July.

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Data, Technology Become New Prized Possessions

Brief: Private equity firms are writing a new chapter in their playbook to favor business models incorporating data utilization and technology. The have accelerated trends already in motion. In the new normal, every company — no matter the sector — will collect and use data to its advantage. All companies will replace existing business models with technology-enabled models that own few assets, making these companies higher priced and more nimble, industry executives said. The digital transformation is a huge benefit in the COVID-19 world in which private equity and venture capital firms are trying to sell or take public as many portfolio companies as possible before the potential double whammy of a second wave of the virus and increased market volatility around the U.S. presidential election. "There will not be a reversion to a pre-pandemic economy," said Jason Thomas, Washington-based managing director and head of global research at The Carlyle Group LP.

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Institutions See Risks Returning, Seek Protection

Brief: Institutional investors and outsourced CIOs are adopting conservative, cautious stances in portfolios for the final quarter of what has been a difficult year, partly due to fears that supportive policies may be pulled back too quickly. Before the end of the year, investors will also have to deal with political events — the U.S. presidential election and the end of the Brexit transition period — and the potential resurgence of the coronavirus and associated lockdowns in Western economies. These fears are leading some investors to pare back on risk assets, while others are adding protection into portfolios in order to try to eke out gains from equity exposures while also hedging downsides. "We have adopted a conservative stance as we move into the final quarter of the year," said Mirko Cardinale, head of investment strategy and advice for USS Investment Management Ltd. in London. USS IM is the in-house manager for the Universities Superannuation Scheme, London, which had £67.6 billion ($83.8 billion) in assets as of March 31. "This is because, while the markets rebounded relatively quickly after the initial impact in March, there are many clouds on the horizon."

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Despite the Pandemic, Europe’s Fund Industry has Enjoyed Net Inflows in 2020

Brief: The European fund industry notched up net inflows of 297.1 billion euros ($347.6 billion) for the first nine months of 2020, according to a new report from Refinitiv Lipper, despite the coronavirus pandemic creating a “tough” environment for the industry. Money market funds — which usually invest in low-risk, liquid assets like short-term bonds — were the best-sellers over the year to date, with inflows of 211.3 billion euros, according to Refinitiv’s European Fund Industry Review. These types of funds yield some income, but are mainly used to park cash in times of high volatility. Meanwhile, funds focused on global equities were the most popular among long-term investors, with the sector seeing inflows of 62.8 billion euros. However, the data and research provider found that total assets under management across the region’s fund industry slipped from 12.3 trillion euros in Dec. 2019 to 12 trillion euros in Sept. 2020, which it attributed in large part to the performance of underlying markets, which saw a 531 billion euro decline. It comes after a volatile year-to-date for markets. After tanking in March when the full impact of the coronavirus started to be realized around the world, stocks have experienced a broad bullish period over recent months as investors bet on stimulus from governments and central banks, and the prospect of a coronavirus vaccine.

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How the Coronavirus Crisis Changed Investment Research, According to the All-America Research Team

Brief: To quote one analyst, working in equity research has gotten “a lot more intense.”  Top research providers in the U.S. and globally have reported a surge in demand for content and corporate access this year, as investors have tried to make sense of the rapid changes brought by the coronavirus pandemic. These changes have impacted not just the markets but the investment research industry itself. This includes changes in how institutional investors view some of their research providers, as the 2020 All-America Research Team will soon reveal. Ahead of that reveal on Tuesday, Institutional Investor asked a number of sell-side analysts to share how they’ve been required to adapt and evolve during the Covid-19 crisis. There are the obvious changes: One airline analyst noted with irony that he traveled a lot less this year. Some pointed to the ability to spend more time with their families. Almost everyone mentioned the increase in virtual communication with clients, corporates, and colleagues.  But’s it’s not just the shift to working from home. This year has also seen an evolution in the kinds and quality of research insights demanded by investors, as numerous analysts pointed out.

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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 October 16, 2020:

  • In the United States, a New York Times article is alleging side meetings from President Trump’s economic team gave the asset management industry a heads-up early on in the pandemic and is what fueled the market sell-off in March. The article points to a memo written by William Callanan, a hedge fund consultant, and member of the Hoover board. The Hoover Institution were in on the side meetings. The memo from Callanan either made its way to investors, or was heard through the grapevine, and was the first significant sign that the Trump administration didn’t have a hold on the coronavirus, even though in public they were assuring everyone it was under control. One major investor who was privy to the memo said the reaction was to, “short everything.” 

  • In Canada, a CBC investigation is reporting the border appears to be more open than citizens think – it just depends on who you are. The CBC first reported back in September that the billionaire CEO of Uline Inc. and two of her senior executives were given “essential” worker status when they arrived in Canada for meetings in late August. The “essential” status allowed them to skip what should have been a mandatory 14-day quarantine. When CBC made Public Safety Minister Bill Blair aware of their findings, he vowed to fix the problem. Follow-up investigations from CBC now uncovered Costco America’s CEO and one of his top executives also arrived in Canada on the same day as the Uline executives. They too were granted “essential” worker status and skipped quarantine while they attended openings of their newest outlets in the Canadian provinces of Ontario, Quebec and Alberta in a three-day span. Minister Blair declined a request from the CBC to explain the Costco situation.

  • United Kingdom Prime Minister Boris Johnson issued his toughest stance yet on regional leaders who oppose his government’s three-tiered coronavirus approach. On Thursday Andy Burnham, Manchester’s mayor said the plans for putting the area into tier 3 – the most restrictive stage – were flawed and unfair. In a news conference on Friday, Prime Minister Johnson issued his response – “I urge the mayor to reconsider and engage constructively. If an agreement cannot be reached I will have to intervene. Our efforts will be so much more effective if we work together.” A move into tier 3 bans social mixing and closes down pubs and bars.

  • In Germany, a Berlin court has overturned the curfew introduced by Chancellor Angela Merkel that was forcing bars, restaurants and off-licenses to close from 11PM-6AM. Eleven restaurant owners had submitted urgent requests against the curfew and the court ruled that, “it was not apparent” that the early closure methods would stop the spread of COVID-19. Instead, the court said new infections were more likely to stem from private gatherings of family and friends, religious gatherings or community facilities. The court also said the curfew wouldn’t prevent young people from meeting – instead push them into areas or places that might not meet hygiene standards. Germany set a record for new daily cases twice this week – the latest over 7,000 cases. 

  • Australia’s largest city Sydney has opened its borders as of Friday to New Zealand as the two countries officially start their travel bubble. More than 350 passengers were scheduled to arrive on three separate flights from Auckland to Sydney and upon arrival will not have to undergo a 14-day quarantine. It was a case of good news, bad news though for Australia on Friday as Melbourne, the country’s second largest city, was marking its 100th day in one of the world’s longest pandemic lockdowns. 

  • The World Health Organization (WHO) released their study on remdesivir, along with three other potential drug treatments for COVID-19 and found they had “little or no effect” on death rates among hospitalized patients. The study was said to be the world’s largest randomized control trial of coronavirus treatments. Remdesivir was one of the drugs given to United States President Donald Trump after he tested positive for the coronavirus two weeks ago. Not surprisingly, Gilead Sciences, the maker of remdesivir are taking issue with the WHO’s findings saying the data appeared inconsistent, the findings were premature, and that other studies have validated the drug’s benefits.

Covid-19 – Due Diligence And Asset Management

Wall Street Executives Urge Another Round of Federal Stimulus

Brief: Lawmakers must approve another round of fiscal stimulus to keep the U.S. economic recovery on track, executives from Goldman Sachs Group Inc. and Wells Fargo & Co. said Friday. Goldman President John Waldron applauded the federal government’s rapid financial response in the early months of the coronavirus pandemic, but said more needs to be done. The absence of additional stimulus could hamper the comeback, particularly in the U.S., he said during the Institute of International Finance annual membership meeting, held virtually this year. “We are going to see a much tougher road to recovery,” Waldron said. Coming back fully from the crisis will take longer, and “people will be laid on the side of the road, sadly.” House Speaker Nancy Pelosi told Democratic colleagues Thursday evening that “disagreements remain” with President Donald Trump’s administration over a number of components of the stimulus she’s attempting to negotiate, even as an agreement nears on a Covid-19 testing program. The establishment of a national testing strategy had been a roadblock cited by Pelosi and her aides this week during talks with Treasury Secretary Steven Mnuchin. Wells Fargo Chief Executive Officer Charlie Scharf said during a separate IIF panel discussion Friday that additional stimulus is needed with the U.S. “not out of the woods” yet.

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Wall Street Bank Trading Boom Does Little to Assuage Concerns About Lending

Brief: As Wall Street banks reported quarterly results this week, investors wondered about the staying power of the trading bonanza that has floated profits, offsetting problems in traditional lending businesses that have been hurt by the pandemic. Trading revenue was up 4% to 29% at the five U.S. banks with major trading operations. Otherwise, lower interest rates hit lending income and prompted banks to add to loan-loss reserves. Goldman Sachs Group Inc and Morgan Stanley benefited most, because they do not have the lending operations of rivals like JPMorgan Chase & Co, Bank of America Corp or Citigroup Inc. Enthusiasm about trading revenue among bank shareholders has faded since the 2007-2009 financial crisis, when the businesses were shown to be black boxes of risk-taking that could generate huge losses. Later, banks’ trading revenue fell dramatically because of new regulations and clients avoiding profitable products they once peddled. Now, trading businesses tend to move in line with market trends or with a bank’s strengths rather than with taking home-run risks. It remained hard to tell why, exactly, Bank of America might experience a 2.5% gain in bond trading whereas Morgan Stanley saw a 35% increase.

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Who is William Callanan, the Hedge Fund ‘Outsourced Strategy Officer’ at the Center of an Explosive NYT Report

Brief: Late Wednesday, the New York Times reported the story of how officials from the Donald Trump administration had privately expressed fear of a coronavirus outbreak while publicly expressing more positive views — and how that information had been sold onto at least one hedge fund by a “consultant. But who is William Callanan, the “outsourced strategy officer” at the center of the storm? Callanan is best known for his efforts as a portfolio manager, analyst, and investment strategist who worked at some of the most high-profile macro hedge funds in the business: Soros Fund Management, Fortress Investment Group, and Stanley Druckenmiller’s Duquesne Capital, according to published reports. In 2019, Callanan left another well-known hedge fund firm — Key Square Capital, started by former Soros investment chief Scott Bessent — to start London-based Syzygy Investment Advisory.  Callanan, an astronomy buff, named the investment advisory firm after an astrological term for the alignment of three celestial bodies, according to a Financial Times report last year. Rather than make its own investments, Syzygy provides long-term investment themes “and aggressive ways of trading them” to hedge funds, pension funds, sovereign wealth funds, and other clients who implement the positions themselves, according to the FT report. 

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COVID-19 Boosts Some Real Estate Trends, Puts Others on Hold

Brief: When it comes to trends in real estate investing, the coronavirus has exacted a toll, according to the annual Emerging Trends in Real Estate report. Densely populated metropolises, once viewed as preferred destinations for millennials, are now being challenged by smaller cities and suburbs. At the same time, co-living and co-working arrangements, for reasons due to human proximity, are being rethought, according to the report, the result of a survey and interviews with industry participants by PricewaterhouseCoopers and the Urban Land Institute. "My one take away is take nothing for granted ... I've seen many cycles but nothing like this," Mitchell Roschelle, managing partner of new strategy advisory firm Macro Trends Advisors, said Wednesday during a panel discussing the latest Emerging Trend's report. Behavior can change very quickly, said Christopher Lee, partner and head of Americas real estate at Kohlberg Kravis Roberts & Co., a speaker on the same panel. For real estate, Mr. Lee said, it means that behaviors of businesses and consumers can change "in ways we've never seen before and it is happening very rapidly."

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Alternative Investment Professionals Predict That Full Deal Activity Will Return in 2021

Brief: A new survey of more than 250 alternative investment professionals finds that a strong majority expect a return to pre-pandemic levels of deal activity by the close of 2021. The survey, conducted during EisnerAmper’s Virtual 5th Annual Alternative Investment Summit, shows that 74% of industry professionals predict a return to pre-COVID-19 deal activity by the end of Q4 2021. Two in five (41%) respondents predicted an even swifter recovery, with a return to pre-pandemic deal activity by the end of Q2 2021. When asked to identify the industries that present the best chance for growth in Q4 2020, respondents pegged technology and health care/life sciences as the sectors with the greatest opportunities. This largely mirrored results from EisnerAmper’s 2019 survey, when technology, cannabis, and health care/life sciences were named as the strongest growth sectors. EisnerAmper’s survey also identified the major trends that will impact how the alternatives sector operates moving forward. Many dealmakers hit the pause button in March 2020 when COVID-19 caused a global economic crisis and dramatically shifted the ways in which deals get done. Despite the investment industry continuing to largely operate in a work-from-home setting, 80% of private equity executives agree that they have been able to satisfactorily conduct deal due diligence during the pandemic. 

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Virtual AGMs Stop Roubst Engagement

Brief: Watered-down shareholder participation at AGMs, due to virtual meetings during the pandemic, is sounding alarm bells at APG, the largest pension fund in Europe, where collaboration with other asset owners and organisations is the beating heart of its ESG strategy and a central tenet to its stewardship response to the pandemic. Virtual annual meetings may be the pandemic norm, but Dutch asset manager APG is concerned about the consequences of lost face-to-face engagement and the ability of investors to collaborate to put pressure on companies to change. “In our view, AGMs as they are now can only be an interim solution,” said Claudia Kruse, managing director, global responsible investment and governance, APG, Europe’s biggest pension fund in an interview with Top1000funds.com. The majority of AGMs that APG has attended since the shut down due to the pandemic are one-way webcams, simply speeches that don’t involve two-way dialogue. Nor is the advance voting process as effective according to Kruse. “We’ve participated in 10 webcast AGMs and sometimes put forward questions as part of a collective engagement, but of course the votes are cast in advance,” she said. In other cases, questions are not put forward as part of collective engagement, and interaction between the board and retail investors is also lost. Possible solutions include hybrid models where investors can participate virtually in conjunction with a smaller physical meeting, said Kruse.

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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 October 15, 2020:

  • In the United States, data is starting to reflect what other countries around the world are already experiencing: the beginning of a second wave. According to Covid Tracking Data, 46 states and Washington D.C. have seen their case trend worsen from where it was a month ago. At the end of September this statement was true for 32 states and at the end of August, only 15 states were seeing an upward trend. The United States are closing in on eight million total cases and have over 217,000 deaths due to the coronavirus. The uptick in numbers is concerning as well with the country’s national election just under three weeks away. 
  • The Pan American Health Organization (PAHO) have a warning for Canada when it comes to the coronavirus. “Canada is currently facing its second wave", and areas that were not previously affected are now surpassing the numbers seen during the first wave, said Carissa Etienne, director of the PAHO and World Health Organization’s regional director for the Americas. During its peak back in April, Canada was experiencing roughly 1,700 daily cases based on a weekly average. In just under the last two weeks, Canada has averaged more than 2,000 new cases a day. Nearly 80% of the country’s cases stem from its two most populous provinces – Ontario and Quebec.
  • In the United Kingdom, seven regions, along with London will be moved into the country’s tier 2 status of coronavirus restrictions beginning midnight Friday. The move into tier 2 will place a ban on gatherings between separate households indoors. Essex, Elmbridge, Barrow-in-Furness, York, Northeast Derbyshire, Erewash and Chesterfield are the other areas that will be affected. Health secretary Matt Hancock added no decisions have been made about further restrictions, which is important as Greater Manchester has balked at Prime Minister Boris Johnson’s tiered system approach. Nine of the 10 Greater Manchester council leaders are members of the opposition Labour party and refused to agree to the measures. Johnson’s government has the power to impose restrictions, which include closing pubs and other businesses, but are reluctant to do so without local support.
  • In Wednesday evening’s televised address, France President Emmanuel Macron imposed a strict 9PM-6AM curfew for Paris and eight other large French cities in hopes of slowing down the latest wave of the coronavirus. The new restrictions are expected to be in place for six weeks and are among the most drastic put in place since the new outbreaks began. The French cities under the curfew will allow essential workers, including people on night shifts to move around, but those caught without permission will face a fine of €135 on their first offence and as much as €1,500 for repeat offenders. Realizing what this curfew will do to some businesses, the French government also announced a further €1 billion of aid to employers during this six-week stretch.
  • In Australia, New South Wales Premier Gladys Berejiklian said a coronavirus cluster in a Sydney GP clinic has caused the region to hold off on easing restrictions. The cluster is similar to the outbreak that hit Crossroads Hotel in Victoria state, which was ground zero for what caused the country’s second largest city Melbourne to enter into a strict lockdown. On Wednesday, New South Wales recorded more locally acquired COVID-19 cases than Victoria state. New South Wales chief health officer said authorities were dealing with “hundreds” of potential close contacts and multiple venues in regards to the latest cluster.
  • Two of Asia’s premier financial hubs – Singapore and Hong Kong – have agreed to open their borders to one another. The move marks the first time travel will be happening between the two countries in almost seven months. Compulsory quarantines will be replaced with compulsory coronavirus testing and the Singaporean transport minister hopes the bubble can start in a matter of weeks. Hong Kong’s commercial and economic development minister said business travelers will get priority in the initial stages and arrangements could be adjusted if the pandemic improves or worsens.

Covid-19 – Due Diligence And Asset Management

Stocks Fall on Wall Street as Coronavirus Spreads in Europe

Brief: Stocks are falling on Wall Street in afternoon trading Thursday, extending the market's pullback this week as optimism that Congress will deliver another round of stimulus for the economy wanes and new data show another weekly surge in the number of Americans seeking unemployment aid. The S&P 500 was down 0.7%. The benchmark index is now on track for its first weekly loss in three weeks. The selling was widespread, with technology, health care and companies that rely on consumer spending driving the decline. The pullback follows a broad sell-off in markets overseas as rising infections in Europe led governments in France and Britain to impose new measures to contain the coronavirus. Treasury yields were lower, while the price for U.S. crude oil also headed lower. The Dow Jones Industrial Average was down 141 points, or 0.5%, to 28,379 as of 12:15 p.m. Eastern time. The Nasdaq composite dropped 1.2%. The Russell 2000 index of small-cap stocks was off 1%. Stocks have been mostly climbing this month, but have pulled back this week as talks between Democrats and Republicans in Washington over another economic stimulus package drag on, dimming investors’ hopes for a deal that can deliver more aid for the U.S. economy in the near term.

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Investment Industry Must Come Together to Help Young People Through Covid-19 Crisis

Brief: Investment managers should come together to provide high-quality work placements for 16-24-year olds on Universal Credit, Investment20/20 says, following the launch of a new initiative in support of the Government’s GBP2 billion Kickstart scheme. Investment20/20, the Investment Association’s talent solution for the industry, is encouraging investment managers to join its new initiative aimed at facilitating Kickstart’s six-month work experience for 16-24-year-olds on Universal Credit and at risk of long-term unemployment. As part of the scheme, Investment20/20 will act as a conduit for the Department for Work and Pensions (DWP) to pay the National Minimum Wage to each participant for 25 hours a week of work. Investment20/20 is providing an industry solution for investment managers looking to participate in the Kickstart scheme, by providing resources and support to young people with no background knowledge of the industry, and enabling firms to offer work placements to fewer than 30 young people - a requirement to engage with DWP directly.

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Wall Street Set for First $100 Billion Trading Year in a Decade

Brief: Working from home hasn’t slowed down Wall Street’s trading desks. The five biggest U.S. investment banks are on pace for their first $100 billion year for trading revenue in more than a decade. In just three quarters, they’ve already generated almost $84 billion, more than any full year since 2010. Sell-side traders have ridden a wave of activity as markets plunged at the start of pandemic-spurred lockdowns before embarking on dramatic rebounds. Trading gains since the start of the pandemic have helped offset weakness in consumer businesses at the nation’s biggest banks, where loan-loss provisions piled up in the first half of the year. Capital markets units have “really been the bright spot as far as revenues have gone since the pandemic started,” Jeff Harte, a bank analyst at Piper Sandler, said in a Bloomberg Television interview. “It’s been pretty good earnings, at least from the big banks.” JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley all saw trading revenue surge more than 20% for a third straight quarter. The totals weren’t as staggering as the second quarter, which was a record for modern Wall Street’s trading and dealmaking units, but they helped lift Goldman to record per-share earnings and Morgan Stanley to its second-highest profit ever.

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Appetite for ESG Accelerates During Pandemic: Royal Bank of Canada Survey

Brief: New research from RBC Global Asset Management shows that three out of four (75%) institutional investors now incorporate ESG principles into their investment process, up from 70% last year. An increasing number of institutional investors believe ESG integrated portfolios are likely to perform as well or better than non-ESG integrated portfolios compared to 2019, going up from 90% to 97.5% in Canada, from 92% to 96% in Europe and from 78% to 93% in Asia. However, while most markets are embracing ESG, investors in the US appear more sceptical. Only 74% of US respondents believe ESG integrated portfolios perform as well or better, down from 78% in 2019, while a quarter believe they perform worse. The coronavirus pandemic has helped boost interest in ESG, with investors becoming more aware of environmental and social factors. More than a quarter of institutional investors (28%) said covid-19 has made them place more importance on ESG considerations. Meanwhile, more than half of institutional investors are looking for companies to disclose more details about worker safety, employee health benefits, workplace culture and other social factors due to the pandemic.

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Value Fund Manager AJO with $10 Billion Assets to Shut Business

Brief: Quantitative fund manager AJO Partners, which manages $10 billion, said on Wednesday it will shut at the end of the year after “lingering viability concerns” from its clients. Performance data on the fund's website here showed a number of its funds were down sharply for the year to Sept. 30, with its Large Cap Absolute Value strategy, which has more than $5 billion, down 15% and Small Cap Absolute Value down 21%.“Our relative performance has suffered because our investment edge, our “secret sauce,” is at odds with many forces driving the market,” founder Ted Aronson said in a memo provided by a company representative to Reuters. “However, the drought in value — the longest on record — is at the heart of our challenge.” Aronson wrote the length and the severity of the headwinds “have led to lingering viability concerns among clients, consultants, and employees.” Value stocks or shares of economically sensitive companies have been among the laggards in the market’s rally from its lows in March. Related sectors such as retail have struggled as their business models get disrupted in a shift to a more tech-driven world.

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Wells Fargo Fires Over 100 Employees for COVID-19 Relief Fund Misuse

Brief: Wells Fargo & Co WFC.N has fired about 100 to 125 employees for unethically availing themselves of coronavirus relief funds, according to a source familiar with the matter.  The bank believes some of its staffers made “false representations in applying for coronavirus relief funds for themselves”, defrauding the U.S. Small Business Administration, David Galloreese, head of Human Resources, said in an internal memo seen by Reuters. The abuse was tied to the Economic Injury Disaster Loan program and outside the employees’ roles at the bank, the memo said, adding Wells Fargo will cooperate fully with law enforcement. “These wrongful actions were personal actions, and do not involve our customers.” Bloomberg first reported the news earlier in the day. Last month, JPMorgan Chase & Co JPM.N dismissed several employees who allegedly misused funds that were supposed to help businesses dealing with the COVID-19 pandemic, the Financial Times reported.

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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 October 14, 2020:

  • With the United States just over a month out from their traditional Thanksgiving holiday – a time when many families gather together – the director for the US Centers for Disease Control and Prevention (CDC) is sounding the alarm on small gatherings. In a call with America’s state governors on Tuesday, Dr. Robert Redfield said while the CDC is seeing a higher degree of safety in mitigation in the public square, “what we’re seeing as the increasing threat right now is actually acquisition of infection through small household gatherings. Particularly with Thanksgiving coming up, we think it’s really important to stress the vigilance of these continued mitigation steps in the household setting.” The Thanksgiving holiday in the United States is often considered one of the busiest travel times of the year in the country as students return home from university and gather with their families. 

  • In Canada, during a radio interview Wednesday, Prime Minister Justin Trudeau indicated he plans to keep the land border closed with the United States as long as coronavirus cases remain elevated in America. “We have committed to keeping Canadians safe and we keep extending the border closures because the States is not in a place where we would feel comfortable reopening those borders,” said Trudeau. Canada and the United States governments have renewed the closure on a monthly basis since March with non-essential travel currently restricted until October 21st. While Prime Minister Trudeau has valid concerns with the United States, Canada too, is in rough shape when it comes to COVID-19 outbreaks suffering higher numbers now, then the initial first wave in some provinces.

  • United Kingdom Prime Minister Boris Johnson didn’t take long to nix the plan of a “circuit breaker” lockdown pitched by government opposition. “He [Labour leader Keir Starmer] wants to close bars, he wants to close businesses in areas across the country where incidence is low… and yet he voted to do nothing last night in the areas where the incidence is highest.” The last night Prime Minister Johnson is referring to is a vote on the latest coronavirus-related restrictions, which the Labour party didn’t support. Prime Minister Johnson has defended his government’s latest strategy, which is a three-tier approach and is looking to avoid a full second lockdown.

  • In France, President Emmanuel Macron is set to address the nation in a televised appearance on Wednesday where he is expected to install further restrictions to help curb the recent surge in coronavirus infections. Local media have speculated President Macron will introduce a night-time curfew and/or limit gatherings in the worst affected regions. Cases have been rising steadily rising for weeks with doctors and nurses in large cities like Paris and Nice expressing concerns that their intensive care units will soon be overwhelmed.

  • Russia announced on Wednesday it has approved a second COVID-19 vaccine as the country deals with its largest daily case count to date. The new vaccine, developed by Siberia’s Vector Institute completed early stage trials last month, but similar to the Sputnik V vaccine approved in August, was given approval without waiting for the results of large-scale trials in thousands of patients. The Sputnik V vaccine’s green light was criticized by many scientists in other countries.

  • Bloomberg is reporting China is planning with one of its leading vaccine developers to inoculate students going overseas with COVID-19 shots that have yet to receive regulatory approval. China National Biotec Group Co., a subsidiary of state owned Sinopharm Group have two vaccines already in the works that are still in their third phase of testing but were already authorized emergency use in the country with thousands of people already inoculated.

Covid-19 – Due Diligence And Asset Management

Goldman’s Trading Business Returns to Former Glory During Pandemic Stress

Brief: Goldman Sachs Group Inc on Wednesday posted its best quarterly performance in a decade by some measures, as trading moved back into the limelight and its lack of a big consumer business switched from a curse to a blessing. The Wall Street bank posted a quarterly return-on-equity of 17.5%, its highest since 2010. Investors closely track that figure because it shows how well a bank uses shareholder money to produce profits. Goldman also boasted record earnings per share, beating analyst expectations by a wide margin. Its performance was driven in large part by a 29% jump in trading revenue, as clients responded to news about the coronavirus pandemic by shifting their portfolios. While rivals including JPMorgan Chase & Co have also benefited from the markets boom this year, they are far more exposed to vulnerable consumers and businesses suffering from unemployment and pandemic lockdowns. Goldman’s consumer bank is relatively tiny. “Simply stunning results,” Credit Suisse analyst Susan Roth Katzke said in a report.

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Fortress Delays Pricing of $3.2 Billion Vegas Train Deal

Brief: Fortress Investment Group delayed the pricing of $3.2 billion of municipal bonds to build a passenger railroad between southern California and Las Vegas, a sign that investors were hesitant to finance such a speculative project at a time of deep economic uncertainty. The company boosted the equity contribution to the project by $500 million, among other changes, according to updated documents released Wednesday. Lead underwriter Morgan Stanley had planned to price the deal Wednesday, according to a pricing wire viewed by Bloomberg. The offering has now been postponed with no new date set, according to people familiar with the matter who asked not to be identified because the discussions are private. The deal is listed as day-to-day. Samantha Kreloff, a spokesperson for Morgan Stanley, and Ben Porritt, a spokesperson for Fortress’s Brightline Holdings, declined to comment. The company has been holding investor calls since at least the last week of September, when offering documents were released. Investors were pitched last week on yields ranging from 7% to 7.5% depending on call date, with final maturity in 2050, for the largest offering of unrated municipal securities. Updated documents Wednesday estimated a 7.25% interest rate.

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Nearly Nine of 10 Workers Want to Keep Work-From-Home Option: Survey

Brief: Nearly nine out of 10 workers want to be able to choose whether to work from home or the office once COVID-19 workplace restrictions ease, and have greater autonomy over their hours, according to research from Cisco Systems CSCO.O. The pandemic has rapidly shifted attitudes towards home working, the research showed, with two thirds of workers developing a greater appreciation of the benefits and challenges of doing their jobs remotely. Even though only 5% of those surveyed worked from home most of the time before the lockdown, now 87% of workers wanted the ability to choose where, how and when they worked - blending between being office-based and working remotely, Cisco said in a report issued on Wednesday. Cisco Vice President Gordon Thomson said companies would have to reconfigure how they operate to help meet the new demands of workers, who prioritised effective communication and collaboration above everything else. He said technology would also be used to ensure employees were safe and their data was secure in their working environment, whether in the home or the office.

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Aviva Investors Sees Reasons to be More Confident About the Recovery

Brief: Aviva Investors, the global asset management arm of Aviva, expects the economic recovery that began in May to continue in the rest of the year and into 2021.  Although further waves of Covid-19 virus infections have emerged, they should be successfully countered by limited and targeted restrictions on activity, avoiding the need for the re-imposition of full national lockdowns. As a result, downside risks to activity have diminished since the summer, while the upside case would be further enhanced by the eventual development and distribution of effective vaccines in early 2021, alongside extensive monetary and fiscal policy support. While there is considerable uncertainty about timings, the contours of a post-Covid “new normal” should come into sharper focus in coming quarters. The ongoing economic revival will rely on continuing policy support in the form of loose monetary policy – conventional and otherwise – and generous fiscal support and stimulus for both businesses and workers. If sustained, the combination of loose monetary policy – which is increasingly geared to achieving higher inflation than in the past decade – and expansionary fiscal policy has the potential to bring long-lasting material changes for economies and global financial markets.

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Ray Dalio Donates US$50M to Fight Health-Care Injustice

Brief: Bridgewater Associates founder Ray Dalio is giving US$50 million to New York-Presbyterian Hospital to fund a center dedicated to health equity and justice, at a time when the COVID pandemic has underlined the stark racial disparities in the U.S. The Dalio Center for Health Justice, a research and advocacy organization, will focus on reducing differences in access to quality health care that overwhelmingly affect communities of color, New York-Presbyterian and Dalio Philanthropies said in a statement. The hospitalization rate from COVID among Black and Hispanic individuals has outnumbered that of Whites and non-Hispanics by a factor of at least 4.6, according to data from the Centers for Disease Control and Prevention. The death rate of Blacks has been more than twice that of Whites. “Access to equal health care and equal education are fundamental requirements of a just society,” Dalio said in a Zoom interview. COVID emphasized the urgent need to address disparities in health outcomes between racial groups that are shaped by everything from differences in treatment protocols to data collection, he said. “There’s so much work to be done.” Julia Iyasere, an internist and Columbia Business School graduate, will head the center. As the child of immigrants with a multiethnic background, Iyasere said she witnessed firsthand various forms of health-care injustice and its consequences.

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Fledgling Private Equity Firms Falter as Virus Curbs In-Person Wooing

Brief: Private equity fund investors have been favoring established buyout firms over first-time managers in recent months, as the challenges of carrying out due diligence remotely during the COVID-19 pandemic reduce their appetite for risk. Out of the $127 billion raised by buyout firms between July and September, only $5.8 billion went to managers raising funds for the first time, the lowest level since 2013, according to industry data provider Preqin. Some private equity fund investors said curbs on business travel were limiting their ability to familiarize themselves with new fund managers, and pushed them toward the relative safety of established players. “It is definitely a higher bar in this environment because you can’t have in-person meetings, you can’t have a dinner with the manager, you can’t really get to know the person,” said Kelly Meldrum, head of primary investments at Adams Street Partners, a $41 billion “fund-of-funds” manager that invests in private equity funds on behalf of institutional investors. In the third quarter of the year, Blackstone Group Inc BX.N, the world's largest private equity firm, closed its fourth real estate debt fund after collecting $8 billion from investors. KKR & Co Inc KKR.N also raised $950 million for its second real estate credit fund.  Few first-time managers achieved the same. Among them were Andros Capital Partners, which closed a $250 million fund focused on the energy sector, and Benford Capital Partners, which raised $130 million to buy small lower middle market businesses.

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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 October 13, 2020:

  • In the United States, drugmaker Johnson & Johnson has paused its Phase 3 coronavirus vaccine trial because of an unexplained illness in one of the volunteers. Johnson & Johnson would not say what the unexplained illness was stating they respect the participant’s privacy and want to learn more about the illness before they share additional information. This marks the second Phase 3 coronavirus vaccine trial to be paused in the United States. AstraZeneca’s vaccine trial was paused last month due to a neurological complication in a volunteer in Britain. The AstraZeneca trial has continued in other countries but remains paused in America as the US Food and Drug Administration (FDA) investigates. 
  • In Canada, the Atlantic bubble is in danger of being popped as New Brunswick is dealing with two coronavirus outbreaks. Back in the early summer, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador agreed to open up to each other with the mandatory 14-day self-quarantine waived, so that an area heavily focused on tourism could at least have a shot at economic survival. While the summer went well with few cases, a recent outbreak has New Brunswick closing in on 100 active cases, focused mainly on the Moncton and Campbellton regions. Nova Scotia, Prince Edward Island and Newfoundland and Labrador all reported no new cases on Tuesday.
  • The United Kingdom’s Labour Party, the main opposition, has changed its course asking the Boris Johnson government to impose a full lockdown of two to three weeks to prevent the National Health Service from being overwhelmed. The “circuit breaker” idea was pitched last month by the government’s “Sage” group, which is composed of scientific advisers. Johnson’s government wanting to avoid the optics of a full lockdown yet again, has opted for more softer options, such as curfews and stricter restrictions for harder hit localized regions. Labour leader Keir Starmer said, “there is no longer time to give the prime minister the benefit of the doubt. The government’s plan simply isn’t working. Another course is needed.”
  • After seeing cases rise to around 5,000 per day, Italy has ordered strict new anti-coronavirus measures. Prime Minister Giuseppe Conte has ordered parties in closed spaces to be banned and strong recommendations are being made against private gatherings in homes with more than six people who don’t live under the same roof. Bars and restaurants must close by midnight and any contact sports not organized by an association will no longer take place – so no more pick-up soccer/football games. Prime Minister Conte negotiated the new measures with governors who were objecting to some of the new rules, especially those on private gatherings.
  • A coronavirus outbreak in a Chinese coastal city has prompted municipal health authorities to pledge a COVID-19 test for all 9.5 million of its residents. Over the weekend, about 12 people tested positive for the virus in Qingdao - with a number of those being tied to the local hospital, which has now been closed. Close to 150 people are under medical observation in quarantine and the health commission in the southern Guizhou province has asked anyone who had travelled to Qingdao over a recent national holiday, to report to neighbourhood communities for testing.

  • Australia is looking to expand its travel bubble beyond New Zealand. Over the weekend, Australian Prime Minister Scott Morrison said his government has held discussions with Japan, South Korea and Singapore in the hope of reopening international travel. Similar to New Zealand, if these deals go through, there would be no need to undergo quarantine. “We have to go cautiously on this, very, very cautiously, Morrison said. “COVID-19 hasn’t gone anywhere. It’s still there, and it is no less aggressive today than it was six months ago.”

Covid-19 – Due Diligence And Asset Management

BlackRock is Soaring as Investors Plow Money into ETFs

Brief: BlackRock, the owner of the wildly popular iShares family of exchange-traded funds and the world's largest asset manager, has gotten even bigger during the Covid-19 pandemic. BlackRock said Tuesday that it now has $7.8 trillion in assets under management, a 12% increase from last year. The continued allure of passively managed index funds is a big reason why BlackRock is thriving during these volatile times for the market. BlackRock said that iShares had a total of $2.3 trillion in assets during the third quarter — and nearly 70% of that total was for stock funds. BlackRock disclosed the numbers in its latest earnings report Tuesday. Revenue and profit easily surpassed Wall Street's forecasts. "As investors around the world navigate current uncertainty, including the pandemic and uneven economic recovery, BlackRock is serving clients' needs with global insights, strategic advice and whole-portfolio solutions," said BlackRock CEO Larry Fink in a press release. Shares of BlackRock (BLK) rose 3% on the news. BlackRock's stock has now surged more than 25% in 2020 thanks to its strong results. BlackRock, like most major Wall Street firms, has had to adapt during the coronavirus outbreak.

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JPMorgan Sticks with Plan to Build Giant New York Headquarters

Brief: JPMorgan Chase & Co is forging ahead with plans to build a mammoth new headquarters in New York, Chief Executive Jamie Dimon said on Tuesday, despite the coronavirus pandemic casting serious doubt on the future of office buildings. “We’re building that headquarters for 50 years! It is not a short-term decision,” Dimon said during a call with reporters after posting quarterly results. Slated to open in 2024, for a price tag of as much as $3 billion, the building at 270 Park Avenue is to house about 14,000 employees. At 1,425 feet, it would be the second-tallest office building in Manhattan behind One World Trade Center, nearly 200 feet higher than the Empire State Building and more than 400 feet above the nearby Bank of America Tower, according to the Council on Tall Buildings and Urban Habitat. An illustration by Lewis Garrison, a 3-D architectural illustrator who likes to make video flyovers of skylines, here envisions JPMorgan's new headquarters towering over Midtown Manhattan, a T-Rex in what might seem like a field of dinosaurs. But since pandemic lockdowns happened in March, far fewer workers have been going into offices, making it unclear why such a big skyscraper is necessary.

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M&A Surge Boosts Event Driven and Merger Arb Hedge Funds Amid Potential Q4 Risk Aversion

Brief: Merger arbitrage and event driven hedge fund strategies can capitalise on the recent pick-up in M&A activity globally, and help cushion investors’ portfolios amid potential risk aversion as a result of the US election, Brexit and a fresh Covid-19 surge in Q4, industry strategists say. The volume of M&A deals plummeted to USD96 billion in April this year – the lowest level since August 2009 during the height of the global financial crisis – as a result of heightened concerns over the coronavirus pandemic, said Man Group in a market commentary on Tuesday. In recent weeks, though, activity has surged across a wide range of sectors globally as deals that had been put on ice because of Covid-19 began flowing back into the market. More than USD1 trillion of deals across the world reportedly came to market during the third quarter, and in a market commentary on Tuesday, London-listed global hedge fund giant Man said volumes bounced back “both in terms of volumes, but also as a proportion of market cap.” Against that backdrop, Lyxor Asset Management believes that merger arbitrage-focused hedge fund strategies will offer “diversification and protection” for investor portfolios during the fourth quarter of 2020…

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Commentary: Crisis Alpha – Everyone Likes the Alpha, no one Likes the Crisis

Brief: History doesn't repeat itself, but it does tend to rhyme. Each crisis period in financial markets is unique with some aspects in common. In 2020, equity markets endured a devastating fall in the wake of concerns about the novel coronavirus followed by a miraculous recovery. To date, many investors are still asking: Was this recent period of turbulence a crisis that may continue or was this crisis a simple V-shaped correction, albeit rather painful? In a recent paper, we take a look at this spectacular market fall from the perspective of a trend-following strategy to determine what is similar and what is different from the crisis periods that came before. Trend-following strategies take long and short positions following prevailing market trends across a wide range of asset classes, e.g., equity indexes, bond index futures, rates, currencies and commodities. These strategies have often been some of the few known to sometimes capture ever-coveted "crisis alpha." A correction is a short-term loss that recovers relatively quickly. A crisis, on the other hand, is a prolonged period of market stress with sustained losses, which can occasionally come in waves. Using peak-to-trough losses in equity markets, we examined the speed (measured as total drawdown divided by time in a drawdown) for crisis periods since 1992. During this period, the tech crisis and (depending on how you look at it) the global financial crisis consist of several waves of drawdowns.

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Venture Capital Funds on Track for Record Fundraising Year

Brief: The coronavirus pandemic isn’t keeping investors from pouring billions into venture capital. As of September 30, U.S. venture capital funds closed this year had raised $56.6 billion, according to a report from PitchBook and the National Venture Capital Association that’s expected to be released Tuesday. This is more than $54.9 raised in all of 2019, and less than $12 billion shy of 2018’s record fundraising total of $68.1 billion. According to PitchBook, investors have continued to make “robust” commitments to venture capital funds this year despite the fundraising challenges and market uncertainty brought by the pandemic. This is in contrast to the slowdown seen in the larger private equity industry, with Preqin reporting last week that global fundraising had dropped to its lowest quarterly total since at least 2015.  “Despite continued uncertainty throughout the year, the rebound in public markets has given investors confidence,” John Gabbert, founder and chief executive officer of PitchBook, said in a statement on the VC report. “As investors seek growth opportunities in a low-rate environment, the growth potential of the venture strategy continues to entice both traditional LPs and nontraditional investors.” Most of the fundraising has been driven by large funds, with the average fund size increasing to $257.2 million — nearly double the average last year. 

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Pandemic Takes Big Toll on Private Markets Fundraising

Brief: The asset management industry has reached a critical period for nurturing gender diversity, industry experts have advised, as investment firms choose how they will adapt to new challenges caused by the coronavirus pandemic. Baroness Helena Morrissey says the investment industry has always been “slow to shift gears” in the face of problems, including gender diversity and transparency over fees.  Baroness Morrissey founded the campaign group the 30% Club in 2010, which targeted a minimum 30 per cent female board members, in addition to being the former chief executive of Newton Investment Management and chair of the Investment Association.  She now chairs the Diversity Project, which works to improve diversity in all dimensions in the investment and savings industry and serves as a peer in the House of Lords. Recent progress has been “very tentative”, with the share of women in fund management roles reaching 11 per cent in 2020. In 2016, women accounted for 10.3 per cent of fund managers.  Citywire estimates that at the current rate of promoting women to senior roles, it will take two centuries before female fund managers achieve parity with their male colleagues.  Baroness Morrissey believes that even the slow progress the industry has made to hire and promote more women could slide backwards, if firms fail to make positive efforts now. “It's too soon for it to withstand a body blow in the form of people just taking their eye off the ball at this point,” she says. 

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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 October 9, 2020:

  • In the United States, the on-again, off-again coronavirus stimulus talks are on again? Multiple media outlets are reporting the White House will take a $1.8 trillion coronavirus offer to Democrats as the sides work to strike a deal before the election next month. The plan is an increase from the $1.6 trillion offer the Trump administration previously proposed, but below the $2.2 trillion bill House Democrats passed earlier this month. House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin plan to talk on Friday about a possible deal on pandemic relief. This caps a confusing week where the stimulus plan was off the table altogether, brought back to life via piece-meal deals, and now whatever this round of negotiations may lead to. 

  • As Canada heads into its Thanksgiving long weekend, Prime Minister Justin Trudeau has warned the country is at a tipping point, with modelling showing as many as 20,000 new cases by October 17th. “Not only is the second wave underway, yesterday (Thursday) we hit the highest daily recorded cases, well above what we saw last spring. We flattened the curve before, we can do it again,” said Trudeau. Elsewhere in the country, Ontario reported 939 new cases of COVID-19 on Friday, the province’s highest single-day total yet, which has caused Premier Doug Ford to move three major “hot" zones – Toronto, Peel Region and Ottawa under stricter measures. As of Saturday, those areas will no longer have indoor dining and will close gyms, movie theatres and casinos. These measures will be in place for 28 days and the government is also calling on people in those areas to leave their homes only for essential purposes.

  • The United Kingdom’s hospitality sector has taken a beating from the COVID-19 pandemic and now they are taking more shots – this time from health authorities. Officials believe the normalization of eating out and drinking in pubs once the restrictions were lifted in the summer has contributed to the UK’s second wave of COVID-19. This response has triggered the rage of an already frustrated hospitality industry who say there is little, to no proof of that being the case and have called on the government and health officials to provide hard data to back up the need for a nationwide curfew and local lockdowns.

  • Spain and its central government have struck back hard after a Madrid High Court tried to put a roadblock in their COVID-19 restriction plans. The government has used their emergency powers to reimpose a ban on people leaving and entering Spain’s capital city – Madrid. The “state of alert” move gives national and regional authorities sweeping powers for the initial period of two weeks. The national government emphasized Madrid’s infection rate of 563 COVID-19 cases per 100,000 people over the past two weeks is more than twice the total for Spain as a whole. 

  • One day after Germany’s health minister considered the surge in cases as “alarming”, Chancellor Angel Merkel issued a warning of her own. Citing the country is in the midst of a watershed moment, Chancellor Merkel met with the mayors of Germany’s 11 largest cities and said they agreed to thresholds that would trigger tighter restrictions. Merkel will speak again to all those involved in two weeks to determine how effective the measures have been. Germany, which is Europe’s largest economy, has seen more than 4,000 new coronavirus cases for the second day in a row, but Chancellor Merkel has ruled out a shutdown as seen during the first wave. Instead, Merkel is urging citizens to respect hygiene and social distancing rules.

  • China has agreed to join a World Health Organization (WHO) initiative aimed at making sure a fair distribution of an eventual COVID-19 vaccine will be distributed around the world. China’s foreign ministry spokesperson said the move was evidence of the country’s commitment “to turn COVID-19 vaccines into a global public good.” The Covax initiative, which is headed by the WHO, along with two other organizations is aiming to provide two billion COVID-19 vaccinations throughout the world by the end of 2021.

Covid-19 – Due Diligence And Asset Management

EQT is said to Explore Takeover of $11 Billion Dutch Carrier KPN

Brief: EQT AB, the European private equity firm, is considering a takeover of Dutch phone company Royal KPN NV in what would be its largest-ever acquisition, people with knowledge of the matter said. The buyout firm is in the early stages of discussing the feasibility of a deal with potential advisers, the people said, asking not to be identified because the information is private. Shares of KPN have fallen 15% in Amsterdam trading this year, giving the company a market value of about 9.4 billion euros ($11.1 billion). No final decisions have been made, and there’s no certainty that EQT’s deliberations will lead to an offer, the people said. Any suitor would want to win the backing of KPN management and the Dutch government after the former telecom monopoly previously fought off an unwanted takeover. Representatives for EQT and KPN declined to comment. KPN, which is valued at about 16 billion euros including debt, has reported declining revenue for more than a decade. Its shares are trading near an all-time low amid fierce competition from regional giants like Vodafone Group Plc. The company appointed Joost Farwerck as chief executive officer a year ago. He took over a business that was cost cutting and in search of new revenue streams to ease competitive pressures in its home market, where rivals have been merging.

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‘Treasuries on Steroids’: U.S. Banks’ Mortgage Bond Trading Bonanza

Brief: Wall Street banks are on track for a record year of revenue from trading U.S. government-backed mortgage debt, industry sources told Reuters, amid a surge in demand - from the Federal Reserve in its battle against the pandemic, and from investors hunting yield. Revenue from trading bundles of home loans at the biggest global banks - including JPMorgan, Citi and Goldman Sachs among others - is expected to top $3 billion in 2020, one source with direct knowledge of the banks’ trading revenue said, besting last year’s peak of $2.5 billion. The source declined to be identified because the data isn’t publicly available. “Buying mortgages in March was one of the best trading opportunities in mortgages since the last financial crisis,” said Daniel Hyman, head of agency MBS portfolio management at Pacific Investment Management Company (PIMCO). The surge in demand and activity has also allowed new names to enter the space. Bank of Montreal, which acquired mortgage security broker-dealer KGS-Alpha Capital Markets in 2018, is now actively trading residential mortgage-backed securities or RMBS, according to the source.

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A Record Number of Private Equity Funds Are in the Market – But Closing Them Won’t Be Easy

Brief: The alternative investment data provider shows that a total of 237 private equity funds closed in the third quarter, which is the lowest quarterly total since at least 2015. Meanwhile, there are 3,968 in the market seeking capital, a record number of funds since 2015.  The coronavirus pandemic has changed private equity fundraising dynamics significantly: Most meetings are now conducted virtually, and the public market correction may have stalled fresh capital commitments, according to Preqin.  During the first three quarters of 2020, just 39 percent of funds closed in 12 months, according to the data. This is at least six percentage points lower than each of the previous five full-year periods. What’s more, 45 percent of funds took more than 18 months to close — the largest amount since 2015, per Preqin. There are, of course, anomalies. On October 1, for example, European private equity firm Nordic Capital announced that it had closed its tenth fund, which it raised fully remotely, with €6.1 billion (US$7.17 billion) to deploy. Likewise, on September 29, private equity firm Advent International closed a $2 billion fundraise for its seventh Latin American fund.  These fund closes are indicative of another trend Preqin pointed out: Despite the pandemic, fundraise sizes grew slightly quarter-over-quarter, to $536 million.

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Hedge Funds Stumble in September, as Stormy Markets Bring Five-Month Surge to an End

Brief: Hedge funds have suffered their first monthly loss since March, as fears over the growing spread of coronavirus in Europe and the US – combined with the imminent presidential election and uncertainty over the US economy – weighed down on managers of all hues in a decidedly patchy September. New data published by Hedge Fund Research shows that only event driven strategies emerged from September in positive territory, as losses swept through the equity, macro and relative value sub-sectors. The flagship HFRI Fund Weighted Composite Index – an across-the-board snapshot of all strategies - dumped 1.2 per cent last month, its first monthly decline since March, when markets were sent spiralling by the Covid-19 outbreak.  The index’s Q2 surge of 9.14 per cent was essentially halved during the following quarter, with the index gaining some 4.06 per cent between July and September.  The end of its five-month positive run last month has left the index flat for the year, at 0.5 per cent. The HFRI Equity Hedge (Total) Index – which measures the performance of a broad range of equity-focused managers – gave back 1.53 per cent in September. Only healthcare-focused equity hedge funds were up last month, rising 1.94 per cent, with fundamental equity, multi-strategy, quantitative and energy/materials strategies all registering losses. Overall, HFR’s equity benchmark remains up 2.24 per cent since the start of 2020.

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Hedge Fund-Pick Arcturus Gambles on a One-Shot Covid Vaccine

Brief: Two-and-a-half years ago Joseph Payne was ousted from Arcturus Therapeutics Holdings Inc., the biotech company he helped found, by what he calls a “dysfunctional board.” Four months later he was back at the helm and the now $1.2 billion firm is racing to push out a Covid-19 vaccine alongside the world’s leading contenders. The contentious transfer of power came after the previously private Arcturus gained access to the public markets in a reverse merger with Alcobra, a struggling biotech. Today, Arcturus’s goal is to develop a potent low-dose one-shot messenger RNA Covid-19 inoculation. Like other vaccine and drug developers chasing Covid medicines, Payne’s company has picked up steam since mid-March when U.S. states started shutting down. The shares have surged more than fivefold since then and climbed as much as 6.3% in Thursday trading. Hedge funds have taken notice, with actively managed firms making up 20% of the company’s holder base as of Oct. 4. Pure play health fund HealthCor Management LP has a 6.5% stake after adding almost 1.5 million shares in the third quarter, according to data compiled by Bloomberg. Arcturus kicked off a dose-finding study in Singapore in August and has clinched supply deals with the governments of Israel and Singapore. It wasn’t among the few companies singled out for the Trump administration’s Operation Warp Speed and it hasn’t signed any large-scale government contracts. But Payne, the company’s president and chief executive officer, sees this as an advantage.

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At a Crossroads: Coronavirus Upheaval Threatens Progress on Gender Diversity in Investment Industry

Brief: The asset management industry has reached a critical period for nurturing gender diversity, industry experts have advised, as investment firms choose how they will adapt to new challenges caused by the coronavirus pandemic. Baroness Helena Morrissey says the investment industry has always been “slow to shift gears” in the face of problems, including gender diversity and transparency over fees.  Baroness Morrissey founded the campaign group the 30% Club in 2010, which targeted a minimum 30 per cent female board members, in addition to being the former chief executive of Newton Investment Management and chair of the Investment Association.  She now chairs the Diversity Project, which works to improve diversity in all dimensions in the investment and savings industry and serves as a peer in the House of Lords. Recent progress has been “very tentative”, with the share of women in fund management roles reaching 11 per cent in 2020. In 2016, women accounted for 10.3 per cent of fund managers.  Citywire estimates that at the current rate of promoting women to senior roles, it will take two centuries before female fund managers achieve parity with their male colleagues.  Baroness Morrissey believes that even the slow progress the industry has made to hire and promote more women could slide backwards, if firms fail to make positive efforts now. “It's too soon for it to withstand a body blow in the form of people just taking their eye off the ball at this point,” she says. 

Read more...


Contact Castle Hall to discuss due diligence

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

Our briefing for Thursday October 8, 2020:

  • In the United States, the next presidential debate’s status is about as chaotic when Donald Trump and Joe Biden took the stage a little over a week ago. It all started Thursday morning when the Commission on Presidential Debates announced the second debate, scheduled for October 15th would be virtual due to President Trump’s recent positive coronavirus diagnosis. Joe Biden’s camp agreed to the virtual setting, but the Trump team declined and came back with a counteroffer of pushing back the debate one week to October 22nd. Joe Biden’s camp declined that option stating, “Donald Trump doesn’t make the debate schedule; the Debate Commission does.” 
  • In Canada, the government will be lifting COVID-19 cross-border travel restrictions for a wider range of family members. As of Thursday, Canada will allow entry to certain extended family members of citizens and permanent residents, including couples who have been dating for at least for a year and their children, as well as grandchildren, siblings and grandparents. The government will also consider “potential limited release from quarantine” for some visitors. In other COVID-19 related travel news, Bloomberg is reporting Canada is aiming to capitalize on its more conservative approach to its border closures once the pandemic subsides. The article notes Canada will look to promote itself as a safe destination for tourists as compared to other nations like the United States.
  • In the United Kingdom, a noticeable increase in coronavirus cases over the past week is highlighting the strain on the country’s test and trace program. For instance, the number of people testing positive for the coronavirus rose more than 50% over the last week and fewer than 70% of people who had been in contact with these cases were reached and advised to self-isolate. According to the test and trace program, positive cases, “have been rising steeply over the past five weeks with over seven times as many positive cases identified in the most recent week compared to the end of August.”
  • Spain’s efforts to contain the coronavirus surge suffered a setback on Thursday when a Madrid court blocked the regional government from applying curbs on movement in one of Europe’s most notable COVID-19 hotspots. The Madrid High Court ruled that restrictions which came into effect last Friday by Pedro Sanchez’s central government and regional administration, violated fundamental rights. The rules had officially banned people from entering and exiting the city without good reason such as work, or education. 
  • Germany’s health minister has noted the biggest surge in daily cases of coronavirus since April as “alarming”. The Robert Koch Institute (RKI), Germany’s main public health authority, recorded over 4,000 cases in the past 24 hours – 1,200 more than Wednesday. Lothar Wieler, head of the RKI said it’s possible that Germany could see 10,000 new cases a day and that “the virus would spread in an uncontrolled fashion.” The new spikes are concerning for a country that handled the first wave much better than some of their European counterparts, such as France and Spain.
  • Brazil surpassed five million cases of the coronavirus on Wednesday and while the country is doing better, health officials are worried about a quarantine hangover for a country known for its party atmosphere. At its height Brazil was recording more than 45,000 cases and 1,000 deaths per day. They are currently at about 27,000 and 700 deaths per day. Epidemiologist Pedro Hallal said a second wave of infections is unlikely this year because of how long Brazil’s crest lasted but a second wave in 2021 is “very likely”. “People thought it unacceptable that 1,000 people were dying every day two months ago, and now they are fine with 700 people dying every day. It simply doesn’t make any sense,” said Hallal.

Covid-19 – Due Diligence And Asset Management

James Gorman Goes Hunting Again with $7 Billion Eaton Vance Deal

Brief: More than a decade into his tenure, James Gorman is busier than ever remaking his firm. The Morgan Stanley chief has carried out a dealmaking blitz that’s transformed the white-shoe firm, from a Wall Street specialist to a big player in the world of money management. If stealing away a wealth manager from Citigroup Inc. propelled the Melbourne-born banker to the top perch in 2010, his recent shopping spree guarantees that the 62-year-old executive’s mark will be left on Morgan Stanley long after he’s gone. Gorman’s two latest mega-deals -- the takeover of E*Trade Financial Corp., to go after millennials and other individual investors, and now the $7 billion purchase of asset manager Eaton Vance Corp., announced Thursday -- are the largest carried out by any of the big banks in Wall Street’s post-crisis reincarnation. And both were done in the span of just 10 months. The acquisitions guarantee Morgan Stanley’s wealth and asset-management group a standing that overshadows the bank’s core Wall Street operations, despite their dominance. And Gorman, who rose up through Morgan Stanley’s wealth business and has been bolstered by a stock price that’s outperformed major Wall Street rivals this year, said the 38% premium he’s paying to gain Eaton Vance’s roughly $500 billion in assets is worth it.

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SEC Reports 700 Enforcement Actions in Fiscal 2020, ‘Significant’ During Telework Period

Brief: The head of the U.S. Securities and Exchange Commission (SEC) said on Thursday that the agency has brought 700 enforcement actions in the 2020 fiscal year, a ‘significant’ amount after March 15. In a virtual address kicking off “SEC Speaks 2020,” an annual SEC enforcement conference put on in conjunction with the Practicing Law Institute, Jay Clayton said the agency had also obtained financial remedies of more than $4 billion, up from a year prior. The SEC has also reviewed disclosures of more than 10,700 funds--including more than 1,200 new funds--in 2020, an increase of 7% over last year, Clayton added. “While the pandemic significantly impacted how we do our work, it did not negatively impact the work itself,” Clayton said. "At the same time, we added to our work load," the top market's watchdog added in reference to the agency's extended telework period that began here on March 10 after an employee at its Washington, D.C., headquarters was treated for coronavirus symptoms.

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Mizuho Employees to get Option to Work Three Days a Week, but With Reduced Salary

Brief: Mizuho Financial Group Inc. plans to introduce a system that would allow employees to work a three- or four-day week, according to informed sources. It aims to launch the system in December after holding talks with its labor union. Mizuho Financial will be the first among the nation's megabanks to implement a permanent system allowing employees to take three or more days off every week. The group is adopting diverse work styles in response to the pandemic. The new work system will cover some 45,000 employees of the holding company and such operating units as Mizuho Bank, Mizuho Trust & Banking Co. and Mizuho Securities Co., the sources said. Each employee will be allowed to choose to work three or four days. Basic salary will be reduced to 80 percent of the current level for employees who work four days a week and to 60 percent for those working three days, according to the sources. Mizuho Financial seeks to prevent talented workers from leaving the group by creating an environment in which employees, many of whom need to take care of older family members or raise their children, find it easy to work according to their own circumstances. The new system is also intended to help employees take time to brush up their skills in their respective areas of work, according to the sources.

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Demand for Risk and Compliance Outsourcing Jumps Over 25 Per Cent in the Age of COVID-19

Brief: ACA Compliance Group (ACA) has identified a global spike in financial services firms turning to RegTech, outsourcing, and operational resilience solutions for risk and compliance management in the age of Covid-19.  The firm has seen a 25 per cent rise in demand for outsourced managed services when compared with pre-pandemic levels, with cybersecurity and regtech solutions also seeing an increase in demand. A key driver is that risk and compliance leaders are being asked to do more with less and reduce costs while enhancing operational resilience. The Covid-19 pandemic has forced financial services firms to abruptly change the way they work now – and in the future. As the global pandemic mutated into an economic crisis, it caused massive unemployment and social unrest. Fires and floods added additional environmental crises to the mix. All of these risks interacted and mutated to present firms with key risks and challenges, including business disruption, remote work, cyber threats, and ultimately risk and compliance monitoring challenges. At the same time, firms are seizing the chance to invest in new opportunities created by the disruption and to modernise their infrastructure to be more resilient, both of which will serve them well in the future. This is a phenomenon that ACA has termed RiskMutation.

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AIMA Plans ITN-Produced Content to Promote Hedge Funds’ Role in Global Economy

Brief: The Alternative Investment Management Association (AIMA), the hedge fund industry trade body, has paired up with ITN Productions to produce a news-style programme which aims to push the case for hedge funds’ role in the economic recovery following the coronavirus crisis.Due to launch in summer 2021, ‘Holding Strong: Alternative Investments in a Volatile Market’ will explore the role played by alternative assets and hedge fund managers in the global economy and their value to investors and markets, and how they offer allocators a differentiated risk/return profile and provide alternative funding avenues for borrowers. The programme will also examine how the alternatives sector is utilising technology, ESG and socially responsible investing in its investment strategies, and the steps firms are taking to strengthen diversity and inclusion at firms. ITN Productions, a commercial communications unit of ITN, produces creative content for broadcasters, businesses, brands, rights holders and digital channels. Its Industry News arm offers bespoke material for industry associations and trade bodies produced in a broadcast news-style programme format.

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Senator Warren asks Big U.S. Banks for Details on Pandemic Performance

Brief: U.S. Senator Elizabeth Warren is asking large U.S. banks to disclose how they performed under a recent Federal Reserve exam of their finances during the coronavirus pandemic. In a letter sent to 14 large firms Wednesday, Warren asked each to provide its results from a confidential Fed test, arguing the central bank’s “limited transparency” on whether banks could weather a severe economic downturn is insufficient. “The safety and soundness of the banking sector cannot be taken for granted, and the American people deserve full transparency regarding the health of the financial system,” the Democratic senator wrote in a letter seen by Reuters. Warren added that the recent collapse of negotiations for further economic stimulus makes the matter more pressing, as the Fed previously noted that some banks’ capital forecasts were “strongly dependent” on additional economic support. In June, the Fed announced that large banks could suffer as much as $700 billion in losses under a severe pandemic-driven recession. But the central bank only released those results in aggregate, citing the fact that the recent onset of the pandemic prevented it from conducting a full-blown stress test of each bank.

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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 October 7, 2020:

  • United States President Donald Trump has pulled the plug (or did he?) on stimulus talks due to the COVID-19 pandemic until after the election confusing many in Washington. President Trump made the declaration on Tuesday afternoon, claiming the stock markets were in great shape. Upon his announcement, the stock markets started to drop. Therefore, President Trump appeared to reverse course and pitched apparent side deals via Twitter for the airline industry, along with a standalone bill for stimulus checks ($1,200) to the American people. However, those connected with Capitol Hill are in general agreement the deals, which were already on shaky ground, are done for the time being. The news of stalled talks comes on the same day, a report from Swiss Bank, UBS and PwC notes the wealth of the world’s billionaires reached a record high during the middle of the pandemic as tech stocks rebounded. 

  • In Canada, Quebec set another single day record for COVID-19 cases on Tuesday prompting their health minister to call on Quebecers just to stay home, regardless of the alert level in their region. While Wednesday’s 900 new COVID-19 cases broke a string of five straight days with 1,000+ cases, the province is starting to see a sharp increase in deaths and hospitalizations. Health Minister Christian Dube said that contrary to the first wave where the pandemic seemed to be primarily concentrated in the Montreal region, the second wave is impacting the entire province and more regions could be classified as “red” zones later this week.

  • In the United Kingdom, Boris Johnson is coming under fire from the opposition Labour party for his government’s handling of the coronavirus. With infection rates in parts of England surging recently, despite restrictions being in place since July, Labour party leader Keir Starmer accused the Johnson government of governing in “hindsight”. “There is a pattern here on care homes, protective equipment, exams, testing – the prime minister ignores the warning signs, hurtles towards a car crash and then looks in the rear mirror and says ‘what’s all that about?, said Starmer. Elsewhere in the region, Scotland announced as of Friday they will be administering new closures and restrictions on pubs, restaurants and other hospitality venues for 16 days in order to counter rapid rises in COVID-19 cases.

  • In order to fight the worsening outbreak, Germany’s federal states have agreed on a ban on overnight accommodation for domestic visitors arriving from areas with high COVID-19 infection rates. Those with a negative COVID-19 test will be exempted, but the move comes after several states began imposing their own bans on visitors from high risk zones, especially those from the Berlin region, based on data from the Robert Koch Institute. As of this Saturday, Berlin authorities will impose a curfew that will close all bars, restaurants and shops at 11 PM.

  • Spain’s Prime Minister outlined his government’s plan to help the country out of its recession and to what life will look like once they are on the other side of the pandemic. Spain will be using 70% of the €140 billion European Union aid to transition the country into green energy and a digital economy. The new look has an aim of creating 800,000 jobs over the next three years. This week, Spain became the first EU country surpassing 825,000 coronavirus infections with its capital city, Madrid experiencing the worst outbreak during the feared second wave.

  • New Zealand has claimed to have beaten the coronavirus for a second time and will try to get back to a new normal. As of midnight, on Wednesday, the country largest city, Auckland will have its limits on public gatherings and activities lifted, although social distancing will still be advised. The country’s minister of health says there are six active cases. New Zealand went 102 days without community transmission of the virus, before an outbreak in Auckland led to 186 cases between August 11th and September 25th.

Covid-19 – Due Diligence And Asset Management

PIMCO sees Low-Return Environment Likely for Next 3-5 Years

Brief: In spite of the rally in risk markets this year, Pacific Investment Management Company (PIMCO) expects low returns across asset classes in the coming three to five years as the global economy recovers from the coronavirus pandemic. Published on Wednesday, the investment giant’s outlook argues that given the current high valuations in credit and equity markets, and the likelihood that interest rates will be kept near zero, investors should expect a stagnation or decline in profit as a percentage of gross domestic product. Credit and equity markets have been bolstered this year by investors’ hunt for yield. With interest rates near zero, share prices have risen and borrowing costs have fallen for riskier companies. But the pandemic’s economic realities still mean that revenue - especially in sectors like travel, entertainment and hospitality - won’t quickly recover, and central banks are unlikely to intervene to prevent defaults from rising.

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Disney Activist Loeb Urges Using Dividend to Fund Streaming

Brief: Activist investor Dan Loeb is urging Walt Disney Co. to permanently suspend its dividend and redirect those funds to its streaming service, saying the entertainment giant needs to lean in to a massive industry shift. Loeb sent a letter to Disney Chief Executive Officer Bob Chapek Wednesday saying he believes $3 billion in annual dividends would be better spent on its direct-to-consumer streaming service, Disney+. He said doing so could more than double Disney+’s budget for original content, bring in additional subscribers, lower churn and boost pricing power. Disney’s shares rose as much as 2% Wednesday after Bloomberg reported on the letter. The company, which has a market value of $222 billion, had seen its stock decline 16% this year through Tuesday’s close. Disney has been the dominant studio at movie-theater box offices in recent years. But with brick-and-mortar cinemas suffering during the pandemic, the company needs to focus on streaming with new urgency, Loeb said. He cited the decision by Regal to temporarily close its U.S. theaters as a sign that cinemas are going away. “While we all share a certain sadness and nostalgia for this eventuality, I am sure that people felt similar emotions about horse-drawn carriages when the automobile was first introduced,” Loeb said in the letter, a copy of which was obtained by Bloomberg.

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Wells Fargo Cuts More Jobs as Part of Earlier Cost-Cutting Drive

Brief: Wells Fargo & Co WFC.N has started to cut jobs at its commercial banking unit as part of larger reductions that will impact nearly all of its functions and business lines, a company spokeswoman said on Wednesday.  The bank resumed job cuts in early August after it paused layoffs in March because of the COVID-19 pandemic. Wells Fargo 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. “We are at the beginning of a multiyear effort to build a stronger, more efficient company for our customers, employees, communities, and shareholders,” a spokeswoman said via email on Wednesday. “The work will consist of a broad range of actions, including workforce reductions, to bring our expenses more in line with our peers,” she added, without specifying the number of job cuts. Wells Fargo has cut 700 jobs as part of workforce reductions that could ultimately impact “tens of thousands” of staff, Bloomberg News reported on Wednesday citing people with knowledge of the matter.

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Morgan Stanley’s Sheets Goes All-In on V-Shaped Recovery Trades

Brief: A famous Wall Street bear-turned-bull is urging clients to double down on V-shaped economic bets, even as talks on fresh stimulus collapse. Spurred by conviction on reflation, Andrew Sheets is bullish on small-cap stocks and recommends selling defensive trades from technology firms to long-dated Treasuries. With investors already hedged for election-related volatility, Morgan Stanley’s chief of cross-asset strategy says the market rally has legs and more policy stimulus is coming soon enough. “The glass half-full view of stimulus talks is if you don’t get it today you’ll get it tomorrow from whomever wins the election,” Sheets said in an interview. “This V-shaped recovery is still intact.” His conviction that growth will continue unabated is in contrast with other strategists who say the U.S. is facing a multitude of risks. Lawmakers have been deadlocked for weeks on the details of a stimulus package and President Donald Trump surprised allies with a unilateral call on Tuesday to halt talks on a deal. Sheets’s recommendations are mirrored in hedge funds positioned ever more aggressively for a steeper U.S. yield curve, often seen as a bet on reflation. The latest data shows speculative net short positions in long bond futures have hit a record, while net long positions on 10-year Treasuries have climbed to their highest since October 2017.

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CommonPass Digital Health Pass and Global Trust Framework Launches to Enable Safer Travel and Accelerate Border Reopenings

Brief: The Commons Project Foundation and the World Economic Forum today announced international trials starting this week for CommonPass, a digital health pass for travellers to securely document their certified COVID-19 test status while keeping their health data private. CommonPass is built on the CommonPass Framework that establishes standard methods for lab results and vaccination records to be certified and enables governments to set and verify their own health criteria for travellers. The purpose of CommonPass and the CommonPass Framework is to enable safer airline and cross border travel by giving both travellers and governments confidence in each traveller's verified COVID-19 status. At present, COVID-19 test results for travel are frequently shared on printed paper — or photos of the paper – from unknown labs, often written in languages foreign to those inspecting them. There is no standard format or certification system. “Travel and tourism has been down across the board due to the COVID pandemic,” said Diane Sabatino, Deputy Executive Director, Office of Field Operations, U.S. Customs and Border Protection (CBP). “CBP wants to be part of the solution to build confidence in air travel, and we are glad to help the aviation industry and our federal partners stand up a pilot like CommonPass.”

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Private Equity Funds Posted Strong Gains Over a Six-Year Period. They Lost Them All in Six Months

Brief: Public markets have largely recovered since their lows in March and April, but private equity funds wiped out six years of gains in the first half of the year, according to the most recent data available from eFront, the private markets software and research firm owned by BlackRock. One of the best measures of performance — the ratio of the current value of investments in the funds (plus any distributions already made to investors) relative to what allocators have invested in the fund — declined to 2014 levels, according to eFront. “Performance of active funds globally, measured by total value to paid-in (TVPI), slumped from a near-record of 1.45x in late 2019 to 1.36x in Q1,” according to eFront’s quarterly performance report on the first half of 2020. Private equity fund performance also declined in the second quarter.  Buyout funds held on to companies slightly longer in the first and second quarters, as they focused on getting their businesses through the crisis, whether through layoffs and restructuring or by investing more cash. Although it has since recovered, the dealmaking environment cooled in the first half of the year as people worked remotely and financing proved scarce.

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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 October 6, 2020:

  • In the United States, the US Food and Drug Administration (FDA) are in a public tug-of-war with the White House after making clear Tuesday that it wants to see two months of follow-up data after volunteers receive their second dose of potential COVID-19 vaccines. The timeline pretty much kills any hope the White House has of having a COVID-19 vaccine ready before the November 3rd election, a claim continued to be made by President Donald Trump in a brief video appearance posted to his Twitter account Monday evening after returning to 1600 Pennsylvania Avenue. A recent New York Times Article claimed the statement made by the FDA Tuesday was submitted more than two weeks ago and that White House officials were stalling, trying to block the new federal guidelines.
  • In Canada, the country’s public health authority has given the green light to a new COVID-19 testing option. Health Canada on Tuesday approved a rapid antigen COVID-19 test produced by a U.S. based firm. Abbot Laboratories can now sell and distribute the Panbio COVID-19 AG Rapid Test Device, which can produce results in less than 20 minutes. Health Canada has authorized its use as a point-of-care test, which means it can be used by trained professionals in pharmacies, walk-in clinics, or doctors’ offices. The move comes as the federal government has been criticized by opposition parties for its lack of producing more testing options.
  • The United Kingdom will conduct an inquiry after a technical error identified close to 16,000 positive COVID-19 cases unaccounted for in the country’s test and trace program. Health Secretary Matt Hancock told MPs he was investigating following an announcement from Public Health England (PHE) that claimed 15,841 cases between September 25th and October 2nd failed to be included in their daily reporting of statistics, and thus left out of the test and trace program. Hancock blamed the error on failure in the “automated transfer files from the labs to PHE’s data systems.”
  • In Italy, the new COVID-19 daily case rate remains significantly lower than France or Spain, and the country would like to keep it that way and are announcing new restrictions. The country’s health minister plans to make face mask usage compulsory in all outside places. The new rule would be adopted across Italy but has already been in place since the summer in places like Lazio, Rome and Naples. Italy’s new daily COVID-19 case rate hit close to 3,000 on Saturday, the most since April when the country was already in lockdown. Prime Minister Giuseppe Conte is expected to extend Italy’s state of emergency, which will allow his government to continue to quickly put in place new measures to combat the virus if needed.
  • With the country still seeing close to 75,000 new COVID-19 cases a day, India is moving forward, allowing schools to reopen as of October 15th. Prime Minister Narendra Modi’s government ordered the schools to be shutdown back in March during their initial lockdown, which left close to 270 million children out of the classroom. Prime Minister Modi said the decision on when and how to reopen schools will rest with state governments. For instance, in New Delhi, the nation’s capital city, authorities have already ruled out children returning to school until at least October 31st.
  • Starting this Thursday, South Korea and Japan have agreed to allow business travellers access to each country without having to enter into a 14-day quarantine. The fast-track entry of business visitors comes about seven months after both countries imposed restrictions due to COVID-19. Under the special entry procedure, business travellers from both countries can plan a short-term stay of up to three months as long as they submit a written business plan and a negative coronavirus test result from the last 72 hours. Their travel will also be limited to areas near their workplace. Japan and South Korea are the third largest trading partners of each other.

Covid-19 – Due Diligence And Asset Management

Goldman Eyes $14 Billion for its Largest Fund Since 2008 Crisis

BriefGoldman Sachs Group Inc. boosted the size of a new credit fund to $14 billion in what is shaping up to be one of the largest debut investment vehicles ever raised. The bank, which set out with a target of $5 billion to $10 billion, is now expecting to finish fundraising with a $14 billion war chest to pour into companies in need of fresh liquidity. A Goldman representative confirmed the goal for the first in a new family of funds, called West Street Strategic Solutions Fund I. The $14 billion mark is notable for the first iteration of a fund series new to investors. Such funds seldom crack $10 billion on their first go-round barring one exception: the $100 billion SoftBank Vision Fund, which is in a league of its own. The Goldman credit fund will provide a boost to the bank’s goal of raising $100 billion for investing in what’s known in the industry as alternatives. Instead of guiding client cash into plain-vanilla asset classes such as stocks and bonds, the funds are focused on seeking outsize returns in less-trafficked corners of the market including distressed credit, real estate and private equity. Fundraising success will also help cement Julian Salisbury’s profile as one of Goldman’s most powerful executives. The 48-year-old Brit has climbed rapidly, from running a secretive and successful group betting Goldman’s money inside its trading group, to now helping run a newly created division that rivals the firm’s dealmaking group in size and profitability, second only to the markets division.

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TPG, Onex are said to Circle Bankrupt Hertz’s Donlen Unit

Brief: Private equity firms TPG and Onex Corp. are preparing bids for bankrupt Hertz Global Holdings Inc.’s car leasing business Donlen, according to people with knowledge of the matter. TPG and Onex are working on offers that could value Donlen at about $1 billion, said the people, who asked not to be identified because they weren’t authorized to speak publicly. Rivals of Hertz are also considering bids, the people said. A representative for TPG declined to comment. Representatives for Onex and Hertz didn’t respond to requests for comment. Donlen performs fleet management functions such as vehicle leasing, maintenance and registration, according to its website. Hertz sees the business as non-core and is willing to sell it to help pay down debt, the people said. Hertz listed $24.4 billion in debt when it filed for bankruptcy in May. The company is negotiating with its creditors for financing after months of funding itself during bankruptcy, people with knowledge of the talks said last month. It’s considering two tentative loan offers of $1 billion to $1.5 billion, which could help bolster operations that have been hurt by the coronavirus pandemic and slump in travel, according to one of the people. Donlen made about $100 million in earnings before interest, taxes, depreciation and amortization last year, Bloomberg News has reported. Hertz bought the Bannockburn, Illinois-based business for $947 million including debt in 2011.

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Covid-19 Prompts More than Half of Asset Management Firms to Accelerate Adoption of Digital Marketing Technology

Brief: A research report commissioned by SDL, the intelligent language and content company, reveals that more than half (52 per cent) of European asset management firms have implemented client engagement, and digital marketing and communications technology, sooner than anticipated due to the Covid-19 pandemic. The pan-European research, conducted by WBR Insights, also discovered that almost a third (32 per cent) of firms admitted experiencing technical problems while implementing new digital technology during the pandemic. “There is no doubt that the pandemic focused hearts and minds on the protection of clients and their investments,” says Christophe Djaouani, EVP Regulated Industries, SDL. “It’s been a wake up moment for the industry, and they know they need to implement more robust client engagement and communications technology if they want to stay ahead of the increasing demands of anxious clients.” Asset management firms also plan to embrace digital marketing communications much more with nearly half (48 per cent) expecting to implement their initiatives across all their available digital channels this year, according to the research. Almost a third (27 per cent) admit that ROI is the key driver that led their firm to adopt digital communications to meet their clients’ needs.

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Companies to Shrink Offices as Remote Work Becomes ‘New Normal’

BriefMore than half of companies plan to shrink their offices as working from home becomes a regular fixture after the Covid-19 pandemic ends, according to a survey by Cisco Systems Inc. Some 53% of larger organizations plan to reduce the size of their office space and more than three quarters will increase work flexibility. Almost all of the respondents were uncomfortable returning to work because they fear contracting the virus, the poll found. Cisco, the largest maker of networking equipment, recently surveyed 1,569 executives, knowledge workers and others who are responsible for employee environments in the post-Covid era. The findings suggest many of this year’s radical changes to work life will remain long after the pandemic subsides. The poll, conducted for Cisco by Dimensional Research, concluded that working from home is the “new normal.” More than 90% of respondents said they won’t return to the office full time. 12% plan to work from home all the time, 24% will work remotely more than 15 days of each month, while 22% will do that eight to 15 days every month. Cisco’s Webex video conferencing service has benefited from lockdowns that have kept millions of people working and studying from home. It’s also faces rising competition from Zoom Video Communications Inc.

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And the Top Alternative to Traditional M&A Deals Is… SPACs, of Course.

Brief: When it comes to post-pandemic deal-making, blank-check companies and other alternatives are winning out over traditional mergers and acquisitions, according to a survey from consulting firm Deloitte published on Tuesday. A record number of special purpose acquisition companies (SPACs), which raise money in an initial public offering to be used for any type of acquisition, have gone public this year, with business titans including Bill Ackman and Reid Hoffman, co-founder of LinkedIn, creating huge pools of capital to be invested. Forty-five percent of U.S. corporate executives said they are most interested in pursuing SPACs, alliances, and joint ventures, while only 35 percent cited traditional acquisitions or merging with another company, according to Deloitte, which polled 1,000 executives at companies and private equity firms… Deloitte had seen the trend toward alternatives in M&A before the Covid-19 pandemic struck in March, but the economic impact of the virus has forced companies to consider every option given the low-growth environment, said Mark Purowitz, principal, Deloitte’s mergers and acquisitions consulting practice, and leader of the firm’s Future of M&A initiative, in an interview.

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SEC Staff Releases Report on U.S. Credit Market Interconnectedness and the Effects of the COVID-19 Economic Shock

BriefThe Securities and Exchange Commission today published a staff report titled U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock, which focuses on the origination, distribution and secondary market flow of credit across U.S. credit markets. The staff report also addresses how the related interconnections in our credit markets operated as the effects of the COVID-19 pandemic took hold. In addition, staff will host a Roundtable on Interconnectedness and Risk in U.S. Credit Markets to discuss the issues raised in the report on the afternoon of Oct.14. In the U.S. credit markets, banking and non-banking entities and intermediaries are intricately and inextricably interconnected. These interconnections are essential for the functioning of the markets, the provision of credit and the distribution of risk. These interconnections can also transmit and amplify risks in times of stress. The report identifies these interconnections and, with that framework, discusses how the COVID-19 economic shock reverberated through the credit markets in March and April 2020. The principal purpose of the report is to identify and place in context key structural- and flow-related interdependencies in the U.S. credit markets as well as areas of stress revealed by the COVID-19 shock, with an eye toward informing policymakers as they seek to improve the functioning and resilience of our financial markets. The report does not make policy recommendations. The report is accompanied by a cover letter from SEC Chairman Jay Clayton and SEC Chief Economist S.P. Kothari and will be discussed at the roundtable, which includes policymakers and market participants, on Oct. 14.

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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 October 5, 2020:

  • In the United States, with close to 7.5 million confirmed coronavirus cases, there seems to be only one dominating the headlines and that is President Donald Trump. The president tweeted late Monday afternoon that he plans to leave the hospital late this evening and to not be afraid of the coronavirus, or let it dominate your life. The fallout from the president’s positive COVID-19 test has been interesting to say the least. In the past three days we have seen a hospital trip via Marine One, multiple doctor news conferences and a motorcade parade around Walter Reed Medical Center with President Trump in the backseat of an SUV waving to supporters while he should have been inside of his hospital room. President Trump has been receiving a combination of three drugs for his COVID-19 symptoms and will continue his treatment from the White House. So far, the number of people in President Trump’s inner circle who have tested positive has now reached the double digits with his wife, aides, Republican Senators and the White House Press Secretary just to name a few.

  • In Canada, two new benefits made available by the federal government are receiving new applications as of Monday. Canadians can apply through the Canada Revenue Agency for a new sick leave benefit and a new caregiver benefit for those forced to take time off to care for a dependent due to the pandemic. These benefits are part of Bill C-4, which will now replace the defunct $500-a week Canada Emergency Response Benefit (CERB). The CERB came to an end last week after helping almost nine million Canadians through the first few months of dealing with the coronavirus. 

  • The United Kingdom’s head of the government vaccine task force has tried to clear up the public’s “misguided” perception of the program’s end goal. Kate Bingham said Britons expecting everyone in the country to eventually get vaccinated against COVID-19 “was not going to happen” and added, “we just need to vaccinate everyone at risk.” Once a successful vaccine is found, the UK government is looking to vaccinate about 30 million people, compared with the actual population, which is about 67 million. Bingham said “there’s going to be no vaccination of people under 18. It’s an adult-only vaccine, for people over 50, focusing on health workers and care home workers and the vulnerable.”

  • France has placed the Paris region on maximum virus alert as of Monday. The new restrictions will be in place for the next two weeks and will place bans on festive gatherings and require all bars to close, but restaurants will be allowed to remain open. Paris’ regional health director said there is about 3,500 new cases of the infection confirmed on average each day and 36% of ICU beds in the area are occupied by COVID-19 patients.

  • A Bloomberg report on Russia via a statistics agency has stated the country’s death toll is double the amount of what the government has laid out. Rosstat, Russia’s federal statistics service said 45,663 people died from the coronavirus between April and August. Russia’s government virus-response staff puts the death toll at 21,475 from the start of the pandemic until October 4th. Rosstat includes deaths both directly attributed to the coronavirus and cases where it was listed as an “important condition” leading to the lethal outcome. Russia has reported the fourth-largest number of COVID-19 cases in the world, but their government death toll has them with one of the lowest death rates due to the virus. Rosstat figures put Russia’s COVID-19 performance more in line with other countries who have also suffered large outbreaks. 

  • China is set to expand its experimental coronavirus vaccine trials beyond frontline health workers as it looks to get a leg up on dominating the potential COVID-19 vaccine supply chain. Last month, a representative from state-owner China National Biotec Group, or Sinopharm revealed that hundreds of thousands of Chinese citizens have already taken the company’s two leading experimental COVID-19 vaccines. The program is now set to expand to include large portions of the population, including transit workers, people travelling to countries with high COVID-19 infection rates and staff in supermarkets or other enclosed spaces. Health experts say this is a high-risk strategy for vaccine developers to distribute and test products before they hit the global market.

Covid-19 – Due Diligence And Asset Management

Managers Find Personal Touch Vital Ingredient for Fundraising

Brief: Alternative money managers are finding it harder to attract investments from new clients in the era of virtual meetings despite strong interest in their strategies as asset owners resume investing during the pandemic. The problem, sources said, is the reluctance in most cases for institutional investors and managers to meet face-to-face given the global COVID-19 restrictions. Despite a much-improved facility by managers in presenting their investment strategies and providing information for due diligence checks via remote communication channels, industry observers said many asset owners still are not comfortable with a digital-only acquaintance. "There's an abyss that asset owners have to jump over when it comes to getting to know potential investment managers for your fund via a Zoom meeting. There's a natural human-comfort factor that comes from meeting in person," said James Neumann, a New York-based partner and CIO of investment consultant Sussex Partners U.K. Ltd., London. "There's a bias toward expanding relationships with existing managers because it's much harder to go from an initial call to hiring a new manager, especially in this environment," Mr. Neumann added.

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JPMorgan Boss Jamie Dimon said up to 30% of Staff Could Work From Home Permanently

Brief: JPMorgan chief executive Jamie Dimon said that up to 30% of employees could work from home permanently. Dimon, who has been vocal in the past few weeks about the need to bring more staff back to the office in a bid to restore corporate culture and spur creativity, told the Sibos conference that the Covid-19 crisis is likely to lead to a proportion of JPMorgan’s staff to remain working from home on rotation. “There will be some permanent work from home, people who work from home or permanently rotate, or have a schedule of three days in and two days out, something like that,” he said during a virtual interview with Takis Georgakopoulos, global head of wholesale payments. “I don’t think it will be 100% of the population, I think it will be 20-30% ... and it’s got to work for the company and the clients. It’s not just whether we like it as employees,” he said. JPMorgan had 256,710 employees at the end of the second quarter. Daniel Pinto, the chief executive of its corporate and investment bank, told CNBC in August that staff could rotate between home and the office, but did not put a figure on his prediction. Dimon’s comments echo those of outgoing UBS chief executive Sergio Ermotti, who said in July that up to a third of the Swiss bank’s staff could stay home permanently.

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The Pandemic Has Only Increased Our Economic Growth Obsession

Brief: The coronavirus pandemic has shown that policymakers will sacrifice business activity if it’s necessary for public safety. Climate activists have warned for years that society’s quest for growth threatens our planet, and some economists encourage using different metrics to judge an economy’s success. So we asked an array of economic policy experts whether anything has really changed. This pandemic forces us to rethink economic growth and, in many respects, the way our economies and societies function. Artificial intelligence and major structural changes have to be taken into account, including working from home and relocalization of activities. Sustainability, mobility, resilience, fairness, and inclusiveness are key policy aims with enormous challenges in the years to come. But the logic of economic growth cannot simply be dismissed. Debts, public and private, have continued to grow in the past decade. The financial crisis has not reduced the propensity to borrow around the world. The pandemic has forced governments to increase their budget deficits and, consequently, public debts. I would add that the stock of debt will not be less of an obsession. The new context for monetary policy, due to substantially lower natural rates, should not make us complacent about the size of debts. Countries need to manage their debts over the long run. Moreover, markets discriminate among economies. And one cannot take low inflation as a given forever. Especially if monetizing debts will be resorted to, increasingly.

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Managers not Scrimping on Tech Budgets

Brief: Despite an economic downturn as a result of the pandemic, money managers are committed to their long-term technology investment plans, migrating client and investment data to the cloud, enhancing remote work capabilities and automating more business operations for better efficiency, sources said. While some firms have attempted to wring out savings by renegotiating contracts with third-party service providers offering investment market data, research and cloud-sourcing arrangements, most global money managers are ultimately spending more on technology as they strive to meet new remote work demands, said Tyler Cloherty, senior manager and head of the knowledge center for Casey Quirk, a practice of Deloitte Consulting LLP, New York. "There's been increased costs for laptops and collaborative software, like Zoom and Microsoft Teams," Mr. Cloherty said. Additionally, costs have increased as money managers continue to make longer-term investments in migrating company data to the cloud and on research portals for investment team data sharing, he added. "I think during the initial downturn in March and April, there was a hesitation to embark on substantial new investments. Since the market has bounced back … third-quarter margin numbers are going to look much better," Mr. Cloherty said.

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Goldman Sees ECB Boosting Pandemic Asset Purchases in December

Brief: Goldman Sachs Group Inc. foresees the European Central Bank boosting its pandemic bond-buying program by 400 billion euros ($470 billion) in December, after euro-zone inflation weakened further. The ECB is also likely to extend the emergency asset-purchase operation, known as PEPP, by six months through the end of 2021, analysts at the U.S. bank wrote in a note to investors Monday. Reinvestments of maturing assets under the plan should continue to the end of 2023, they wrote, adding that the central bank may also target high-yield bonds for purchase. “A PEPP expansion is likely to be more powerful in supporting the recovery of the euro-area economy -- particularly in southern Europe, where it is most needed -- than a rate cut or an expansion of the regular asset-purchase program,” Goldman analysts including Soeren Radde wrote. That’s because PEPP “would be more powerful in compressing credit spreads.” Speculation of further monetary easing has grown for a host of reasons -- from the recent uptick in coronavirus infection rates in Spain and France to a decline in euro-area core inflation to a record-low 0.2% in September. The latter prompted ECB officials to comment that they were uncomfortable with almost nil price growth. Goldman previously expected the PEPP -- with a current limit of 1.35 trillion euros -- to end in mid-2021 and for the ECB to provide additional support through its regular asset-purchase program launched in 2015.

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Frozen Deal Market Turns Frenzied as Election Approaches

Brief: The frozen mergers & acquisitions market of just a few months ago has turned into a frenzy as sellers look to lock in capital gains before year-end. Company founders and CEOs are hedging their bets against any tax law changes, including the treatment of capital gains and carried interest, that could come in 2021 if former V.P. Joe Biden, the Democratic nominee, defeats President Trump in the November election.  “It’s going to be a busy three months here before year-end,” said Art Penn, founder and managing partner of PennantPark Investment Advisers, which focuses exclusively on middle market lending. “It’s a combination of good asset values for sellers and concern about potential tax law changes next year if there’s a change in administration.” Not all companies will get sold. Companies that have been hard hit by the quarantine and slowdown caused by Covid-19 likely won’t have buyers right now, even if their sector is expected to improve once the economy returns to normal. A lawyer involved in a number of M&A transactions that haven’t yet closed said there’s too much uncertainty about a potential vaccine, government aid, and companies’ future growth projections. “There’s a real unease about what will be permanently changed by the coronavirus,” she said. 

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Contact Castle Hall to discuss due diligence

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

Our briefing for Friday October 2, 2020:

  • United States President Donald Trump and First Lady, Melania Trump have tested positive for the coronavirus. The news broke early Friday morning on the east coast of America after White House aide, Hope Hicks had a positive COVID-19 test confirmed on Thursday. The White House Chief of Staff said President Trump and his wife are experiencing mild symptoms but were deemed to be in good spirits and the president was “very energetic”. President Trump will now quarantine for the time being at the White House and will perform his presidential duties from there. If Trump’s condition worsens, Vice President Mike Pence, who tested negative for the virus, would likely take over duties. The positive test has now set off a chain reaction of mass testing and tracing due to President Trump’s busy schedule in the middle of an election. Just this week alone, Trump was in multiple states for rallies, fundraisers and a televised Presidential debate. His rival in that debate, Democratic nominee Joe Biden was tested for the virus on Friday, along with his wife and both results came back negative. President Trump joins United Kingdom Prime Minister Boris Johnson and Brazil President Jair Bolsonaro as key world leaders who have contracted COVID-19 during this pandemic. 
  • In Canada, with Ontario recording a new record of daily COVID-19 cases for the second time this week, Premier Doug Ford is considering adopting Quebec’s colour-coded alert system. Ontario recorded 732 new cases on Friday and if the province were to adopt the colour-coding system, it is likely the provincial capital Toronto, the national capital, Ottawa and Peel Region would be classified as “red zones”. The declaration of a red zone would come with tighter public health restrictions for restaurants, gyms, workplaces and meeting spaces.
  • In the United Kingdom, Prime Minister Boris Johnson said during a BBC interview that citizens became “complacent and a bit blasé” about social distancing rules in the last few months, which has left the country in the situation they are currently in. While Prime Minister Johnson is blaming the public, fingers are also being pointed in his direction. The UK leader has faced growing criticism for his handling of the pandemic, even from those inside his own Conservative Party – accusing the administration of mixed messaging and overly complicated local restrictions.
  • Spain’s late summer surge of coronavirus cases appears to have handcuffed the country that greatly depends on its tourism industry. Total expenditures made by international tourists visiting Spain in August reached £2.5 billion, a 79% decrease compared with August 2019. Tourism accounts for a larger share of Spain’s economy than any other major European country.
  • While countries in Europe struggle with the second wave of COVID-19, Italy has seemingly learned from its harsh lesson the first time around. During the first wave, Italy was devastated by COVID-19 with close to 36,000 deaths, but while countries such as France and Spain are seeing new cases in the 12-16,000 range per day, Italy sits at 1,700, now among the lowest infection and death rates in Europe. Italy credits the initial strict lockdown with making residents take the pandemic seriously. For instance of lessons learned, Rome’s Fiumicino Airport was the first airport in the world to receive a five-star top score by ranking site Skytrax as a result of hygiene and other preventative measures for coronavirus.
  • Australia has agreed to a travel zone with New Zealand. As of October 16, New Zealanders will be able to fly from the country to New South Wales and the Northern Territory and avoid mandatory quarantine. This will be the first reopening of either country’s international borders since COVID-19 restrictions were imposed back in March. At first travel will be limited to New Zealanders with Australia’s Deputy Prime Minister stating the decision on when Australians may be able to visit New Zealand would be up to its Prime Minister, Jacinda Ardern.

Covid-19 – Due Diligence And Asset Management

Trump’s Positive COVID-19 Test Throws Markets Pre-Election Curveball

Brief: Investors, already skittish ahead of U.S elections in November, now have another thing to worry about: the president’s health. President Donald Trump’s COVID-19 diagnosis triggered a sell-off in stocks and oil as investors moved away from risk assets on Friday. “The president of the United States has got a disease which kills people. People are de-risking because of that,” said Chris Weston, head of research at brokerage Pepperstone Group in Melbourne. But where investors go from here depends, to a large degree, on how Trump copes with a disease which has killed more than a million people around the world…  Aside from the Trump news, investors were digesting a jobs report showing U.S. employment growth slowed more than expected in September and back-and-forth negotiations over a U.S. coronavirus relief plan. If Trump’s symptoms turn out to be mild and he recovers quickly, markets could stabilize and the Republican president could use the experience to project his image as a fighter in the campaign against Democratic challenger Joe Biden. But if the 74-year-old gets very sick and has to be hospitalized, as British Prime Minister Boris Johnson was earlier in the year, or the virus spreads to other members of his administration, investors will be alarmed.

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Financial Institutions are set for a once in a Generation Change, says PwC Report

Brief: The primary role of a traditional bank providing financing and capital is set to be challenged further in a post Covid-19 world by non-banks, according to a PwC report, “Securing your tomorrow, today – The future of financial services,” which predicts that alternative providers of capital are set to become an even more important part of the global financial system. In the last 10 years, aggregate lending in USD by non-banks has outstripped the pace of growth of traditional lenders, with non-banks seeing a compound annual growth rate (CAGR) of lending 2.3 per cent, compared to 0.6 per cent CAGR to banks. This trend is likely to accelerate as declining core capital ratios – caused by asset impairments resulting from the Covid-19 pandemic - will limit the lending capacity of banks, particularly in Europe. Non-traditional sources of finance such as private equity, sovereign wealth funds, credit funds and governments themselves will need to step into the breach to finance the recovery and its aftermath. In 2019, non-banks – including private equity funds and sovereign wealth funds – lent 41 trillion dollars compared to the 38 trillion dollars lent by traditional lenders. In particular, the analysis by PwC shows that private debt has seen substantial growth, which is set to propel the asset class into a significant category of non-bank lending.

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Pandemic Pushes Investors Toward Biggest Alts Managers

Brief: Institutional investors are increasingly favoring the biggest, most established alternative managers as they make allocations during a global pandemic. Alternative investment fund clients surveyed by SS&C Intralinks reported an increased preference for $1 billion-plus and $5 billion-plus fund managers in the investment technology firm’s global poll of around 200 limited partners. For example, 15 percent of surveyed LPs said they were favoring general partners with more than $5 billion in assets under management, compared with just 5 percent last year. Meanwhile, the proportion of respondents prioritizing mid-sized managers — those with between $100 million and $500 million in assets — fell from 53 percent to 41 percent. “It suggests that LPs are looking to back the most trusted names in the industry to guard against reputation risk, as well as appease investment committees who might be cautiously minded in the current market,” SS&C Intralinks said in a report on the findings. “Another factor could be that large-cap managers are more likely to have experienced a market downturn, such as in ’08, and considered a safe pair of hands.”

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COVID-era Interview Questions at Banks and Hedge Funds

Brief: Investment banks might be hesitant about hiring too much experienced talent right now, but junior recruitment is proceeding as normal. Hirevue interviews have been underway since late July and virtual super days and Zoom interviews abound. For the most part, the interview questions being asked are the same as usual: if you're applying for a markets role you'll almost certainly need an opinion on how to invest $1m+; if you're applying for a corporate finance role you'll need to know how to explain a DCF to your 80 year-old grandmother.  Peppered in among the questions students say they're being asked at banking interviews this year, however, are questions specifically related to the pandemic. As we noted in May, you'll also need a good story about how you've handled the pandemic personally and have used it as a chance to 'grow' etc etc. You might also want to prepare answers to the questions below, which recent interviewees claim to have been asked in postings on Wall Street Oasis and Glassdoor. As ever, some of wildest/most philosophical questions are being asked at hedge fund Bridgewater, where some people have been working in the woods since the pandemic began...

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Private Debt Fundraising Squeezed by Pandemic Jitters, Election

Brief: Private credit fundraising slumped globally to US$8.3 billion in the third quarter, down 68 per cent from the same period a year ago, as investors took a wait-and-see approach amid uncertainty caused by the pandemic. The last quarter’s figures compare to US$37.6 billion brought in for the asset class in the second quarter, according to London-based research firm Preqin Ltd. In North America -- the biggest hub for alternative lending -- fundraising fell to $7.8 billion in the third quarter, down from US$24.6 billion the prior quarter and compared to $8.6 billion in the same period in 2019. “What we’ve seen in the third quarter is a real reduction in the number of funds closed and the amount of capital raised, because investors have already allocated the capital potentially or it could just be the fact that Covid has not disappeared like some hoped,” David Lowery, Preqin’s head of research insights, said in a Wednesday interview. In the U.S., investors keeping an eye on the Nov. 3 president election could also lead to them taking a “wait-and-see approach,” Lowery said. Raising capital in the wake of a pandemic has undoubtedly been a challenge -- particularly when a credit manager is connecting with new investors, according to Theresa Shutt, chief investment officer at Canada-based Fiera Private Debt.

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U.S. Tech Venture Investing Gets a Boost from Pandemic

Brief: Brian Bell, chief executive of Split Software, was in a meeting pitching investors when California announced the shelter-in-place policy to prevent the spread of the coronavirus in March. In the days that followed all of his meetings were delayed or canceled as venture capital investments froze. But since then things haven’t just thawed, they are boiling over. According to previously unreleased data from PitchBook, in the first nine months of 2020, U.S. venture capital firms invested $88.1 billion in tech startups, up from $82.3 billion in the first nine months of 2019. Tech investments represented 78% of venture capital investments last year and 74% in 2018. Venture capitalists say $3 trillion in stimulus funding has investors looking to put cash to work, and top venture capital firms continue to launch massive funds. Greylock Partners, an early investor in Airbnb, started raising money for its latest fund during the pandemic and announced a billion-dollar fund in September. Lightspeed Venture Partners, the first outside investor in Snap, in April announced it raised more than $4 billion for three new funds to support early- and growth-stage startups. Investors say they are betting the pandemic will have the lasting effect of pushing more economic activity online, making up for the businesses boarding up on Main Street. And they are investing in startups that aim to enable the further digitization of sectors like banking, retail and healthcare.

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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 October 1, 2020:

  • In the United States, one of the drug companies pegged with developing a COVID-19 vaccine dealt a blow to President Donald Trump’s plan of having it ready before the elections in November. In a Financial Times interview, Stephane Bancel, the chief executive of Moderna Therapeutics said his company would not be able to apply for authorization of a vaccine until at least late November. Bancel also added he didn’t expect Moderna to have full approval to distribute the drug to all sections of the population until next spring. The news comes in direct conflict to what President Trump said during a contentious debate earlier in the week in which he said a vaccine would be ready “a lot sooner”.

  • During a news conference on Thursday, Canadian Prime Minister Justin Trudeau announced his government’s plan to spend $10 billion on infrastructure initiatives. The money will go towards projects such as broadband, clean energy and agriculture and is part of a plan to also add one million jobs to an economy left reeling due to the coronavirus pandemic. Elsewhere in the country, Quebec’s two major cities – Montreal & Quebec City – along with one other region are now under the province’s strictest COVID-19 restrictions. The “red” zone includes restrictions on home gatherings and closures of bars and restaurants until October 28th. The police will also be on higher alert in those areas, issuing fines up to $1,000 to those who don’t comply and will have access to obtain warrants faster to crackdown on potential house parties.

  • In the United Kingdom, recent data from the country’s test and trace program revealed a 60% increase in positive COVID-19 cases over the past week. The latest figures show 31,373 people tested positive during the week of September 17th. During the same time period, close to 30,000 people were transferred to the contact tracing system and of those, only 71.3% were reached and asked to provide information about their contacts, down from close to 81% the week earlier. The numbers need to be in the 80% range for the test and trace program to be deemed effective.

  • Germany is planning to move ahead with a law that will give its citizens the legal right to work from home. The announcement was made by the country’s labour minister with the draft law to be published in a few weeks time. The goal is to ensure workers have the option of working from home when possible, as well to regulate home office work, such as limiting hours. COVID-19 has made many employers and employees reconsider office life, forcing many into a mass experiment of mobile work.

  • In Spain, 19 regions including Madrid, will have two days to implement a national order that will limit social gatherings, shops’ opening hours and restrict trips in and out of any large cities. Madrid will carry out the order, but its regional president said she will fight the Spanish government’s resolution in the courts because she deems it arbitrary. 

  • In Turkey, the country’s health minister admitted to publishing only a partial tally of confirmed coronavirus infections, which now brings into question the true scale of the pandemic in the country. In July, as countries were reopening their borders around them and rebooting their tourism industry, Turkey changed the way it reported its coronavirus cases, replacing the words “today’s number of cases” to “today’s number of patients”. The changing of the wording meant “patients” were considered people who tested positive and displayed symptoms. Those who tested positive but were asymptomatic were not included in the tally. The World Health Organization (WHO) defines confirmed cases as the following: “a person with laboratory confirmation of COVID-19 infection, irrespective of clinical signs and symptoms.”

Covid-19 – Due Diligence And Asset Management

Private Equity Firms Bet on Booming Demand for Online Shopping

Brief: Private equity firms are betting that the rise in online shopping is here to stay, with some of the world’s biggest investment funds eyeing deals for everything from warehouses to delivery companies. Clipper Logistics Plc, which supports the e-commerce operations of retailers from Asos Plc to Superdry, is attracting interest from buyout firms, people with knowledge of the matter said. Cinven is among potential suitors that have been evaluating the 496 million-pound ($638 million) company, while CVC Capital Partners has also looked in the past, according to the people, who asked not to be identified because the information is private. Silver Lake recently participated in a $650 million funding round for Klarna AB, which lets shoppers pay for online purchases in installments. In August, Advent International acquired a controlling stake in the U.K. operations of package delivery service Hermes. The coronavirus crisis has created rising e-commerce demand, with customers stuck indoors ordering everything from food delivery to clothing and items for home improvement. That’s attracted private equity firms, which are eager to spend the record piles of capital they’ve amassed even as they grapple with the effects of Covid-19 on the companies they already own. Permira led a $300 million funding round last month for Mirakl, the French startup behind a platform used to create digital marketplaces, while Warburg Pincus invested in Boston-based Salsify Inc., which helps brands manage their online presence.

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Goldman Job Cuts Drive 2020 Global Bank Cull Toward 70,000

Brief: The global cull of banking jobs continues with Goldman Sachs Group Inc. joining the growing list of lenders resuming cuts paused during the coronavirus pandemic. The Wall Street firm is embarking on a plan to eliminate about one per cent of its workforce, or roughly 400 positions, according to people with knowledge of the matter, who asked not to be identified as the information isn’t public. Adding that to disclosures this week by other banks would take the total announced this year to 67,844, according to figures compiled by Bloomberg. More than 30 lenders -- from Europe, North America, Asia and Africa -- are behind the planned reductions. The actual total is probably higher because many banks eliminate staff without disclosing their plans. The banks cited a need to reduce expenses to offset the cost of credit souring during the pandemic as well as spending to comply with stricter regulation and invest in digital technology. Goldman’s plans suggest that the pandemic is outlasting the financial industry’s resolve to offer jittery employees stability through the economic downturn. They add to a bad week for banking jobs. Italy’s Intesa Sanpaolo SpA said on Wednesday that it agreed with trade unions on at least 5,000 voluntary job reductions. Banco de Sabadell SA’s U.K. unit said this week it will eliminate more than 900 roles.

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Big U.S. Banks to Report Profit Plunge as Pandemic Recession Takes Hold

Brief: As big U.S. commercial banks close their books on the third quarter, analysts expect them to report a 30% to 60% plunge in profits on the year-ago period due to the pandemic-induced recession and near record low interest rates. That slump in third quarter net income comes even though lenders are not going to make outsized provisions for expected loan losses as they did in the first and second quarters. And, while capital markets and investment banking revenue is expected to be up from 5% to 20%, that won’t be enough to make up for the decline in interest income from loans and securities. “You have soft loan growth and you’re still feeling the impact from aggressive Fed actions earlier this year,” said analyst Jason Goldberg of Barclays. Citigroup IncC.N and Wells Fargo & CoWFC.N, the third- and fourth-biggest U.S. banks by assets respectively, will report net income down by about 60%, according to I/B/E/S analyst survey data from Refinitiv.

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Private Capital Overwhelmingly Expects Economic Rebound in 2021, but Braces for Second Wave of COVID-19

Brief: Private equity and venture capital fund managers are anticipating the economy will improve in 2021 but are actively preparing for the impact of a second wave of the pandemic, according to BDO’s Private Capital Pulse Survey. Three-quarters (74.5%) of all fund managers surveyed expect the economy to improve next year—28% expect it to be “much better” and 46.5% “slightly better.” Only 15.5% of PE and VC fund managers surveyed said they expect the economy to perform worse in 2021, and the remainder, 10%, said the economy would fare about the same. At the same time, PE and VC fund managers are preparing for a potential second wave of the coronavirus in various ways: by conducting a business continuity risk assessment (55%), by making changes in forward-looking valuation metrics (47%), by activating a crisis response task force (39.5%), by considering applying for a government loan (36.5%), and by assessing EBITDA for asset impairments (32%). Just 4.5% of respondents say they are not doing anything to prepare for a second wave.

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Heirs to Asian Fortunes Tested on Sustainability Commitments by Pandemic

Brief: As markets tumbled this year, Mary Ann Tsao faced a tough choice. Her fourth-generation family office in Singapore had adopted sustainable investing principles, but the coronavirus was trashing the global economy. Relatives suggested a return to the old ways. "They'd say 'don't lose any money - never mind about the ESG (environmental, social and corporate governance)','" she said. "But we have to ask: what is the purpose of investing money in the first place?" In a sign of how Asia's ultra-rich family offices are slowly embracing the sustainability trend, the Tsao Family Office has tried to stay the course, buying into the Brown Advisory US Sustainable Growth Fund and adding to its investment in the Robeco Sustainable European Stars Fund after the pandemic began. For sustainable investing to take hold in Asia as it's started to in Europe and North America, family offices like Tsao's are key. Families run 85 per cent of the businesses in Asia, according to Ernst & Young estimates, a much higher proportion than the rest of the world. As fortunes get passed on to next generations, the push to do well by doing good is gathering steam.

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BlackRock Unlocks £3.1 Billion British Property Fund from COVID Freeze

Brief: BlackRock BLK.N said on Wednesday it had lifted the suspension of its 3.1 billion pound ($4 billion) British property fund, one of several to resume dealings after a six-month freeze due to uncertainty about valuations. Much of Britain’s 70-billion-pound ($90 billion) property fund sector was frozen in March as a result of the COVID-19 pandemic, but surveyors lifted an uncertainty warning earlier this month. Dealing in the BlackRock fund, which was suspended on March 20, will start again on Oct. 30, the U.S. asset manager said in a statement emailed to Reuters, as the fund’s assets were no longer subject to “material uncertainty”. “The fund has sufficient liquidity to meet the current level of redemption requests,” the statement said. Legal & General LGEN.L, Royal London, St James's Place SJP.L and Columbia Threadneedle have also lifted the suspension of their funds. Aegon AEGN.AS, Aviva AV.L, Janus Henderson JHG.N and Standard Life Aberdeen SLA.L said on Wednesday theirs remained suspended. Some funds have said they are checking market activity, redemption queues and cash levels before reopening.

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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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