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Covid-19 Diligence Briefing

Our briefing for Monday November 30, 2020:

  • In the United States, Congress members returned to Washington with only a few weeks to wrap up work before year-end holidays, which includes a deadline to pass a new round of coronavirus relief funding. Many programs are set to expire December 31st – including expanded unemployment benefits, an eviction moratorium and a pause on student loan payments. If lawmakers do happen to come to an agreement on any broader economic aid package, the wild card then becomes current United States President, Donald Trump. White House officials haven’t said whether President Trump would sign off on a spending bill once its finished, so as a result, law makers are preparing another short-term bill into next year, just in case.
  • Canada’s coronavirus case count has more than doubled since the start of November. According to CTV News tracker, as of November 1st, Canada had 28,875 active COVID-19 cases. As of Saturday November 28th, that number increased to 61,421 – an increase of 113%. From west to east and the far north – provinces and territories have been setting records for all the wrong reasons. For instance, Canada set a single day record on Friday with 5,967 cases. Modeling released by Canada’s Chief Public Health Officer, Dr. Theresa Tam a few weeks ago said that number could almost double to 10,000 cases a day in a few weeks if Canadians don’t do more to curb their interactions with others.
  • According to a study from Imperial College London and Ipsos MORI U.K. Ltd., England’s coronavirus case load has lowered by 30% after lockdown measures were rolled out in November. The report reflects cases were rising as the country entered a four-week lockdown on November 5th, and that a sharp decrease followed as national restrictions were implemented. The study also supports Prime Minister Boris Johnson’s plans of a tighter tiered system once the lockdown ends later this week as stronger measures are needed in some areas to prevent the pandemic from growing out of control. Elsewhere in the UK, the country is poised to become the first nation to approve the Pfizer/BioNTech COVID-19 vaccine, with inoculations to begin as soon as next month.
  • Italy’s government eased restrictions over the weekend to its financial capital, Milan and its industrial hub, Turin following a steady decline in the number of COVID-19 cases. On Friday, the country’s health minister signed a new order that would allow movement and economic activities in five Italian regions. The government also has approved a further support package worth €8 billion that will include support for small companies, the self-employed and others who have suffered a sharp drop in income due to the pandemic, to delay paying their taxes. 
  • According to The Guardian, China is moving aggressively to debunk the theory that the city of Wuhan was indeed ground zero for the coronavirus pandemic.  The article states Chinese state media have been pouring research into possible cases of the disease found outside of the country’s borders prior to December 2019. The official People’s Daily newspaper claimed in a Facebook post last week that “all available evidence suggests that the coronavirus did not start in central China’s Wuhan.” Michael Ryan, director of the health emergencies program for the World Health Organization (WHO), said last week it would be “highly speculative” to argue that the disease did not emerge in China.
  • American biotech company Moderna became the latest company to throw their hat in the ring for the COVID-19 vaccine race. Moderna released their final data on Monday, saying its vaccine candidate has proven to be nearly 94.1% effective in protecting people from COVID-19, and an efficacy rate of 100% against severe coronavirus cases. The firm plans to request an emergency authorization from the U.S. Food and Drug Administration (FDA), along with conditional approval from the European Medicines Agency (EMA). Moderna looks to be the second firm behind Pfizer to be granted emergency use status in the United States and said 20 million doses could be available by year’s end and the company remaining on track to produce 500 million to one billion doses for the rest of the world in 2021.

Covid-19 – Due Diligence And Asset Management

Research Casts Light on Major Investment Themes Post-Covid

Brief: Covid-19 is predicted to cause a sea-change for pension fund investing, mainly in the area of private markets and ESG. Schemes are expected to seek private markets for greater portfolio resilience, and invest in ESG now that Covid-19 has made more companies realise they “need a social licence to operate”. Meanwhile, global equities will be sought as pension funds try to plug funding gaps. Portfolio resilience is the chief prize for schemes, with “anti-fragility” the key concern, according to Professor Amin Rajan (pictured), whose latest research has just been published. Three quarters of schemes surveyed said they will target private markets to achieve custom-built resilience, whereas “high-quality cash flow compounders” among global equities will top the asset allocation choice for 76% of respondents looking to build antifragility into their portfolios. The research was published by Professor Rajan’s Create-Research consultancy and asset manager Amundi. It has 158 respondents from pension funds in 17 markets managing nearly €2 trillion in assets.

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Dealmakers Aren’t Letting Up in Frantic Finish to Crisis Year

Brief : Dealmakers are on track to end 2020 with a flourish, having recovered much of the ground lost to the coronavirus pandemic earlier in the year. Companies have announced $760 billion of acquisitions so far in the fourth quarter, the highest for this point in the period since 2016, according to data compiled by Bloomberg. November has been the busiest month of the year so far by number of deals, the data show. The tally got a boost Monday with financial data giant S&P Global Inc.’s takeover of IHS Markit Ltd. for about $39 billion in stock, the year’s second-biggest transaction. The latest series of megadeals, added to the record third-quarter haul of $993 billion, is helping volumes recover after the Covid-19 crisis triggered a steep decline in the first half of the year. The value of M&A announced this year is now down just 13%, compared with the 42% decline through the end of June. Most of this year’s biggest deals have come in the past few months, including Advanced Micro Devices Inc.’s $35 billion takeover of chipmaker Xilinx Inc. agreed in October. Other major transactions announced recently include billionaire Li Ka-shing’s sale of his European wireless towers to Cellnex Telecom SA for about 10 billion euros ($12 billion) and the 7.2 billion-pound ($9.6 billion) purchase of blue-chip British insurer RSA Insurance Group Plc.

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Value of Analyst Meetings Has Fallen by 47 Per Cent Since January 2020

Brief: Substantive Research, a research discovery and research spend analytics provider for the buy-side, has published a survey into how asset managers have changed their approach to research payments during Covid-19.  The findings indicate that the value asset managers place on one-to-one interactions with analysts has fallen by 47 per cent since the pandemic began and all physical meetings became virtual. Group meetings fared only slightly better, with the rates paid for virtual as opposed to face-to-face meetings dropping by 35 per cent. This is despite the appetite for research increasing and analyst engagement rising over the same period of time. The drop in value applies to asset managers that agree annual all-in prices at the beginning of the year, as well as those that value and pay for research after consumption. The survey also indicates that from the start of the Covid-19 crisis, 40 per cent of asset management firms who agreed a total research payment in 2020 have since recalculated and reduced their payments to providers in light of market uncertainty and structural changes in research consumption.  Annual research budgets can vary greatly depending on the size of the firm, from USD1 million-USD50 million-plus for the largest asset managers. Analyst interactions make up 50-70 per cent of research budgets with one-to-one meetings as the main driver of those payments.

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Fed’s Barkin Says U.S. Economy Holding Up Amid Virus Resurgence

Brief: The U.S. economy seems to be holding up despite a surge in Covid-19 cases and hospitalizations, clouding the case for more monetary stimulus, Federal Reserve Bank of Richmond President Thomas Barkin said. ‘’It’s hard to find a huge drop in the real-time data,” Barkin told reporters Monday in a press briefing before a University of South Carolina virtual speech. “I’m thinking about credit-card spending which I get to see every week. It really hasn’t taken a step back yet.” The Fed’s monthly asset purchases of $120 billion already are providing a pretty strong stimulus to the economy, in addition to near-zero interest rates, Barkin said. The Federal Open Market Committee is considering changes to its asset program, including new guidance, the minutes of its last meeting showed. “I’m intrigued by what the Bank of Canada has done in terms of duration extension,” Barkin said. “I think that is an interesting technique if we decide the economy needs some more stimulus.” Last month the Bank of Canada made a technical adjustment to its bond purchase program, scaling back the buying of government bonds while shifting purchases to longer-term securities. Yet with long-term U.S. Treasury yields below 1%, a move to push down rates further might have little effect, he said.

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U.S. Bond Volatility Players Eye 2021 Inflation Bump

Brief: The ICE BofA MOVE Index, which tracks expectations of volatility in Treasuries, is again languishing near all-time lows after a spike in March was quelled by U.S. Federal Reserve intervention. But a handful of fund managers, and some major banks, warn of the risk of a spike in inflation next year that could spur losses for bond funds and more volatility before the Fed steps back in, or eventually even change the central bank’s stance. Nancy Davis, who manages the Quadratic Interest Rate Volatility and Inflation Hedge ETF, said she has seen a jump in interest in recent weeks from investors worried about the impact of rebound in some of the consumer and asset prices quashed by this year’s crisis. She argues that while stock markets have accounted for COVID-19 vaccines spurring a swift recovery in 2021, debt market indicators of inflation have not budged, leaving bondholders exposed if headline price growth moves. “Equities already seem to be pricing this in, but the rates market hasn’t,” Davis told the Reuters Global Markets Forum (GMF) last week. “In the U.S., we are likely to get fiscal stimulus from the new administration combined with the loose monetary policy that could push inflation higher, it is probably an underpriced risk at this point,” she added.

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Covid-19 Has Made Anti-Fragility the Single Most Important Concern for Europe’s Pensions Industry

Brief: With the global economy dogged by so much uncertainty, pension investors find themselves on a journey into the unknown and now prize portfolio resilience above all else, according to a new report published today by CREATE-Research and the largest European asset manager, Amundi. The report surveyed 158 respondents from 17 pension markets across public and private sectors, collectively managing EUR1.96 trillion of assets. It aims to shed light on how pension plans worldwide are responding as the world economy struggles to recover from what is the economic equivalent of a massive cardiac arrest. The extraordinary policy response by central banks and their governments was timely and vital. But it has also inflicted toxic side effects on pension solvency via ballooning liabilities and plunging incomes from zero-bound interest rates. Alongside the market meltdown in March 2020, these have ravaged funding ratios worldwide. According to 85 per cent of respondents, financial markets will have a W- shaped or an accordion-shaped recovery: both are highly volatile by nature. Most respondents felt it was likely that central banks will lose their independence from their governments (84 per cent) and inflation will follow deflation after the current crisis is over (77 per cent). Finally, the overwhelming majority of those surveyed believe asset returns will be lower this decade than the previous ones (90 per cent). Professor Amin Rajan of CREATE-Research, who led the project, said: “Assessing the macroeconomic damage of Covid-19 is akin to looking through a kaleidoscope: different images appear with each turn of the dial. However, one thing is certain: the longer the pandemic lasts, the greater the economic damage to Pension plans.”

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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 November 27, 2020:

  • In the United States, the number of COVID-19 patients being treated in hospitals across the country reached 90,000 on Friday. The rate of hospitalizations are now at the highest level since the pandemic began. That number is only going to increase as people who gathered with family and friends over the Thanksgiving holiday could become sick over the next few weeks. According to America’s Transportation Security Administration, more than 1.07 million people travelled through the country’s airports the day before Thanksgiving – the busiest day since the start of the pandemic. Nearly six million Americans travelled via the air from Friday to Wednesday – that number though is less than half compared to the same time period last year.

  • In Canada, Prime Minister Justin Trudeau announced during a Friday news briefing that the federal government has chosen a senior military commander to lead its COVID-19 vaccine distribution effort. Dany Fortin, the current chief of staff to the Canadian Joint Operations Command will head up vaccine logistics within a new branch of the Public Health Agency of Canada (PHAC). Reporters questioned why Prime Minister Trudeau didn’t appoint a military liaison earlier – for instance, the United States has had one in place for months. “I can understand the eagerness with which people want to know when this will be over, when we’re going to get vaccines. What we can say is we’re going to work extremely hard to deliver as quickly and as safely as possible,” said Trudeau. The prime minister also noted that Canada is on track to vaccinate nearly every person that wants a shot by September 2021.

  • In the United Kingdom, Prime Minister Boris Johnson continues to defend his government’s new three-tier system to contain the coronavirus once the national lockdown ends next week. The prime minister has come under fire from his fellow Conservative party members with as many as 70 members claiming the system was arbitrary and not backed by evidence. Their argument might carry more weight with the latest COVID-19 data released in the country. The R-rate, which estimates how many infected people pass along the virus onto others, is in the 0.9-1 range, based on data up to November 24th. This would mark the first time the virus isn’t spreading exponentially in the UK since August 14th. 

  • Australia’s Victoria state is reaping the rewards of a strict coronavirus lockdown, but government officials also don’t want to jinx it. Victoria has gone 28 days with no new cases of the virus after enduring one of the world’s strictest and longest stay-at-home orders. At its peak – there were nearly 700 cases per day in August. The success means Australia could be one of the few western nations that can look forward to a holiday season with limited restrictions on family gatherings. However, infectious disease experts warn Australia faces an ongoing risk of the virus entering the community from returning overseas travelers – despite a mandatory system of hotel quarantine. More than 30,000 Australians, many living in Europe and the United States, where the virus is surging, are waiting to return home.

  • India is the latest country to enter a recession with the economy contracting in the three months through September due to the lingering effects of the coronavirus. India’s GDP declined 7.5% in the last quarter, milder than the 8.2% economists predicted and considerably better than the disastrous record 24% contraction in the previous quarter. The second straight quarterly decline in GDP though pushed India -  Asia’s third largest economy into its first technical recession in records going back to 1996.

  • Brazil’s President Jair Bolsonaro is at it again. The always outspoken leader, who contracted the coronavirus in July, said he won’t be taking any working COVID-19 vaccine himself and called the use of masks to limit the spread of the disease, “the last taboo to fall”. “I tell you: I will not take (any vaccine). It is my right, and I am sure that Congress will not create difficulties for whoever doesn’t want to take a vaccine,” said Bolsonaro. The president’s comments alarmed Brazilian health experts who worry Bolsonaro’s words could undermine their attempts to get the general public onboard to achieve successful vaccination levels once the time comes. The only silver lining health experts can take from President Bolsonaro’s wide ranging set of comments: any inoculation certified by Brazil’s health agency will be available free to the public, according to the country’s leader.

Covid-19 – Due Diligence And Asset Management

JPMorgan’s Pil Sees Quick Return to Office Boosting Real Estate

Brief: People will likely return to the office more quickly than expected and that will help boost the price of some commercial real estate, according to J.P. Morgan Asset Management. Investors may be making a mistake by extrapolating the future from the current situation with lots of working from home due to Covid-19, according to Anton Pil, global head of alternatives at J.P. Morgan Asset Management, part of JPMorgan Chase & Co. Top malls worldwide should see a faster-than-expected rebound in traffic, he said, and there’s an overshoot in expectations about how many people will want the status quo versus returning to the office. “I’m expecting a pretty significant rebound in valuation,” Pil said in a phone interview Wednesday. “Financing terms are at some of the lowest levels that we’ve ever seen, and the income generation continues to be quite strong, at least if you own top-notch offices in strong locations.” Urban centers have been able to survive previous pandemics and will do so again this time, Pil said. He pointed to the co-working trend as evidence that even when people could work from home they found there was value in being around others. However, investors are taking things slowly at this point, with commercial real estate dealmaking in the third quarter far below pre-pandemic levels, according to data from CBRE Group Inc. and Real Capital Analytics Inc. Pil also said that easy monetary policy and available financing means that it’s harder to tell which companies have simply been hurt by the pandemic and which have business models that just aren’t viable. 

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Canada’s Richest Grew Their Fortunes by $53 Billion During the Pandemic

Brief :As Canadians lost their jobs during the COVID-19 pandemic and businesses shuttered, the country’s richest got richer. A new report by Canadians for Tax Fairness reveals Canada’s top 44 billionaires grew their fortunes by $53 billion from April to October, or by more than 28 per cent. Only one of them, Michael Lee-Chin of AIC Investments, didn’t maintain or increase wealth. “While millions of households are struggling to survive through the pandemic, our top billionaires have made out like bandits, including some who have cut pandemic pay for their front-line workers,” said Toby Sanger, economist and director of Canadians for Tax Fairness. “As Finance Minister Chrystia Freeland prepares to table the government’s fall economic statement and consider ways to pay for the crisis and recovery, she should go to where the money is.” The period coincides with a massive rally off the bottom for stocks and a surprisingly strong run for real estate, but the trend has been playing out over the past decade. The report found the number of Canadian billionaires and their wealth has more than doubled. Between 2010 to 2019, only the top 1 per cent increased their share of total wealth, while it fell for everyone else.

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Goldman Sees Many in U.S. and Europe Vaccinated by Mid-2021

Brief: Goldman Sachs Group Inc. expects large swathes of the public across major developed economies to receive a vaccine against the coronavirus by the middle of next year, driving a “sharp pickup” in global growth. The bank’s economists predict that half the U.K. public will be vaccinated in March, with the U.S. and Canada reaching that threshold a month later. The European Union, Japan and Australia are due to follow in May. “We expect large shares of the population to be vaccinated” toward the end of the second quarter, economists Daan Struyven and Sid Bhushan wrote in a report to clients. With production increasing, the vaccination rate is set to exceed 70% in the autumn. The best hopes for ending the pandemic, which has sunk the global economy into its deepest contraction since the Great Depression, rest on deployment of a vaccine. While experimental shots have produced positive trial results, drug makers and governments face logistical hurdles to successfully vaccinate hundreds of millions of people around the world. Should some of the vaccines in development not prove successful, supply -- particularly in the EU -- would rise more slowly, the economists wrote.

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Private Credit Managers to Provide More than USD100bn of Financing During 2020, says ACC

Brief: Private credit managers will provide more than USD100 billion of financing during 2020 as economic uncertainty and low interest rates are reducing the attractiveness of traditional fixed income assets, according to research published by the Alternative Credit Council and Allen & Overy. The ACC’s 6th 'Financing the Economy' research paper showed that 88 percent of firms expect to continue raising capital for their existing strategies, and 98 per cent of businesses plan to raise capital for some form of private credit strategy in 2021. According to Sanjeev Dhuna, a London-based Allen & Overy partner and head of the firm’s direct lending practice, direct lenders are increasingly being considered by borrowers and sponsors alongside underwritten and bank club financings. “The direct lenders offer speed of execution and certainty of pricing, and in recent months we have seen these lenders play in the structured financing market, offering liquidity for delayed exits in order to return cash to investors,” he commented and added: “the direct lenders are a staple part of the mid-market financing scene and they have an increased presence in the large cap market.”  The paper, which surveyed 49 firms with an estimated private credit AuM of USD431 billion, notes that Covid-19 will highlight differences in origination, documentation standards and risk management within the sector.

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Optimal Opportunities: Why Current Volatility Levels are Proving a “Sweet Spot” for Alpha-Focused Funds

Brief: Markets look set to remain in a “sweet spot” of heightened volatility – driven by Covid-19 uncertainty and the fallout from the US presidential election – offering a wealth of opportunities for alpha-focused strategies. New research by JP Morgan Asset Management shows that current above-average volatility levels offer an “optimal environment” for certain alpha-based funds to capitalise on mispricings amid choppy trading and high dispersion, in contrast with more mixed prospects for equity and credit beta exposures. The emerging investment landscape heading into 2021 offers a boon to a beleaguered hedge fund sector which in recent years has had to contend with patchy performances and continued investor aversion. Prevailing volatility levels - between 15 and the early 30s on the VIX – are creating particularly strong trading opportunities for relative value, quantitative, and macro-based strategies, which can tap into the increased dispersion across markets, explained Karim Leguel, international head of investment specialists for hedge funds and alternative credit solutions at JP Morgan Asset Management. “We see more dispersion coming up in terms of different stock dispersion and different stock behaviour, so that’s beneficial particularly for those strategies that trade short-to-medium dispersion between stocks,” Leguel told Hedgeweek.

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2020: Covid-19 and Black Lives Matter Force Industry to Refocus Priorities

Brief: This year, Covid-19 and the Black Lives Matter movement have resulted in a refocus of priorities in the investment management industry, not just as businesses but also as responsible employers. This refocus is in line with the purpose and ethos of Investment20/20.With Covid-19, we are halfway through a second national lockdown in England, and well into the youth employment crisis. Recent research from the London School of Economics shows a staggering one in ten 16 to 25-year-olds have lost their job since the start of the pandemic - double the rate of those over 25 - and if that was not bad enough, 58% of young people have also experienced a fall in their earnings too compared with 42% across the rest of the working population. It is precisely because of this that the investment management industry must demonstrate to young people that their skills and perspectives are valuable to our industry. As the careers and talent solution for the investment management industry, Investment20/20 has not been immune to the impacts of Covid-19. To ensure our mission of building a diverse pipeline of talent for our industry was not knocked off course by the pandemic, we adapted quickly and innovated to a changing operating environment, both in March and more recently at the start of the new academic year in September.

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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 November 26, 2020:

  • In the United States as families potentially gather for Thanksgiving and other holidays in the near future, the Supreme Court struck a ruling on religious gatherings in regard to COVID-19. In a 5-4 ruling, America’s highest court knocked down an attempt from New York state Governor Andrew Cuomo to limit religious gatherings. Governor Cuomo had made a similar move earlier in the year when the first wave of the coronavirus ran through his state, particularly in New York City. The injunction, which was granted on the grounds of maintaining freedom of speech and religious practice, will apply until the case is heard in the Appeals court. The deciding vote was cast by new conservative Supreme Court Justice Amy Coney Barrett, who replaced Ruth Bader Ginsburg after her passing earlier this year. 
  • In Canada, Ontario Premier Doug Ford is asking his citizens to stay home and celebrate on their own for the upcoming holiday season. In a news release on Wednesday, the government stated the safest way to spend this holiday season is only celebrating in-person with the people you live with, or if you live alone, choose one household to bubble with. The recommendations are for the entire province and not just the lockdown areas of Toronto and Peel Region. The news comes as Premier Ford and his government are trying to defend themselves against the province’s Auditor General report who cited delays, conflicts and confusion has hampered Ontario’s response to the pandemic. Health Minister Christine Elliott defended the government’s handling of the pandemic and stated the Auditor General made, “factual inaccuracies” in her report.
  • In the United Kingdom, the government laid out who will be in their strictest Tier 3 zone when the current lockdown is lifted on December 2nd. The cities of Manchester and Newcastle will face at least two more weeks of tough restrictions while London was spared the worst and bumped down to Tier 2. In a news conference on Thursday, Prime Minister Boris Johnson defended his government’s positioning due to the lingering signs of coronavirus spread in certain regions. Starting next week, those regions in Tier 3 can apply for support from the National Health Service (NHS) Test and Trace Programme, which will roll-out six weeks of rapid community testing. Up to 14,000 military personnel will be on stand-by to help out if need be. “Your tier is not your destiny,” said Johnson noting regions can move out of tighter restrictions once they show improvement.
  • In Germany, Chancellor Angela Merkel agreed with her 16 state leaders as their current coronavirus restrictions will be extended until at least December 20th. Merkel met with the 16 state governors via a video call on Wednesday and agreed measures such as the closing of bars and restaurants will remain while shops and schools remain open. From December 1st, private gatherings will be limited to five people and be increased to 10 around Christmas time. However, Wednesday’s decision did include an appeal to avoid social contact a week prior to family visits. “This must not be a lonely Christmas for people in vulnerable groups,” said Merkel. 
  • The Philippines are set to sign a supply agreement with AstraZeneca for their potential COVID-19 vaccine as early as Friday. A top coronavirus task force official said the deal would be for two million doses. Private firms will pay for the vaccine and give half of the supply to the government, with the other half to be used to cover employees in the private sector, but the private companies involved in the purchasing weren’t identified. The government also said it was in talks with China’s Sinovac for a vaccine deal in the $20-$50 million range, as well as United States drugmaker Pfizer. 
  • The Philippines though will want to keep their eyes on AstraZeneca as the drugmaker along with their partner, the University of Oxford are now facing mounting questions about their trial results after acknowledging a manufacturing error. Earlier this week, AstraZeneca and Oxford announced their shot was 70% effective in a late-stage study. In a later statement, the pair said a difference in the manufacturing processes led to some participants being given a half dose instead of a full one. Ironically those given the mistake of a half-dose before given a full second dose proved to have a 90% efficacy  while those who received two full doses showed only a 62% efficacy. None of this information though was disclosed in AstraZeneca’s original statement, thus forcing the drugmaker to likely conduct an additional global trial to assess its effectiveness.

Covid-19 – Due Diligence And Asset Management

European Asset Management Industry to Reach New Record High by Year-End, says EFAMA

Brief: The European asset management industry is back on track for another year of growth, according to industry body The European Fund and Asset Management Association (EFAMA) – with assets under management rebounding strongly after being hit by the coronavirus crisis in the first quarter of 2020. In its yearly report, EFAMA estimates that total assets under management in Europe stood at EUR25.8 trillion at the end of 2019, a figure that fell by 11 per cent to EUR23 trillion by the end of the first quarter of 2020. A rebound of 8.3 per cent in the second quarter took assets back up to EUR24.9 trillion. “Thanks to the positive news on the Covid-19 vaccine front, it is likely that the value of assets under management will reach another historical height by the end of 2020”, comments Bernard Delbecque, senior director for economics and research at EFAMA. The amount of assets managed within Europe has more than doubled in a decade, starting from EUR10.8 trillion in 2008 and going up to EUR23.1 trillion by the end of 2018. EFAMA’s report also looked at the asset management industry’s contribution to the real economy, and found that asset managers in Europe held an estimated 25 per cent of all debt securities and 30 per cent of listed shares issued by Eurozone residents at the end of 2018.

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Brexit Negotiations and Covid Surge Erode Investor Confidence

Brief : European investor confidence fell to its lowest level this year due to Brexit concerns and an EU budget impasse, while risk appetite overall increased at a global level. The latest State Street Investor Confidence Index saw European investors register a reading of 92, down 1.8 points on the revised total for October, marking a second consecutive month of declining sentiment.  Any reading on the scale below 100 means investors are selling more risk assets than buying. Marvin Loh, senior macro strategist at State Street Global Markets, said: “Risk appetite fell to its lowest levels of the year in Europe, as surging virus cases resulted in another round of lockdowns and restrictions.” He added: “Ongoing Brexit negotiations and an EU budget impasse further sapped investor confidence, although most European bourses are set to report double-digit gains for the month.” At a global level, however, investor confidence overall was on the rise, increasing to 90.7 – up over 10 points on October’s final total. This, according to State Street, was primarily driven by a “jump” in the North American confidence index to 87.4 points. The Asian investor confidence index also increased, rising from 91.8 to 95.1.

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Delta and Alitalia are Bringing Back Quarantine-Free Flights Between U.S. and Europe

Brief: Through the use of repeated COVID-19 testing, Europe and the U.S. are going to establish the first quarantine-free air corridors since the coronavirus pandemic led countries to isolate arrivals. Delta and Alitalia will be operating the flights from next month. However, with both the U.S. and Europe maintaining heavy restrictions on who can enter from the other side, these are still just trials of procedures that are only likely to be widely rolled out in the summer of 2021. From December 19, Delta said Thursday, it will start operating test flights between Atlanta and Rome in which passengers do not have to go into quarantine on either end. However, they will have to take a series of tests to make this possible. Those travelling from Hartsfield–Jackson Atlanta International Airport to Rome-Fiumicino International Airport will first need to take a high-assurance PCR test, up to 72 hours before departure. If the result is negative, they'll get a rapid test at the Atlanta airport, and another on arrival in Rome. Travelling in the other direction will require a rapid test at Rome-Fiumicino.

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Japan Bond Market in the Dark on New Sales as Virus Spikes

Brief: As coronavirus infections in Japan spark increasing alarm, the government has left investors guessing on how much money it will pump into the economy through a third extra budget. This presents a huge challenge for the bond market trying to gauge how much additional debt will be issued in the current fiscal year through March, along with which maturities will be in focus and the likely impact on yields. Primary dealers told the government that the market has the capacity to absorb more 20- and 40-year bonds, an official at the Finance Ministry said after a meeting on Thursday. Here are some of the main scenarios seen by interest-rate strategists in Tokyo. The issuance pipeline for this fiscal year is already at a record 212.3 trillion yen ($2 trillion), which puts pressure on the government to limit additional sales, if it can. But the risk of a big jump is very real if virus infections increase significantly. Tokyo last week raised its Covid-19 alert to the highest of four levels amid a resurgence of the pathogen across the country -- a spike that’s come after Prime Minister Yoshihide Suga called on officials to prepare the third extra budget.

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Canadian Banks’ Return-To-Office Plans Thwarted by Virus Surge

Brief: A recent surge in COVID-19 cases is derailing Canadian banks’ plans to bring employees back to offices, with one lender even asking some workers who had already returned to go back home. Canada is now facing about 5,000 new COVID-19 cases a day, prompting provinces and cities including Toronto -- home to the country’s five biggest banks -- to implement new restrictions to limit the virus spread. Even Prime Minister Justin Trudeau recently returned to working from home in an attempt to set a national tone of caution. Bank of Montreal and Canadian Imperial Bank of Commerce are extending work-from-home plans for some employees until at least April, while National Bank of Canada is prolonging such measures for corporate-office staff until the end of June. Toronto-Dominion Bank hasn’t set a firm date for a return, but said in a memo last week that most people working from home won’t come back “until at least the spring.” Royal Bank of Canada even encouraged employees who had gone back to offices to return to working at home as of Nov. 16, according to a memo from Chief Human Resources Officer Helena Gottschling. Canada’s second-largest lender by assets said it will continue pre-screening and requiring masks and distancing for those who can’t work remotely.

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After Years of Famine, This Distressed Debt Pro Predicts a Feast

Brief: The coronavirus pandemic and resulting economic conditions have presented a “once-in-a-decade” opportunity for distressed debt investors, according to SVPGlobal.  The high yield, leveraged loan, and direct lending markets in the United States are worth $4.5 trillion, according to a new paper from the distressed debt and private equity firm. With a projected 10 percent default rate for 2020, distressed investors will have many options to choose from.  “If you use the default rate as a proxy, we think that for us and people who do what we do, we are going to be feasting for the next two or three years,” said Victor Khosla, SVPGlobal’s founder and chief investment officer, by phone.  Khosla’s $9.8 billion SVPGlobal, previously known as Strategic Value Partners, has the dry powder available to do it: the firm closed a $1.7 billion distressed debt fund in late October, Institutional Investor previously reported.  When the pandemic came stateside in March, a wave of debt holders unloaded their now-distressed investments following downgrades. “In almost all markets, the first 60 days of the pandemic were bedlam,” Khosla said. Then, the Federal Reserve stepped in with an open market buying program that injected liquidity into the debt markets, slowing the sale of debt.  

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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 November 25, 2020:

  • In the United States, Reuters is reporting the White House is considering rescinding entry bans for most non-U.S. citizens who were recently in Brazil, Britain, Ireland and 26 other European countries. The U.S. restrictions barring most visitors from Europe has been in place since mid-March while the Brazil entry ban has been imposed since May. The Trump administration is not considering lifting separate entry bans on most non-U.S. citizens who have recently been to China or Iran. According to people briefed on the matter in the Reuters report, the plan has the backing of White House coronavirus task-force members, public health and other federal agencies. Despite the consideration, President Donald Trump still may opt not to lift restrictions as COVID-19 cases are still high in Europe and European countries may not be immediately ready to return the favour of travel within their borders because of America’s high coronavirus count.

  • As coronavirus cases continue to spike in Canada across multiple provinces, local leaders are stepping in with initiatives to help curb the spread. In British Columbia, after a record 941 cases on Tuesday, health officials moved to temporarily ban indoor group fitness activities. This is coupled with a move made last week to make masks mandatory in all indoor public spaces. Alberta, which is dealing with some of the highest daily cases in the country, temporarily banned indoor private social gatherings and moved all students from grade 7 and above to at-home learning. With the Atlantic bubble officially popped, Nova Scotia reported its most cases in one day since April. That sparked the province’s premier to close restaurants to in-person dining and other public spaces like libraries, casinos and recreation centres in the Halifax area – the Atlantic region’s largest metropolitan area for at least the next two weeks starting Thursday.

  • United Kingdom Chancellor Rishi Sunak laid bare the government’s spending during the coronavirus pandemic and as expected – it was a lot, but some groups believe more needs to be done. The UK is borrowing at a peacetime record of £394 billion this year and Sunak admitted that “the economic emergency has only just begun.” Sunak said the UK’s GDP is facing a fall of 11.3% in 2020 – the largest fall in output in 300 years. The chancellor admitted the scars from the coronavirus crisis will continue to be felt economically well into the middle of this decade. Business groups said the measures announced by Chancellor Sunak in his spending review on Wednesday did not do enough to support jobs.

  • Going into the busy holiday season, France will begin easing COVID-19 restrictions as early as this weekend. Starting November 28th, shops can reopen with strict health restrictions and social distancing guidelines in place. Residents will be able to leave their home for exercise for up to one hour within a 12-mile radius of their home and new rules will allow religious centres to open, with 30 people or fewer in attendance. President Emmanuel Macron said restrictions will gradually be lifted through December and January but only if the infection rate keeps going in a downwards trajectory. If cases continue to stay low as of December 15th, President Macron said citizens would be able to travel around the country to visit friends and family for the holiday season.

  • In Japan, the governor of Tokyo has urged residents to avoid unnecessary outings and work from home if possible as the city struggles with an increase in COVID-19 cases. Tokyo government officials are also asking restaurants and popular karaoke boxes to close early at 10 PM and will provide financial support to those establishments for doing so. The number of new cases in Japan's largest city was 401 - close to a record high and the percentage of positive COVID-19 tests are at their highest rate since the summer.

  • Seeking to gain a head start on its western rivals, a leading Chinese vaccine developer has applied to the country’s regulators for authorization to bring their COVID-19 inoculation to the rest of the world. China’s state media reported on Wednesday that China National Biotech Group Co. (CNBG) submitted the application, which likely includes phase three human testing conducted in the Middle East and South America. With the application submitted, CNBG will likely become the first developer outside of Russia to see its COVID-19 vaccine available for public use.

Covid-19 – Due Diligence And Asset Management

More Corporate Defaults Forecast for 2021

Brief: The continued presence of the Covid-19 virus combined with the winding down or potential withdrawal of state support schemes is likely to trigger a significant increase in European corporate defaults and insolvencies. This is the finding of a report from S&P Global Ratings which analysed the European corporate debt market and concluded that the speculative grade default rate will likely double next year from its current rate of just below 5% to around 8%. The high number of corporates accessing government-sponsored support programmes has seen corporate debt levels rise substantially in Europe, by 2.5% in Germany and as high as 11.9%. However, with a vaccine in sight, the scale of the European debt problem will only become visible once public vaccination programmes commence and governments consequently scale back their support, states S&P. For example, at the end of October the UK government announced that it would wind up its employment furlough scheme at the end of March 2021. Furthermore, the complexity of these various support measures, such as furlough schemes and tax holidays, in place makes it difficult to get a full picture of the additional debt burden on corporates' balance sheets and of how sustainable this burden will be, the report adds.

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Emerging Market Debt Funds Are Yet to Fully Recover From Covid-19

Brief :Fund flows at the largest emerging market bond managers by assets under management (AUM) have struggled in 2020, with the coronavirus pandemic having taken a toll on higher-risk investments, according to the latest issue of The Cerulli Edge – European Monthly Product Trends.Overall, European AUM in emerging market bond funds – EUR275.8 billion (USD327.5 billion) as of September 2020 – have so far failed to match the heights of 2019. AUM ended last year at EUR314.2 billion, meaning September’s position represents a steep 12.2 per cent decline. This experience contrasts with those of the wider markets, which have generally seen a resurgence since March’s downturn. “Emerging market bond flows have fluctuated in Europe over the past few years, registering net withdrawals of EUR19.4 billion in 2015 – when currency volatility and the fact that some countries were struggling to service their debt meant investors were unwilling to be over-exposed – before recovering to deliver record inflows of EUR60.6 billion in 2017,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli Associates. But despite 2020 having been a largely bleak year for many of Europe’s prominent emerging market managers, some have seen their offerings prosper. Some managers are betting on a recovery – a spate of launches have occurred this year with a particular emphasis on sustainable investing.

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Credit Fund Managers Pause Implementation of New Investment Strategies Due to Covid-19, says Ropes & Gray Research

Brief: Covid-19 has stalled the emergence of new credit fund investment strategies and has pushed managers to focus on their existing credit platform products, according to a new report from global law firm Ropes & Gray. The report, “Challenges and Opportunities in Post-Covid-19 Credit Fund Platforms 2020” analyses the responses of 100 senior-level executives at US- and UK-based credit funds. To get a sense for how credit fund managers are shaping their investment strategies in light of the economic upheaval and uncertain market conditions brought about by Covid-19, executives were surveyed twice: prior to the introduction of lockdown restrictions and again in the midst of the pandemic. Early in 2020, 50 per cent of managers stated they were considering launching new investment strategies. Six months later, only 20 per cent were, reflecting a distinct shift away from pre-Covid-19 enthusiasm. Some 23 per cent responded that they were closing less popular strategies, and in light of the Covid-19 pandemic, managers and investors alike are more focused on existing strategies. Commenting on the overall findings, Ropes & Gray asset management partner and head of the credit funds practice, Jessica O’Mary, says that despite fund managers’ concerns, credit funds have proven resilient: “There had been some concerns around systematic risk issues with these products, but by-and-large, the system held up pretty well.”

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Wall Street’s Rise From Pandemic Lows has Further to go, say Strategists

Brief: The S&P 500 is poised to climb 9% between now and the end of 2021 as the anticipated widespread release of a COVID-19 vaccine drives an economic and corporate earnings recovery from the pandemic, according to a Reuters poll of strategists. After a more than 60% recovery from the March lows of the outbreak to a record high on Nov. 16, the benchmark index is now up about 10% in the year to date. The benchmark S&P 500 will finish 2021 at 3,900, a 9% gain from its close Monday of 3,577.59, according to the median forecast of 40 strategists polled by Reuters over the last two weeks. The index is expected to end 2020 at 3,600, close to its current level, according to the poll median. Recent evidence of high efficacy rates in experimental COVID-19 vaccines has driven an advance in equities this month, and strategists in the poll cited progress in the vaccine as the main factor behind their forecasts. “They assume a vaccine is widely available starting some time in the second half of 2021,” said Sameer Samana, senior global market strategist for Wells Fargo Investment Institute, which has a 2021 year-end forecast for the S&P 500 of 3,900. With a big pickup in the economy expected to follow, Wall Street is likely “grossly underestimating” next year’s rebound in earnings, said Jim Paulsen, chief investment strategist at The Leuthold Group in Minneapolis, who sees the S&P 500 ending next year at 4,100. “That’s one thing I think could be a huge driving force,” for stocks, he said.

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Investors Turn to Private Credit as Key Portfolio Hedge Amid Covid-19 Market Ruptures

Brief: Private credit managers are on track to provide some USD100 billion of real economy financing this year, as investors increasingly turned to the sector as a resilient portfolio hedge and diversifier amid equity market ruptures during 2020’s coronavirus pandemic. New research published by the Alternative Credit Council suggests the private credit market has weathered the economic shock brought about by Covid-19, with fund managers now increasingly bullish about the sector’s prospects next year. The sixth annual ‘Financing the Economy’ report - published jointly by the ACC, the private credit affiliate of the Alternative Investment Management Association, and Allen & Overy – surveyed 49 firms globally, with an estimated combined AUM in private credit of USD431 billion. The deep-dive study gauged credit manager outlook, investor sentiment, and market opportunities, and explored an assortment of case studies on how such capital is being deployed. Private credit managers will have provided some USD100 billion to small-to-medium enterprises (SMEs) and mid-sized business by year-end, in line with 2019’s total lending volume, the research showed – underlining the importance of non-bank lending during the Covid-19 downturn. It found that credit managers are optimistic despite continued economic uncertainty: more than 80 per cent of survey respondents are either ‘somewhat bullish’ or ‘very bullish’ in their appetite to deploy capital over the next 12 months.

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JPMorgan Is Hunting for Properties in a Sector Poised for Post-Covid Growth

Brief: JPMorgan Chase & Co.’s asset management arm expects to expand its ownership of laboratories as part of its effort to position its portfolio for a post-pandemic world.  The U.S. will probably see a “re-onshoring” of pharmaceutical production and life-sciences drugs as a result of Covid-19, Anton Pil, global head of alternatives at J.P. Morgan Asset Management, told Institutional Investor in a phone interview. “To be prepared the next time around, you probably want to make sure you have a manufacturing and a laboratory capability within your country.” J.P. Morgan Asset Management, which oversaw $2.3 trillion at the end of September, invests in traditional and alternative assets. The investment manager already owns around $500 million to $1 billion of labs in its alternative real estate portfolio, according to Pil. “I expect that to grow quite a bit,” he said. “I can even see that growing into manufacturing areas, as well — not just pure lab space.” The lab properties in JPMorgan’s portfolio are near the most important biotechnology centers in the U.S., including Boston, San Francisco, San Diego, and New York, according to a spokesperson for the bank’s asset management business. The assets include real estate under development. In New York, J.P. Morgan Asset Management is redeveloping an old factory near Columbia University into lab and office space, the spokesperson said in an email. In San Diego’s Sorrento Mesa, the asset manager is developing and redeveloping existing office properties into labs.

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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 November 24, 2020:

  • In the United States, the General Services Administration (GSA) informed President-elect Joe Biden that the Trump administration is ready to begin the formal transition process. According to a CNN report, this is welcome news to the Centers for Disease Control and Prevention (CDC). The Biden team was unable to gain access to a government organization like the CDC until the GSA initiated the process. During the pandemic, the CDC have been at odds with the Trump administration over its handling of the coronavirus. The government health organization is hoping the Biden team re-establishes their department in a more visible role as both sides figure out their ongoing response to the pandemic, most notably, the distribution of vaccines to the American public. 

  • The Canadian federal government will unveil the impact of the emergency COVID-19 spending on the country’s finances in a budget update next week. Finance Minister Chrystia Freeland told lawmakers on Monday that her department will release its new projections on November 30th. Canada is facing its largest budget deficit since World War II after COVID-19 emergency spending is closing in on $400 billion. “Our plan will continue to support Canadians throughout the pandemic and ensure that the post Covid economy is robust, inclusive and sustainable,” said Freeland.

  • Airlines shares soared in the United Kingdom after the government said it will slash its 14-day quarantine for arrivals from high-risk countries. England’s self-isolation period will be down to just five days if a passenger takes a COVID-19 test on the fifth day that proves to be negative. Those that don’t get a COVID-19 test by the fifth day must continue to isolate for the full two weeks. The news will be greeted fondly by travellers who would like to travel for the holiday season if possible. The news is also a step forward for the airline industry, but they were seeking an outright removal of the UK’s quarantine system. Major airlines such as Ryanair and British Airways owner, IAG have blamed the quarantine policy for making an unprecedented crisis for the industry worse.

  • In Germany, the governors of all 16 states have agreed to extend the central government’s “lockdown-lite” until at least December 20th but want to see it relax for Christmas and New Year’s Eve to allow for family celebrations. Germany has been under a partial lockdown since the beginning of November, which has seen pubs, restaurants, gyms and theatres shutdown and domestic tourism banned. The restrictions were supposed to end this month, but with the number of coronavirus infections still high in the country, state leaders reached a consensus they should be extended. The 16 governors will take their discussed next steps to Chancellor Angela Merkel in a video call on Wednesday. According to media reports, it is highly likely that the draft measures the governors have agreed upon will be endorsed by the central government.

  • Japan and China agreed to restart business travel between the two countries by the end of this month. The agreement between the two countries was supposed to be made in October but was delayed due to increasing new infections cases in Japan and China. The timing still seems to be strange as media reports are noting Japan is eying tighter virus steps as cases in Tokyo jump.  The agreement will approve short-term business travel and long-term stays for expats. This also marks the first high-level dialogue between the two countries since Japanese Prime Minister Yoshihide Suga took office back in September.

  • The CEO of Australian’s national airline said it will require future international travellers to prove they have been vaccinated against COVID-19 before flying. Qantas chief executive Alan Joyce made the comments to Nine News - “Whether you need that domestically, we will have to see what happens with COVID-19 in the market. But certainly, for international visitors coming out and people leaving the country, we think that’s a necessity.” Joyce thinks the topic will be something all airlines and countries will grapple with as more COVID-19 vaccine treatments become readily available. The International Air Transport Association – the body that represents airlines globally – said a digital health pass, which could include vaccine information, is the key to reopening borders.

Covid-19 – Due Diligence And Asset Management

Business Travel May Never Return to Pre-Pandemic Levels: Trivago CEO

Brief: Business travel is typically the most lucrative for the leisure and hospitality industry, but the coronavirus pandemic may have changed that forever. Corporate trips taken by Americans contributed $334 billion to the entire travel industry's $1.1 trillion in revenue last year, according to Bank of America research. That revenue dried up when the pandemic hit. “Whenever this [pandemic] is over, we will have practiced for more than one year how to interact across very, very big distances. So, we do expect a structural reduction of the business travel market,” Trivago CEO Axel Hefer told Yahoo Finance Live. Hefer’s comments echo sentiments from business leaders across industries as many major companies re-imagine the future of work. Microsoft founder and philanthropist Bill Gates predicted in a recent interview that business travel will shrink by 50% and office work will be reduced by a third post-pandemic… Even the most optimistic predictions estimate it will take several years for business travel to return to pre-pandemic levels. According to Bank of America research, corporate travel is unlikely to rebound until 2024.

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“Cause for Concern”: Man Group Sounds Warning on Risk Appetite and Positioning

Brief: Man Group has raised the alarm over elevated risk appetite and potentially hazardous market positioning following the recent seismic factor reversal, with some hedge fund strategies potentially gambling on “prior winners continuing to win”. In a market commentary on Tuesday, the London-listed hedge fund giant pointed to a continued close correlation between hedge funds’ positions and momentum and value factors – a positioning that shows “little sign of shifting after the dramatic factor reversal two weeks ago.” This positioning – coupled with gross and net exposures for equity long/short hedge funds now “comfortably” at five-year highs – suggests “funds remain fully committed to prior winners continuing to win, and markets continuing their march higher,” Ed Cole, managing director, equities at Man GLG, wrote in the company’s weekly ‘View From The Floor’ note. A number of hedge fund strategy types were rocked by the recent sell-off in momentum stocks as investors piled into value companies, a rapid market rotation driven partly by the positive announcements regarding a Covid-19 vaccine breakthrough earlier in the month.

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Buyout Titans Fire Up LBO Machine With $1.6 Trillion to Spend

Brief: The biggest private equity firms in the U.S. are unleashing a flurry of new leveraged buyouts and debt-funded dividends, seeking to make up for lost time after staying on the sidelines for much of 2020. From Blackstone Group Inc. to KKR & Co., firms have been pivoting from repairing the balance sheets of companies they own to hunting for new investments and realizing gains on businesses that performed well during the pandemic. North American buyout activity, which was 57% off last year’s pace at the end of June, is now only 32% behind, according to data compiled by Bloomberg. Of course, any number of adverse developments -- from a worsening economic outlook to setbacks in Covid-19 vaccine production -- could upend the trend. But with interest rates at record lows, seemingly insatiable demand from bond and loan buyers and almost $1.6 trillion of pent-up cash, industry watchers say the ramp up in deal making might just be getting started. “Private equity firms don’t get paid to sit on cash,” said Harold Varah, global co-head of financial sponsors at RBC Capital Markets. “You’ve seen a tempering of the storm, a desire to deploy capital and a leveraged finance market that has recovered pretty remarkably. All the elements that you need for deal making are there.”

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The U.S. Futures Watchdog Won’t Assign Blame for the Oil Price Crash. Market Watchers Say That’s a Big Problem

Brief: After more than seven months of investigating the oil price collapse of April 20, the U.S. Commodity Futures Trading Commission, the top futures watchdog, released an interim report Monday outlining the day’s events, but would not provide any definitive reasons for the price plunge, nor any final conclusions or recommendations as to how to prevent a future oil price crash. The report drew immediate criticism from within the CFTC’s own ranks, with Dan Berkovitz, one of the agency’s commissioners, blasting the probe as “incomplete and inadequate.” In an interview late Monday with Institutional Investor, Berkovitz, who pushed hard for the investigation, noted the report merely offers a basic, if detailed, overview of various facts and statistics about the market and trading as oil prices bottomed out, but does not provide the public with any suggestion as to the cause.  “Providing statistics that may or may not have contributed to the oil price collapse is not enough,” he said. “That should be just the start of our analysis, not the end. Intelligent readers and members of the public are going to say, ‘What’s my takeaway from this?’ The report makes it impossible to draw any conclusions.”

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Goldman Sachs Slashes US Growth Forecasts as Spiking Coronavirus Cases Drive Economic Slowdown

Brief: Goldman Sachs has cut its US growth forecasts for the next two quarters, pegging their gloomier outlook on the "rapid and broad-based resurgence of the coronavirus." The bank lowered its fourth-quarter gross domestic product forecast to 3.5% from 4.5%. Growth in the first quarter of 2021 will slow to just 1% from the prior estimate of 3.5%, the team added. The third wave of infections and cities' implementation of new lockdown measures cuts into an already weakening economic recovery, economists led by Jan Hatzius said in a note to clients. Data from virus-sensitive sectors show "clear signs of a growing hit," according to the team. The US sits squarely in its worst phase of the coronavirus pandemic yet. New cases totaled 150,098 on Sunday, bringing the 7-day average to 167,568, according to The COVID Tracking Project. Total deaths neared 250,000, and the number of Americans currently hospitalized with COVID-19 hit 83,782. "The public health and economic situation is likely to get worse before it gets better, in our view," Goldman said, adding that various high-frequency indicators of consumer activity show an economic slowdown coinciding with "the national deterioration in public health."

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The Assets Class That Raised Record Funds This Year

Brief: U.S. venture capital funds have raked in record assets this year, despite a global pandemic that was expected to drag down fundraising. On Friday, two Andreessen Horowitz funds closed with a combined $4.5 billion in commitments, bringing the year-to-date fundraising total for the asset class to almost $70 billion, according to PitchBook. “US venture capital funds have raised a combined $69.1 billion in 2020, edging past a 2018 record and defying the odds amid a pandemic-rattled economy,” PitchBook said in a blog post Friday.The record fundraising in U.S. venture capital contrasts with slower asset gathering in other alternative asset classes, including the larger private equity industry. As of the third quarter, private equity funds had raised about $400 billion globally — trailing behind the $481 billion raised over the same period in 2019, according to Preqin data. Other private capital managers, including hard-hit real estate funds, have also struggled to raise money this year, according to Preqin. However, while U.S. venture capital fundraising has hit a new high in terms of total assets, the number of fund closes have plummeted this year. PitchBook reported that just 287 funds have closed so far in 2020, less than half the number that closed during the previous record year of 2018.

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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 November 23, 2020:

  • In the United States, late last week the Centers for Disease Control and Prevention (CDC) asked Americans to think twice about travelling for Thanksgiving – it looks like not everyone is heeding that warning. Since Friday, 3.5 million Americans have travelled through United States airports, according to data from the US Transportation Security Administration. There have only been three days since the start of coronavirus lockdowns that air travellers in the country topped the one million mark and two of them occurred in the past three days. The silver lining, if there is one – the number of travellers who passed through airports on Sunday in the United States was less than half the number that travelled through the same time last year.
  • Canada is experiencing its roughest stretch since the initial coronavirus lockdowns back in the spring. From west to east, it doesn’t seem to matter where you are at – the news isn’t good right now. Out west in Alberta over the weekend, the province had the highest number of daily cases in the country (1,584 on Sunday) even though they have three times less of a population than Ontario (1,534 cases) and two times less than Quebec (1,154 cases). In Ontario, the country’s largest city Toronto, along with neighbouring Peel Region are officially back in lockdown as of Monday for at least the next 28 days. Even in Atlantic Canada, where the travel bubble has been largely successful, succumbed to the pandemic as cases have risen in New Brunswick and Nova Scotia. Prince Edward Island and Newfoundland and Labrador “popped” the Atlantic bubble on Monday, which has been in place since early July, for at least the next two weeks, and likely longer.
  • In the United Kingdom, Prime Minister Boris Johnson has confirmed England’s “stay at home” national lockdown will come to an end on December 2nd. Coming out of the country’s second lockdown though, a new toughened tier system will await Britons. Prime Minister Johnson on Monday set out his new winter plan, which will require MPs’ approval, and will see the reopening of non-essential shops in time for the busy Christmas rush. The tougher rules focus on the hospitality industry as pubs and restaurants in the worst affected areas will remain closed, except for take-out orders. Gyms and outdoor sports venues will also be allowed to open again on December 2nd and “rule of six” will return for people meeting outside in public spaces. 
  • In attempt to recuperate from the coronavirus pandemic, the United Arab Emirates (UAB) announced via its state-run media that the region has relaxed and removed a range of limits on foreign ownership of companies. The move is coupled with a series of reforms to its Islamic legal code earlier this month, which will now allow unmarried couples to live together, improved protections for women, and loosening restrictions on alcohol consumption. All of these moves are seen as an attempt to draw in Israelis from a recently brokered deal between the two nations and other foreign ownership as the UAE, especially Dubai, has seen its economy battered by COVID-19 since it relies heavily on the tourism, hospitality and aviation industries. 
  • In the Philippines, the government will offer tax breaks to manufacturers of medicine, medical equipment and personal protective equipment, such as face masks, which have now become essential during the coronavirus pandemic. Companies that produce these kinds of goods may be exempt from paying income tax for as long as six years. Investment in activities that will create jobs away from congested city areas such as Manila, may also qualify for fiscal perks, according to the government plan.
  • Singapore and Hong Kong have suffered a setback in the world’s first quarantine-free travel bubble. The plan has been pushed back for two weeks after a surge of new coronavirus infections in Hong Kong made the move too risky for the time being. The two governments delayed the inaugural flights, which were supposed to start Sunday. The decision seemed to be made last minute with Singapore stating as late as Saturday that the travel bubble would go ahead as planned, before walking back the statement later that same day. Under the current terms of the agreement, travel between Singapore and Hong Kong becomes suspended for two weeks if the seven-day moving average of unlinked cases rises to five in either city. Hong Kong’s rose to 3.9 on Saturday while Singapore hasn’t reported any local transmissions since November 10th.

Covid-19 – Due Diligence And Asset Management

BlackRock Says Buy U.S. Stocks, Looking Past Covid-19 Surge

Brief: Despite the surge in Covid-19 cases, investors should look past near-term market volatility and buy U.S. stocks, BlackRock Investment Institute said, raising its recommendation to a buy-equivalent rating. “We upgrade U.S. equities to overweight, expecting this market to benefit from both structural growth trends and a potential cyclical upswing during 2021,” said Mike Pyle, global chief investment strategist at BlackRock, in a report published Monday. “Positive vaccine news reinforces our outlook for an accelerated restart during 2021, reducing risks of permanent economic scarring.” Large-cap companies riding structural growth trends and smaller companies geared to a potential cyclical upswing are preferred investment opportunities, Pyle said. He added that the U.S. stock market has a “higher share of quality companies” in sectors with longer-term growth trends, like technology and health care. Investors have honed in on promising progress with Covid-19 vaccines, brushing past rising coronavirus infections across the world that have led to more lockdowns across North America and Europe. The S&P 500 Index is up about 10% this year and is on pace for a 9% gain this month alone.

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Hedge Fund Managers Look to Outsource Work Amidst Covid Pandemic

Brief: Hedge funds that had seen their operational models being disrupted due to Covid pandemic have been relying on outsourcing part of their work to achieve greater efficiency. Many hedge fund managers that saw most of the executives being stranded at home due to the pandemic have been exploring the outsourcing model, especially some part of their work.  As per a survey by KPMG, more than 70% of the hedge funds said that outsourcing part of their work may actually be more efficient. An overwhelming 71 percent of respondents agree that the current experience of working remotely has convinced them they could achieve better cost efficiencies if they outsource some of their operations. Approximately one-in-five firms say their outsourcing decision is being influenced by employee health concerns related to returning their own people to the office environment, the KPMG report said. “Many firms also point towards potential cost and business agility benefits of outsourcing. One-in-five firms admit they are moving towards outsourcing additional functions to better manage margin pressures. As one North American manager sensibly noted, “those that get the balance to outsourcing right will be able to scale their costs both during this disruption and going forward,” KPMG report said.

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Fund Managers Hate Working From Home as Much as the Rest of Us

Brief: Mary Erdoes, who runs asset and wealth management at JPMorgan Chase & Co., reckons fund managers are one of the few groups of finance professionals who’ve benefited from the pandemic, given they’ve had more “thinking time” while forced to work from home. “Of all sectors that I think will come back to work in the office fastest, I would put asset management at the end of the list,” she said earlier this month. Many portfolio managers would beg to differ. The lack of interaction with colleagues focused on different asset classes, the increased difficulty of getting trades done, and the risk of junior staffers missing out on day-to-day instruction all make investment professionals as keen as others to get back to their office desks. “I want to go back,” says Chris Bowie, who helps oversee more than $25 billion at TwentyFour Asset Management in London. “I think the lack of a commute does allow more time to read and think, but you lose the over-the-desk ad-hoc interaction, which, in my experience, often leads to bigger discussions on themes and then asset allocation.”  That interplay with teams across asset classes is a valuable source of investment insight that’s difficult to replicate, says Jamie Stuttard, head of global macro fixed income at Robeco Group, which manages more than $180 billion. Although lockdown has in some cases improved connections within teams, the cross-pollination of ideas has taken a big hit. “The casual ‘coffee machine’ interaction is gone,” he says.

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Delta CEO Says New York-London Travel Corridor ‘Complicated’, as Airlines Aim to Revive Transatlantic Travel

Brief: Delta Air Lines CEO Ed Bastian said Sunday that the New York-London travel corridor will be "complicated" due to coronavirus restrictions, as airlines look to revive transatlantic travel. Bastian said that it would be easier to reopen a route to almost any other European city than London, citing the quarantine requirements in the U.K. as well as the lack of reliance on tourism. “I think you will find on the continent several countries that are more open,” Bastian told the Financial Times, adding, “I think New York-London is complicated.” Domestic flights in the U.S. have revived faster than international travel, with Thanksgiving to see a bump – though, Bastian projects that flight volume would be around 35%-40% of last year’s level. That suppressed level could continue throughout Christmas and the new year because of the recent surge in coronavirus cases seen in most states across the U.S.  Airlines have attempted a number of pilot programs to develop better safety and confidence in air travel amid the pandemic: United Airlines converted its United Club inside Newark airport into an on-site testing facility, intending to test passengers before the flight departs. United touted the four-week test run as “a good proof-of-concept for governments around the world,” but no one has yet jumped to replicate it.

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Blackstone Seeking at Least $5 Billion for Second Asia Fund

Brief: Blackstone Group Inc. is doubling down on Asia, seeking to raise at least $5 billion for its second private equity fund focused on the region, people familiar with the matter said. The U.S. investment firm has started marketing the new vehicle to potential investors, according to the people, who asked not to be identified because the information is private. It’s targeting more than double the size of its first Asia buyout fund, which closed at about $2.3 billion in 2018. Blackstone is raising ever-larger pools of capital as dislocations from the coronavirus pandemic offer up more deal opportunities. President Jon Gray has vowed to increase the proportion of Asian investment in its total business, which stood at just under 10% two years ago. In 2018, it raised $7.1 billion for Asia real estate investments. The firm joins KKR & Co., which is in the process of raising at least $12.5 billion for its next Asia fund. TPG, Warburg Pincus and Baring Private Equity Asia raised larger amounts of money earmarked for investment in the region, totaling $15 billion since early 2019.

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Private Equity Mega Funds Land Half the Industry’s Dry Powder

Brief: Private equity is flush with even more cash waiting to be invested than before the pandemic shut down large swaths of the economy. Buyout funds had $853 billion in dry powder as of the third quarter, with more than half of that in the industry’s largest funds, according to Ernst & Young’s third-quarter report on private equity trends. Funds that were specifically set up to invest in distressed deals had $140 billion, or 15 percent more to work with than they did at the beginning of the year. Total funds raised in 2020 through the third quarter have decreased by 19 percent, to $524 billion, with the absolute number of funds falling by 28 percent from the same time last year. But that’s still in line with fundraising trends over the past five years, according to EY. With most communication still happening through Zoom or Microsoft Teams, investors are handing more money to the funds they already know. That means the average fund size grew by 9 percent as of the third quarter. As a result, smaller funds without well-known brand names need to figure out how to get in front of investors. The star-studded list of mega funds includes CVC Capital Partners’ $24 billion buyout fund and Brookfield's $20 billion infrastructure product. Investors also handed over $18 billion to Silver Lake Partners for another buyout fund.  There were also surprises along the way. When markets cratered beginning in March, industry observers were concerned that investors would fail to make their capital commitments to private equity funds.

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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 November 20, 2020:

  • In the United States, Treasury Secretary Steve Mnuchin plans to allow several of the Federal Reserve emergency lending programs expire on December 31st, which will dramatically reduce the central bank’s ability to help the financial system in the midst of the pandemic. Funding set to expire at the end of the year include plans to cover corporate bond buying, loans to state and local governments and the Main Street Lending Program to small and medium-sized businesses. Mnuchin says the move isn’t a political issue and there is plenty of money around to provide funding where needed. The Federal Reserve who has been working with the Trump administration through the majority of the pandemic, disagreed with the decision stating: “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backup for our still-strained and vulnerable economy.” 

  • Canadian Prime Minister Justin Trudeau asked citizens to please follow public health rules in their regions as provinces across the country struggle to keep an alarming spike in COVID-19 cases under control. “We are facing [a] winter that’s going to drive people inside more and more, and we’re really at risk of seeing caseloads go up, and hospitals get overwhelmed, and more loved ones dying,” said Trudeau. The prime minister’s plea comes as new modelling from Canada’s public health agency shows the number of COVID-19 cases could reach 60,000 a day in the country by the end of December if Canadians increase their current level of contact with other people. The number could be limited to 20,000 a day if Canadians maintain their current number of personal contacts, according to the data.

  • United Kingdom Health Secretary Matt Hancock said there are “encouraging signs” the number of coronavirus cases are starting to flatten in the country. The health secretary was also asked about plans to ease restrictions for Christmas. Hancock said the government was hoping to come up with a set of uniform rules across the four nations that make up the UK but warned it won’t be a normal Christmas. Some semblance of Christmas though would be key it seems – especially to young Britons. The Office of National Statistics carried out a survey and noted that more than a third of those aged 16-29 feel lonely and 41% reported a high level of anxiety, only heightened due to the pandemic and well above the shares for other age groups included in the study. 

  • Sweden’s health authority and scientists are on much different pages when it comes to the effectiveness of masks against the coronavirus pandemic. Swedish health authorities reiterated their skepticism towards masks on Thursday saying they didn’t see the need to recommend general use of face masks on public transit as it shouldn’t be used as an excuse not to keep a safe distance. The policy view has drawn sharp criticism from the Royal Swedish Academy of Sciences, which awards Nobel Prizes in Physics, Chemistry and Economics. They issued a statement of their own in defence of masks. On Thursday, the number of COVID-19 cases in Sweden went above 200,000 as the country is struggling more during the second wave.

  • While many countries throughout the world are coping with the second wave of the coronavirus, Hong Kong health officials are stating the fourth wave of the coronavirus has started in the region. Two of Hong Kong’s top infectious disease experts declared the city’s fourth wave had begun with more than 30 confirmed and preliminary infections across various districts and sectors. The health officials stated that all non-essential indoor gatherings should be postponed with immediate effect and the public should be prepared for school closings and working from home if caseloads double or triple in the next few days. 

  • The World Health Organization (WHO) has advised against prescribing the drug remdesivir to COVID-19 patients in hospital. The WHO expert panel published their recommendation in the British Medical Journal on Friday stating the drug was “not suggested for patients admitted to hospital with Covid-19 regardless of how severely ill they are, because there is currently no evidence that it improves survival or the need for ventilation.” Remdesivir was approved last month by the United States Food and Drug Administration (FDA) and was one of the cocktail drugs given to President Donald Trump when he contracted COVID-19. Clearly, the US based drugmaker for remdesivir, Gilead has disagreed from the outset with the WHO, stating their study was flawed and that there was “robust evidence” from multiple studies showing the drug accelerated COVID-19 recovery.

Covid-19 – Due Diligence And Asset Management

KKR is Said to Make Preparations for New European Buyout Fund

Brief: KKR & Co. is preparing to raise another European buyout fund just a year after its last one, having comfortably outspent rivals during the coronavirus pandemic, according to people familiar with the matter. The U.S. private equity firm is in the early stages of planning for a new fund, the people said, asking not to be identified discussing confidential information. The vehicle is likely to be larger than the 5.8 billion euros ($6.9 billion) KKR raised for its fifth European private equity fund in November 2019, the people said. KKR plans to begin the fundraising next year, one of the people said. The fund will be managed by partners Philipp Freise and Mattia Caprioli, the person said. Deliberations are ongoing and no final decisions on timing or amount have been made, according to the people. A representative for KKR declined to comment. Such a quick return to the fundraising trail is a result of KKR having been the world’s most active buyout firm this year, according to data compiled by Bloomberg. It has announced more than $20 billion of purchases in Europe alone, the data show. While the crisis brought an abrupt halt to dealmaking for many of the private equity industry’s biggest names in March, KKR continued to spend big and invest through the downturn. Notable deals have included a 6.8 billion euro take private of German publisher Axel Springer SE and a 4.2 billion pound ($5.6 billion) acquisition of waste-management business Viridor Ltd.

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U.S. Financial Groups, Wary of Crackdown, Feel Out Biden Transition Team

Brief: Financial lobbyists, kept at arm’s length by Joe Biden’s campaign, have begun engaging with the Democratic president-elect’s transition team on issues including economic stimulus, pandemic aid programs, and appointees, according to more than a dozen executives at banks and financial lobby groups. Some industry executives had worried they may struggle to access Biden’s transition team after his campaign had largely warned off lobbyists pushing policy asks and pledged to crack down on influence-peddling if he won. But recently Biden’s transition team has approached financial groups and lobbyists to discuss policy and regulation issues, three people said. In addition to these formal meetings, other industry executives said they had been able to chat informally with long-established contacts, including policy experts and academics, now acting as unpaid advisers to the transition team. With progressives pushing Biden to reverse Trump’s corporate giveaways, install hard-charging financial regulators and ramp-up consumer protections and climate-risk measures, financial executives hope the access may help avert an industry crackdown. Richard Hunt, chief executive of the Consumer Bankers Association (CBA), which represents big lenders including Bank of America Corp BAC.N, Citigroup Inc C.N, and Wells Fargo & Co WFC.N, said Biden's team recently approached the CBA to discuss its priorities.

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JPMorgan Becomes First Major Bank to Say First-Quarter GDP Will Decline Because of Covid Surge

Brief: JPMorgan economists now see an economic contraction in the first quarter due to the spreading coronavirus and related restrictions being imposed by states and cities. The new forecast is a departure from Wall Street’s widely held view that the first quarter would be positive, with an improving economy throughout 2021. The JPMorgan economists said they expect the economy to expand briskly in the second and third quarter, based on positive vaccine developments. “This winter will be grim, and we believe the economy will contract again in 1Q,” the economists wrote. They projected that the first quarter will contract by 1% after growth of 2.8% in the fourth quarter. For the second quarter, they see the economy rallying and growth of 4.5% followed by a robust 6.5% in the third quarter. The economists also expect about $1 trillion of fiscal stimulus, likely beginning near the end of the first quarter. That should help boost midyear growth. “One thing that is unlikely to change between 2020 and 2021 is that the virus will continue to dominate the economic outlook. ... Case counts in the latest wave are easily surpassing the March and July waves,” the economists wrote.

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Morgan Stanley Sees K-Shaped Recovery For Commercial Real Estate

Brief: Morgan Stanley says commercial real estate will see a so-called K-shaped recovery from the pandemic, leading to stark winners and losers among holders of commercial mortgage-backed securities. This bifurcation means that some deals will experience much higher realized losses than others, depending on factors such as bond, vintage and property type. Bonds backed by hotels, retail and offices are likely to see more struggles than those on industrial properties. The split creates a market where due diligence and active management is key as investors seek to gain an upper hand amid the chaos. “A bond picker’s market has emerged,” a team of Morgan Stanley analysts led by Richard Hill wrote in an outlook report Wednesday. For instance, a “market of ‘haves’ and ‘have-nots’ has emerged in BBB- (CMBS bonds), as idiosyncratic risks and rising loss expectations magnify quality tiering.” This has led to scant trading opportunities for older BBB- CMBS conduit tranches. Investors are unwilling to sell the higher-quality bonds, while the lower-quality bonds lack sponsorship, the analysts wrote.

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Where Glenview Founder Larry Robins Is Bullish on Covid-19 Vaccine Optimism

Brief: Glenview Capital Management founder Larry Robbins is upbeat about the development of Covid-19 vaccines, making him optimistic about some sectors but still wary of others. “For the first time in this battle, in the last several weeks there’s been real light at the end of the tunnel,” Robbins said Thursday at the New York Alternative Investment Roundtable’s online event. “We do believe that there will be millions of doses given in December,” he said, with frontline workers and the elderly being among the first to receive it and the second phase of distribution beginning as early as March. “We think Pfizer files tomorrow,” Robbins said, referring to government authorization for its Covid-19 vaccine. “We think we are in a cadence now where every week, or every two weeks, you’re going to get good news from another supplier,” he said, explaining that means good data on their vaccines or ways to ship them to the markets. Robbins expects that beaten-down hospital stocks — such as Glenview’s largest holding, Tenet Healthcare Corp. — are likely to rise as deferred procedures such as knee replacements and cataract surgeries get done once vaccinated patients feel safe. 

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Private Equity Veterans Says Virtual Fundraising Rocks

Brief: The coronavirus-induced necessity of raising funds virtually this year has done more good than harm for well-established private equity firms, industry veterans speaking at a private equity forum sponsored by Hong Kong-based AVCJ said this week. "We haven't missed a beat," said Kewsong Lee, New York-based CEO of the Carlyle Group in a keynote interview Wednesday.  Carlyle, with $230 billion in alternatives assets, raised $18 billion over the first nine months of 2020, exceeding the prior year's $16 billion total in part due to the effectiveness and efficiency of virtual client meetings, Mr. Lee said.  Having conversations that start in the morning with Korea, Japan and China before moving on to Europe in the afternoon is something "you couldn't do ... in a world where you're hopping on an airplane," he said. "From a productivity standpoint ... this is a step forward," agreed Jean Eric Salata, chief executive and founding partner of Hong Kong-based Baring Private Equity Asia, in an interview Thursday morning. "You can get a lot more done in a much shorter period of time." By contrast, flying around the world and meeting investors one on one is time-consuming and inefficient, he said.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Thursday November 19, 2020:

  • In the United States the country is one week away from celebrating its Thanksgiving holiday and the Centers for Disease Control and Prevention (CDC) is urging Americans to stay home this year. “CDC is recommending against travel during the Thanksgiving period,” said Dr. Henry Walke during a conference call with reporters. “For Americans who decide to travel, CDC recommends doing so as safely as possible by following the same recommendations for everyday living.” The CDC is concerned about transportation hubs such as airports and bus depots and the ability to maintain social distancing in those locations. On Wednesday, the United States recorded 1,869 deaths due to the coronavirus, the largest single day increase since May 7th. 
  • In Canada, the country’s most populous province has three regions that are “staring down the barrel of another lockdown.” The statement was made by Ontario Premier Doug Ford who is growing increasingly frustrated with the Toronto, Peel and York regions. Those three areas accounted for close to 75% of Ontario’s 1,422 cases on Wednesday. Premier Ford added that his cabinet will be discussing new public health measures with those announcements coming as early as Friday. Elsewhere in the country, British Columbia Premier John Horgan has called on the federal government to implement a “pan Canadian approach” to non-essential travel during the COVID-19 pandemic. “I am asking the federal government to work with us and other provinces to get the message out that if you do not need to travel between jurisdictions, you shouldn’t do that,” said Horgan.
  • In the United Kingdom, Chancellor Rishi Sunak is busy making headlines when it comes to the coronavirus pandemic. The Guardian is reporting Sunak is refusing to disclose whether he will profit from a surge in the share price of COVID-19 vaccine manufacturer Moderna. The company was of one of the latest biotech firms to make news earlier in the week, declaring a 94.5 efficiency rate in trials. Sunak was a founding partner of hedge fund Theleme Partners, which was a major investor in Moderna. Sunak left the firm in 2013 to pursue his political career, but it’s not known if the chancellor retained any investment in the Theleme fund after leaving. The hedge fund is registered in the Cayman Islands, a noted tax haven which does not make company records public. 
  • In France, the government is hoping to get cooperation from online shopping giant Amazon to delay the country’s Black Friday shopping promotions until high-street shops can reopen from its latest coronavirus lockdown. French business representatives said the current plan, which hasn’t been finalized, was for non-essential shops (not restaurants or bars) to reopen on Saturday November 28, one day after the originally planned date for the start of Black Friday shopping. France’s government has come under pressure to allow brick and mortar shops to reopen to take advantage of Christmas holiday sales. Politicians on the left and environmentalists have called for a boycott of Amazon over Christmas as the company has reaped the benefits of business closures with a sales increase of 40-50% in France during its latest lockdown. 
  • According to the Organisation for Economic Co-operation and Development (OECD), countries such as South Korea, Finland, Norway and Estonia were among the best performers at containing COVID-19 to the benefit of its people and economy. The OECD said those countries were helped either by past experience of infectious disease control, population structure and relatively low cross -border flows of people. The OECD report also highlighted the success of Japan, Australia and New Zealand, which quickly introduced effective testing, tracing and isolation practices, along with trust and compliance with social distancing and other key guidelines.
  • China has inoculated almost one million of its citizens with an experimental COVID-19 vaccine developed by state-owned Sinopharm under the government’s emergency use scheme. China is just one of two countries (Russia is the other) who are known to use so called vaccine candidates that are still undergoing clinical trials to test their efficacy and safety. China justified the authorization of an unproven vaccine stating that the products use has been restricted to high-risk individuals such as frontline health workers, but also included school, supermarket and public transport workers. In an interview with a Chinese based media company, the Chairman of Sinopharm said there has not been a single case of a serious adverse event from the nearly one million people who took the shot and people have experienced only mild symptoms.

Covid-19 – Due Diligence And Asset Management

World’s Biggest Companies Chose Men to Lead in the Pandemic

Brief: The world’s biggest companies seem to have decided that leadership in a global pandemic is men's work. Since March 11, when the World Health Organization designated Covid-19 as a pandemic, only 3% of the chief executive officers picked by the world's largest companies have been women, according an analysis to be released Thursday by executive recruiter Heidrick & Struggles. In the six months before that, women were winning four times as many of the jobs at the 965 largest companies around world. The study didn’t consider race or ethnicity. Women and other underrepresented groups have been at greater risk of career setbacks and unemployment during the pandemic because they hold a larger share of the jobs hurt by lockdowns and other restrictions. Women also were more likely to quit their jobs to care for children because of school shutdowns or lack of child care. Some economists are calling the economic downturn the first female recession, reversing much of the workplace progress women have made during the past decade. A big reason that more men were picked for the top job is that companies now are more likely to pick a new leader who has already served as CEO, a role dominated by men. Women now hold only about 6% of the CEO jobs at S&P 500 companies. The number of new CEOs appointed also fell since the pandemic began, with 30 new leaders among the largest companies in 20 global markets from March to the end of June, compared with 45 in the same period a year ago. Companies also were more likely to pick men to fill the CEO job after the global financial crisis in 2008, but the shift was less pronounced, Heidrick found. 

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Fixed Income Managers Less Risk-Averse Despite Covid-19 Concerns, says Russell Investments

Brief: Russell Investments’ latest survey of fixed income managers found 50 per cent expect the global economy to revert to pre-pandemic levels by year-end 2021, while 48 per cent don’t expect it to revert before 2022The 64 bond and currency managers who responded to the firm’s Q4 survey also indicated more appetite for riskier assets.  The percentage of managers selecting investment-grade credit from among 10 options as the most attractive asset class for risk-adjusted returns dropped from 40 per cent in the previous survey to 20 per cent. In contrast, preference for emerging market debt increased 10 percentage points to 15 per cent and high-yield credit increased eight percentage points to 23 per cent. In addition, fixed income managers expressed more balanced views on regional preferences in the Q4 survey, with 48 per cent selecting the U.S. as offering the best risk-adjusted return potential, versus 71 per cent in the previous survey. The US was followed by Asia (20 per cent), Latin America (15 per cent) and Europe (13 per cent). “While a second wave of Covid-19 infections and the speed of global economic recovery remain top concerns for the fourth quarter, fixed income managers seem to be less worried about the depth of the global recession,” said Adam Smears, Senior Director, Investment Research - Fixed Income at Russell Investments. “Instead, they appear more focused on the pandemic’s financial impact on specific companies.”

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Traders’ Vaccine-Stock Giddiness Fades Amid Doubts on Road Ahead

Brief: The initial blast of enthusiasm for stocks linked to Covid-19 vaccines triggered by key milestones in their development is quickly fading as investors assess the challenges they still face in becoming commercially successful. Wall Street analysts can’t quite gauge when or how sales will peak because it’s unknown how long vaccines will be effective, whether they’ll be needed more than once or even if those who have been vaccinated will continue to spread the virus. Forecasts on when the U.S. might reach herd immunity, potentially obliviating the need for inoculations, also run the gamut, though Anthony Fauci, the nation’s top U.S. infectious disease doctor, says things could be “approaching normal” by late next year. That’s prompted a retreat among many of the retail investors who had piled in to biotech stocks. All the unanswered questions have led to a slow leak in a biotech bubble. BioNTech SE dropped back below its summer highs in the three days following positive late-stage results with partner Pfizer Inc. Moderna Inc.’s run was even shorter. It fell below July’s record the day after its data. Companies playing catch-up with the vaccine front-runners including Inovio Pharmaceuticals Inc., Novavax Inc, Arcturus Therapeutics Holdings Inc. and CureVac NV have similarly lost momentum.

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Struggling Retailers Rack Up $52 Billion in Missed Rent

Brief: Eight months into the pandemic, clothing stores, restaurants, gyms and other businesses find themselves in a $52 billion hole. That’s the total amount of retail rent that’s been missed since April, according to CoStar Group Inc. While some of the overhang has since been paid back, the remainder will be a drag on merchants as they try to rebuild and landlords demand their money. In some cases, the unpaid balances could drive them into bankruptcy. “You’re going to have big bubbles that are going to be hitting next year or even in the fourth quarter,” said Andy Graiser, co-president of A&G Real Estate Partners, an advisory firm. “I’m not sure if they are going to be able to make those payments in addition to their existing rent.” Overdue rent compounds the problems these companies have faced this year, including lost sales during shutdowns, consumers’ reluctance to return to stores and restaurants and the long-running migration of shoppers from brick-and-mortar locations to online venues.

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COVID-19 Ushers Changes to Investor Behavior and Surfaces New Opportunities for Providers

Brief: Investors, especially those younger than age 50, express significant interest in expanding their advice relationships and in using a variety of product solutions. In response, providers must decide how to prioritize the development of their offerings, according to the latest Cerulli Edge—U.S. Retail Investor Edition. Cerulli’s findings show that 22% of respondents expect to increase their advisor reliance. Projected increases varied widely from a high of 40% among those in their 40s to only 9% among those in their 70s. Expectations regarding the use of automated online investment services and budgeting apps followed a similar pattern. In both categories, investors under age 40 expressed elevated interest that grew among those in their 40s before declining rapidly among older cohorts. “These results underscore the importance of establishing advice relationships with investors in their 40s, in many cases before substantial wealth accumulation,” says Scott Smith, director of advice relationships at Cerulli. “Prospective clients in this segment are desperate for help in sorting out their competing financial priorities but draw little interest from traditional advisors unless they accumulate substantial assets,” he adds.

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AQR to Liquidate Some Funds After ‘Persistent Outflows’

Brief: AQR Capital Management is slimming down, this time in the mutual fund world. Next month, the alternative investment firm plans to shut down several liquid alternative mutual funds, including a multi-strategy alternative fund, high- and low-volatility funds, and a volatility risk premium strategy, and according to Securities and Exchange Commission filings. “We remain fully committed to the mutual fund business as well as the advisor market, and we believe that the updates we are making to our mutual fund platform will bring greater clarity across products and better assist investors and advisors with making investment decisions,” the firm said in an emailed statement.  It’s no secret that AQR has been struggling with performance and investor redemptions. The firm, like many of its quantitative peers that use systematic value factors in its funds, has been hurt as value has underperformed for a record number of years. Value did bounce back beginning in October, but it’s too early to say whether there will be long-term relief for the style. Sources say AQR is shutting down funds because there hasn’t been enough demand from investors to justify the products. Indeed, the funds are small. According to Morningstar, the multi-strategy alternative fund, similar in strategy to AQR’s Delta hedge fund, had $33 million in assets.

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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 November 18, 2020:

  • In the United States, drugmaker Pfizer, along with its German partner, BioNTech announced on Wednesday that their Phase 3 trial of its coronavirus vaccine is now complete. The analysis shows the vaccine was 95% effective in preventing infections, even in older adults and caused no serious safety concerns. The COVID-19 vaccine partners will now file the formal paperwork to American drug regulators on Friday for emergency use of its new apparent breakthrough. The Food and Drug Administration’s (FDA) process is expected to take a few weeks with an advisory committee tentatively scheduled to review the Pfizer vaccine in early December. 

  • In Canada, CTV is reporting news that shouldn’t come as a surprise to anyone: the COVID-19 travel restrictions in place at the country’s land border with the United States is expected to remain in place for at least another month. The current extension is set to expire on November 21st, but sources tell CTV News that the measures are set to be renewed through December 21st. In related news, new figures from the Canada Border Services Agency said the country has admitted approximately 5.3 million travellers, most of them essential workers, who have been exempted from the mandatory 14-day quarantine to control the spread of COVID-19. 

  • The United Kingdom’s public spending watchdog has criticized Boris Johnson’s government for a series of failures when it awarded more than £17 billion of contracts to private companies to deal with the coronavirus. The National Audit Office flagged some of the failures as a lack of transparency, errors, and potential conflicts of interest. For instance, some government departments failed to explain why some companies with government connections or poor due diligence records were chosen to provide crucial services during the pandemic, such as supplying personal protective equipment, consulting, and policy advice. 

  • In Germany, police had to use water cannons to disperse thousands of anti-lockdown protestors who gathered in the capital city of Berlin on Wednesday. Police stopped the demonstration after protestors, who were angry at a law regulating coronavirus shutdowns, failed to observe social-distancing rules and wear masks. One of the largest demonstrations since the pandemic began, wanted to initially gather outside of the Reichstag building, where parliament sits but were denied that opportunity with riot police standing by. The German government passed a series of amendments on Wednesday to their law on protecting the population in a national epidemic. Previously, imposed shutdowns on the basis of decrees were open to legal challenge – the amendments to the epidemic law put such measures on stronger legal footing.

  • Japan is planning to move its capital city Tokyo, to its highest COVID-19 alert level as cases trend upwards. More than 2,000 cases were reported in Japan – a new daily record with almost a quarter of those in Tokyo. The 493 new cases in Tokyo surpassed a previous high set in August. Japanese media are reporting government officials are expected to meet Thursday to discuss what to do with Tokyo to help curb the spread, with measures that could include asking businesses to close early.

  • Australia’s state of South Australia, home to the city of Adelaide, are implementing a six-day circuit breaker set to go into effect midnight Thursday local time. Liberal Premier Steven Marshall said the circuit breaker is needed to undertake a testing and tracing blitz. The lockdown will essentially shutdown the state with all non-essential businesses closed and only one person per household to be allowed to leave once a day, for essential shopping. People will not be allowed to leave their home to exercise or travel. After the six-day circuit breaker, state officials will rollout other measures to follow for eight days after that.

Covid-19 – Due Diligence And Asset Management

Jamie Dimon Lashes out at ‘Childish Behavior’ From Congress Amid Deadlock Over Coronavirus Relief

Brief: JPMorgan Chase CEO Jamie Dimon criticized lawmakers for a monthslong deadlock over a second round of coronavirus relief to help unemployed Americans and struggling businesses as the pandemic deepens. “I know now we have this big debate. Is it $2.2 trillion, $1.5 trillion?” Dimon said Wednesday, referring to competing visions for a relief bill from Democrats and Republicans, at The New York Times’ DealBook conference. “You gotta be kidding me,” Dimon told Andrew Ross Sorkin. “I mean just split the baby and move on. This is childish behavior on the part of our politicians.” Congress has so far failed to pass a second relief bill after key parts of the first law, the CARES Act, expired in July. While financial pain for the unemployed and small businesses is set to grow as Covid-19 infections surge to records across the country, top leaders from both parties haven’t met since the Nov. 3 presidential election. Dimon urged lawmakers to agree on fiscal stimulus that would act as a bridge until midyear 2021, when promising vaccines may be widely distributed. “Thank God we have these two vaccines coming, thank God,” Dimon said. “Now is the time to not act like it’s over, let’s double down and get though Covid the best we can.”

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Goldman Plans Second Round of Jobs Cuts After Pause for Pandemic

Brief: Goldman Sachs Group Inc. is preparing to trim its workforce for the second time in just three months, as a moratorium on firings during the pandemic gives way to a push to improve efficiency. This round isn’t expected to exceed the roughly 400 positions the bank began eliminating in September, according to people with knowledge of the matter. But executives expect to go deeper in the coming year, in what could eventually amount to one of the most significant staff reductions at the bank as it looks to deliver on a promise to rein in costs. Big U.S. banks including Goldman Sachs pledged early this year to refrain from broad firings as the pandemic erupted across the country. But the industry’s resolve has frayed as the virus has persisted, leaving executives to refocus on earlier cost-cutting initiatives. Goldman had laid out a target in January to eliminate more than US$1 billion in expenses, and it has been examining how to meet that goal. A spokeswoman for the bank reiterated its statement from September. “At the outbreak of the pandemic, the firm announced that it would suspend any job reductions,” the company said at the time. “The firm has made a decision to move forward with a modest number of layoffs.”

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A Harvard Researcher Found Hedge Funds Weren’t to Blame for Treasury Market Turmoil in March. The FSB Is Taking a Close Look

Brief: The Financial Stability Board is scrutinizing the behavior of hedge funds and other non-bank investors during the market tumult sparked by the coronavirus earlier this year. “Market dysfunction was exacerbated by the substantial sales of U.S. Treasuries by some leveraged non-bank investors and foreign holders,” the FSB, a global group of finance officials, said Tuesday in announcing its report on the market turmoil in March. “Dealers also faced difficulties absorbing large sales of assets, amplifying turmoil in short-term funding markets.” Recent research from Marco Di Maggio, a finance professor at Harvard’s business school and a faculty research fellow at the National Bureau of Economic Research, found that hedge funds did not drive disruption in the Treasury market, as they represented a relatively small trading role. Foreign sellers were “a more significant cause behind illiquidity,” he suggested in a paper on the tumult. But the FSB said in its report that “some leveraged investors” worsened dysfunction in the market by unwinding almost $90 billion in U.S. Treasuries trades in March. That’s the volume of selling reportedly done by relative-value hedge funds that focus on fixed-income markets, according to Di Maggio — a figure he said was dwarfed by the foreign sector’s $260.4 billion of net outflows in Treasuries securities in March. 

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Bitcoin Hits Three-Year High as Investors Jump In

Brief: Bitcoin, the world's best-known cryptocurrency, has jumped above $17,000 (£12,800) to hit a three-year high. The digital currency has suffered plenty of wild price swings since it was launched in 2009. But investors have been flocking to cryptocurrencies during the pandemic-driven volatility on global stock markets. However, experts have cautioned about viewing them as a "safe haven". On Wednesday, Bitcoin had climbed more than 7% to $17,891, its highest level since December 2017. Some analysts said the Covid-19 pandemic has encouraged investors to reassess the long-term outlook for Bitcoin and other cryptocurrencies. But there are still concerns about the fraudulent trading in cryptocurrencies following a succession of high-profile hacks. During times of volatility, investors tend to move their money out of shares and into what are considered safer havens, like cash and gold. Some feel cryptocurrencies are now being viewed as a shelter from stock market volatility. "Covid-19 has disrupted the traditional safe-haven trade and gold's inability to outperform. Periods of extreme risk aversion have forced many traders to diversify into Bitcoin," said Edward Moya, at trading firm Oanda.

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Howard Marks Pivots Back to Caution After Catching Distress Wave

Brief: Howard Marks, the dean of distressed-debt investing who turned bullish within days of the sector’s 2020 low, is back to a cautious stance now that the ensuing rally has whittled attractive targets down to pre-pandemic levels. “When the level of optimism is high, there is usually more room for disappointment,” Marks, the co-founder of Oaktree Capital Group, said in a Tuesday telephone interview. “The main way to achieve high returns in a low-return world is through taking increased risk. And I don’t think this is the climate to take more risk.” Back in early April, after valuations had collapsed and the supply of newly distressed assets was soaring, Marks told investors it was time to play offense. Trying to time the market for the absolute low is “irrational,” he wrote at the time, because the bottom is apparent only in retrospect. The same advice still applies today about forecasting tops as well as bottoms, according to Marks. “Trying to predict market sentiment gets you into trouble,” he said in the interview. Nevertheless, Marks has doubts about the wisdom of buying at current prices. “Maybe we’re in the area of a top,” he said. “The rebound has been substantial.” Investors are viewing future events including the development of a Covid-19 vaccine favorably, with equity and debt markets staging strong rallies. Yields and spreads remain low, and “the pressure to buy is strong,” he said.

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Amid a Tough Year, CQS Makes Changes – And Sees a Rebound

Brief: London hedge fund firm CQS, which struggled with management turnover, layoffs, and drastic performance losses earlier this year, has made up some of the lost ground in its funds and has told clients it has a plan for getting the firm back on track In a letter sent to clients on Tuesday and obtained by Institutional Investor, firm founder Michael Hintze called 2020 “arguably the most turbulent year in financial markets for a generation” and acknowledged that government lockdowns in response to the Covid-19 pandemic have posed massive challenges for the global economy “and in turn, for a number of our funds.” The assets CQS specializes in, namely structured credit and more complex credit instrument, were among those hardest hit, Hintze wrote.  The firm’s flagship CQS Directional Opportunities Fund, which Hintze manages, lost more than 33 percent in March and was down by more than 50 percent through April, according to a Financial Times report, while the CQS ABS Fund lost 43 percent in March alone. But the funds have posted strong gains since then, according to the letter. The ABS Fund has gained 37.2 percent from its March low through the end of October, while another hard-hit fund, the Credit Multi Asset Fund, gained 16.4 percent over the same period — nearly erasing its drawdown. 

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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 November 17, 2020:

  • United States President Elect Joe Biden is expected to partake in a conference call with a bipartisan group of American governors on Thursday to discuss the coronavirus pandemic. The group of governors include leaders from the states of New York, Michigan, Massachusetts, Colorado and Maryland, just to name a few. The call comes as the Biden administration continues to be blocked by the current Trump administration on issues such as public health and national security. Groups in America representing doctors, nurses and hospitals are calling on President Trump and his administration to share information regarding the current pandemic. Health officials fear a delay in the transition will cause needless death as COVID-19 cases continue to increase across the country.
  • In a news conference on Tuesday, Canadian Prime Minister Justin Trudeau says he hopes the latest COVID-19 aid bill will be passed soon by the Senate. Bill C-9 which includes extending the federal wage subsidy and evolving the commercial rent subsidy program, was fast-tracked through the House of Commons in the first week of November. Despite the fast-track, the legislation currently sits at the feet of the Senate – who are studying the bill as it still has several steps to make it through before it becomes law. Other leaders throughout the country, such as Toronto Mayor John Tory are growing increasingly impatient with the Senate, sending out a series of tweets that they need to speed up the process. “These businesses need help right now. We cannot afford any further delay,” said Tory.
  • In the United Kingdom, those hoping for more lenient coronavirus lockdown restrictions after December 2nd, may need to think again. Susan Hopkins, an infectious diseases adviser at Public Health England stressed the post-lockdown restrictions might have to be stricter than the previous three-tier system put in place by the Boris Johnson government. “I think when we look at what tiers may be there in the future – we will have to think about strengthening them in order to get us through the winter months until the vaccine is available for everyone,” said Hopkins. The UK government is expected to vote on measures coming out of the lockdown next week.
  • In Germany, Chancellor Merkel left her meeting with state leaders on Monday frustrated as she was unable to get consensus on stricter coronavirus measures. Under Germany’s federal health system, health policies are largely decided by states, so all sides will meet again on November 25th where Chancellor Merkel hopes new restrictions will be put in place for the coming winter months. Pushing for the “democratic imposition” of tougher restrictions has been among the toughest decisions of her 15 years as Chancellor, Merkel admitted. 
  • While India’s latest coronavirus one-day tally hit a four-month low on Tuesday, the rise of COVID-19 infections in its capital city has alarmed authorities. Officials in New Delhi are proposing fresh lockdown restrictions as the large urban centre of 20 million people has recorded 7,000 new infections a day, compared to 3,000 a day just a month ago. New Delhi’s chief minister has said he would ask the central government for permission to close shopping areas that have the potential to become COVID-19 hotspots and sought clearance to limit wedding ceremonies to 50 people rather than 200.
  • Australian Prime Minister Scott Morrison made his first overseas trip since the pandemic began to Japan to meet with new Prime Minister Yoshihide Suga on Tuesday. The two leaders discussed a joint response to the coronavirus pandemic, while also agreeing to strengthen defense ties between the two nations as they are both wary of China after its recent handling of Hong Kong. The deal marks the first time in 60 years that Japan has approved of foreign troops to operate on its home soil. Australia has been in an ongoing dispute with China since demanding inquiries into the origins of the coronavirus pandemic, which has angered the country. Prime Minister’s Morrison’s trip is a quick one as he is scheduled to depart Wednesday morning back to Australia, where he will self-isolate for two weeks as per the country’s travel restrictions due to COVID-19.

Covid-19 – Due Diligence And Asset Management

Oaktree, Apollo Lead U.S. Firms Betting on Stressed India Assets

Brief: India’s macroeconomic troubles are attracting a new wave of global investors betting they can eke out profits from the rising number of capital-starved businesses struggling to stay afloat. Some global heavyweights like Apollo Global Management Inc. and Oaktree Capital Group have either struck recent India deals or scaled up their teams in the country in a push to invest in distressed assets. New York-based Cerberus hired a former Apollo and Citigroup veteran to establish and lead an India office in 2019, and this year vied with Ares Management Corp.-backed SSG Capital Management for control of a failed shadow lender. Researcher Venture Intelligence calculates that funds have already pumped $1.5 billion in distressed assets in India this year, 55% more than through all of 2019. That data only captures deals that have closed and doesn’t includes others that have been recently announced such as Oaktree’s 22 billion rupee ($294 million) loan to lender Indiabulls Housing Finance Ltd. in July. India in recent months has struggled to control its coronavirus epidemic, reporting the largest number of infections after the U.S. and has suffered the worst economic contraction among major economies worldwide. Yet even before the pandemic, the country had been battling one of the world’s worst bad debt problems in its financial sector, which claimed a string of lenders and left banks reluctant to lend to the most vulnerable businesses.

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Renaissance, Two Sigma See Losses as Quant Giants Navigate Chaos

Brief: Two of the hedge fund industry’s quantitative powerhouses are getting tripped up this year as wild markets throw off their investing models. Renaissance Technologies, which manages the world’s biggest quant hedge fund, and Two Sigma Advisers have seen losses across several of their funds in 2020, a sign of how unprecedented market volatility caused by the Covid-19 pandemic hurt even the most sophisticated traders. Stocks sank into the fastest bear market on record in March before staging a rebound not seen in nine decades. The CBOE’s volatility gauge has averaged 33 since the end of February, 14 points higher than the average over the prior 30 years. That upended performance from firms that in recent years have been among the best on Wall Street. “Quants rely on data from time periods that have no reflection of today’s environment,” said Adam Taback, chief investment officer of Wells Fargo Private Wealth Management. “When you have volatility in markets, it makes it extremely difficult for them to catch anything because they get whipsawed back and forth.” Renaissance saw a decline of about 20% through October in its long-biased fund, according to a person familiar with the matter. The $75 billion firm’s market-neutral fund dropped about 27% and its global-equities fund lost about 25%. The firm, founded by former codebreaker Jim Simons, told investors that its losses are due to being under-hedged during March’s collapse and then over-hedged in the rebound from April through June. That happened because models that had “overcompensated” for the original trouble.

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Despite Vaccine Progress, Investors Eye Fed Support as Coronavirus Surges

Brief: Investors are weighing the chances the Federal Reserve will increase its purchases of U.S. government debt in coming weeks to counteract the economic fallout of a COVID-19 resurgence, an intervention that could reverse a recent rise in Treasury yields to multi-month highs. News that two coronavirus vaccines proved highly effective in late-stage trials in recent days have stoked investors’ appetite for risk, sending yields, which move inversely to bond prices, to their highest levels since March and U.S. stock markets to record highs. Still, some investors believe that rising coronavirus cases may threaten the fragile U.S. economic recovery at a time when fiscal stimulus is likely to be delayed and widespread access to a vaccine remains months away. The United States recorded more than 1 million new COVID-19 cases last week. That combination of negative factors could push the central bank to increase its support, some investors argue, even though asset purchases already stand at record levels and the Fed has not indicated it intends to raise them at its next two-day policy meeting, Dec. 15-16.

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Shadow Lenders Poised to Get Tougher Rules in Global Crackdown

Brief: Global regulators are preparing to tighten restrictions on investment funds and shadow lenders, concluding they threatened the stability of the financial system at the height of this year’s pandemic-fueled market volatility. Key areas of vulnerability during the March mayhem included big investors’ dash for cash, significant redemptions in mutual funds and non-government money market funds, as well as leveraged hedge fund trades in Treasuries, the Financial Stability Board said in a report published Tuesday in Europe. The panel of global regulators indicated it would issue proposals next year to make money market funds more resilient and then address risks posed by the broader non-bank financial sector in 2022. The FSB said this year’s stress would have been much worse if the U.S. Federal Reserve and central bankers around the world had not rushed to the rescue with unprecedented support. “It’s clear we need to take action to address these issues,” Randal Quarles, chair of the FSB and vice chairman of supervision for the Federal Reserve, told reporters during a Monday press briefing. He warned in a letter accompanying the report that the financial system remains vulnerable, because the “structures and mechanisms that gave rise to the turmoil are still in place.”

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SEC Whistleblower Tips Eclipse Records Amid COVID-19

Brief: The U.S. Securities and Exchange Commission's record-breaking fiscal year for whistleblower awards was driven by more than 6,900 tips, an all-time high that was nearly one-third greater than last year's count, according to the office's annual report published Monday. The report shows the number of whistleblower tips in fiscal year 2020 jumped by nearly 33% to 6,911, from 5,212 in fiscal year 2019. The figure was well over double the 3,001 tips recorded in fiscal year 2012, when record keeping began. The tips spurred a previously announced record-breaking year during which the agency awarded approximately $175 million to 39 individuals. Monday's report notes that the third quarter, between April and June, resulted in a particularly high number of tips. Kyle DeYoung, a Cadwalader Wickersham & Taft LLP partner who previously served as senior counsel to former SEC enforcement director Andrew Ceresney and co-directors Stephanie Avakian and Steve Peiken, attributed the spike to COVID-19. "It isn't surprising that tips were up during COVID," said DeYoung. "Whenever there is huge volatility and a downturn you tend to have an increase in tips because more people have lost money, more people are frustrated, and there's more opportunity for wrongdoing in that sort of a market." DeYoung thinks the backlog of virus-related tips will continue to produce payouts as the commission heads into a new fiscal year that is already on track to shatter records.

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Public Asset Managers Just Had Their Best Quarter Ever. But It Wasn’t All Good News

Brief: Publicly traded traditional asset managers notched their strongest quarter ever between July and September, even as the coronavirus pandemic continued to shut down big sectors of the economy, according to Casey Quirk, the asset management strategy consultant that is part of Deloitte. Public managers hit new highs for both revenue and assets under management between July and September 2020. That performance is in line with public markets, which recovered much of their losses since the lows in March. Casey Quirk, which analyzed 23 asset managers that were not a part of larger corporations such as banks or insurance companies, found that aggregate revenue increased 1.85 percent and assets increased 2.7 percent compared with the fourth quarter of 2019. Last year’s final quarter was the previous high for the group, which represented firms in the U.S., Canada, and continental Europe.  But the difference between the best and the worst in the industry widened and quickened between July and September, according to Amanda Walters, a principal at Casey Quirk. 

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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 November 16, 2020:

  • In the United States, American biotech firm Moderna gave the markets (pardon the pun) a shot in the arm on Monday after its COVID-19 vaccine showed a 94.5% efficacy in clinical trials. Moderna’s news comes on the heels of last week when American drug company Pfizer, along with its German partner BioNTech found their vaccine to be 90% effective. Moderna’s chief executive, Stephane Bancel called the moment “pivotal”. “This positive interim analysis from our phase-3 study has given us the first clinical validation that our vaccine can prevent COVID-19 disease, including severe disease,” said Bancel. With the first vaccinations reported to be rolling out by the end of December, an advisory committee to the US Centers for Disease Control (CDC) is scheduled to meet next week to decide who will receive COVID-19 inoculations first. Health care workers, essential workers, those over the age of 65, and people with underlying conditions are among the first to be considered, but the question becomes in what order.

  • Canada’s Green Party leader is calling on the federal Liberal government to appoint a national COVID-19 task force as the numbers continue to rise across the country. Speaking to reporters on Monday, Green Party Leader Annamie Paul said the country should have clear, coordinated messaging with officials speaking with one voice. “What’s happening right now doesn’t work – that’s clear. People are dying, we’re in the midst of the second wave and we’re not seeing any improvement,” said Paul. The Green Party leader pointed to Australia and United States President Elect Joe Biden as examples of leaders setting up COVID-19 advisory boards to help deal with the pandemic.

  • United Kingdom Prime Minister Boris Johnson has been forced to self-isolate after meeting with a Conservative MP who later developed symptoms of COVID-19. It is well-known Prime Minister Johnson suffered through a battle with COVID-19 in April, forcing him into the hospital for several days. The news also comes as the prime minister dealt with a series of resignations from his inner circle last week. Prime Minister Johnson was hoping to turn the corner on Wednesday, making a big speech on the UK’s “green economy”, but instead will follow the rules and continue working in isolation from 10 Downing Street. 

  • After taking a more hands-off approach during the first wave, Sweden has unveiled its toughest restrictions yet to fight the rise of COVID-19 cases in the country. Prime Minister Stefan Lofven said the situation was going to get worse in the country and that Sweden would be limiting public gatherings from 50 people down to eight. “It is a clear and sharp signal to every person in our country as to what applies in the future. Don’t go to the gym, don’t go to the library, don’t have dinner out, don’t have parties – cancel,” said Lofven. 

  • The United Arab Emirates (UAE) will extend loan payment deferrals through June 2021, the central bank announced on Monday. Originally, retail and corporate customers struck hard by the pandemic had until the end of the year to tap into a $13.6 billion USD zero-cost facility the central bank made available to lenders, so customers could defer loan payments. The UAE has been hit hard in 2020 due to the combination of the pandemic, and lower oil prices.

  • Japan’s gross domestic product grew by 21.4% in the third quarter, expanding at its fastest rate since 1968, but the world’s third largest economy still has a steep hill to climb from coronavirus pandemic. The strong third quarter was helped by government stimulus, which fueled consumer spending and strong pickup in trade. However, the fourth quarter is already forecasted to be not as strong as the pandemic flares up in Japan and other countries throughout the world - keeping a lid on further export and consumption gains. Prime Minister Yoshihide Suga has already called on a third extra budget, which will only add to Japan’s mounting debt, but is deemed necessary as the boost from the government’s earlier cash handout weakens and a job furlough scheme has run its course.

Covid-19 – Due Diligence And Asset Management

COVID Causing Concerns, Shifts in Recruitment

Brief: Asset manager CEOs and other senior leadership are navigating new workforce concerns caused by the pandemic, including a pause on in-person recruitment of early career professionals. Some executives say they are concerned about how the talent pipeline from colleges and universities will be impacted going forward, while others see an opportunity to broaden their recruitment to a more diverse pool of candidates, sources told Pensions & Investments. Mario J. Gabelli, founder, chairman and CEO of GAMCO Investors Inc. in Rye, N.Y., is concerned that the pipeline from which GAMCO typically recruits will be trimmed by the effects of the coronavirus. He also questions how recruitment will be affected now that firms are not able to visit cam- puses. "I don't know how effective it's going to be on Zoom recruiting," Mr. Gabelli said. GAMCO, which had $29.7 billion in assets as of Sept. 30, typically recruits from undergraduate programs at Babson College, Boston College, Yale University, Fordham University, New York University, Princeton University, Duke University, the University of Miami and Roger Williams University. The firm also recruits from MBA programs at the University of Pennsylvania's Wharton business school, Columbia University and, to a minor degree, Harvard University, Mr. Gabelli said.

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How Women-Led Hedge Fund Firms Can Gain Value

Brief: The hedge fund industry is dominated by men, with women and minorities controlling only a small fraction of US-based assets. Some financial observers say fixing this gender imbalance is long overdue. They bolster their argument with data showing hedge funds run by women have performed well in recent years, including during the pandemic, when they out-performed those managed by men. “Embracing a culture of inclusion and diversity in an organisation is not just the right thing to do,” says Allison Nolan (www.athena.ky), founder and managing director of Athena International Management Limited and author of the upcoming book, Madam Chair, about how women are transforming the hedge fund industry and why more women are needed. “The benefits of gender balance within investment management firms are clear and irrefutable. Not only does gender diversity and inclusion within a firm improve decision-making and enhance the business culture, but evidence shows that it is sound business sense, creating value and improving returns.” Studies reveal that part of the reason female investors fare well compared to men is due to behavioural differentiators, such as showing more discipline than men in investing decisions, being less overconfident and trading less, and focusing more on protecting investments from risk.

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RXR Realty Eyes $1 Billion to Tackle Property Market Dislocation

Brief: RXR Realty is seeking $1 billion for a vehicle dedicated to making bets on real estate with the expectation that valuations may tumble as a result of the Covid-19 pandemic, according to a person with knowledge of the matter. The firm is discussing the RXR Real Estate Market Dislocation & Mega-Trends Fund with potential investors, said the person, who requested anonymity because the talks aren’t public. RXR plans to find “pockets of distress” such as non-performing debt and opportunities for rescue financing. It’ll focus on logistics, telehealth and residential wagers -- areas of the property market that the firm believes will thrive in a post-Covid 19 world, a presentation reviewed by Bloomberg News shows. The pandemic may have permanently altered the way companies and consumers use real estate, according to the presentation. RXR foresees demand for transit-linked suburban downtown areas and conversion of obsolete buildings including hotels and malls into multifamily, industrial or film-studio properties. The firm has forecast underperformance for office properties in 2021 and 2022, before a rebound begins in 2023.

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Buyout Activity Up Again After Pandemic-Induced Pause

Brief: U.S. corporate pension plan buyout volume is picking up again after a drop in activity in the second quarter as plan sponsors shifted their attention to addressing the economic effects of the pandemic, industry experts said. Still, even with a spate of recent activity, overall volume for 2020 should total about $25 billion, down from $28 billion in 2019, according to experts. Much of that expected drop is the result of a slow second quarter. Buyout sales totaled $2.3 billion in the quarter ended June 30, down from $4.2 billion in the second quarter of 2019, according to the LIMRA Secure Retirement Institute's most recent survey of the 17 insurers that make up the U.S. pension risk transfer market. For the first half of 2020, deal volume totaled $7 billion compared with $9 billion in the first half of 2019."The effect of COVID-19 on the economy has clearly had a negative impact on pension risk transfer sales, both in terms of volume and dollars," said Mark Paracer, assistant research director, LIMRA Secure Retirement Institute, in a Sept. 2 news release. "Fluctuating funding levels and the uncertain timing of the recovery have given employers reason to pause. While we believe social distancing and work-from-home transitions have also contributed to the sales decline, we expect increasing PBGC premiums and other administration costs will drive employers to seek PRT deals in the future."

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Over 40 Per Cent of Institutional Investors Say Global Pandemic Has Accelerated Deployment of Capital Into European VC Funds

Brief: Mountside Ventures and ALLOCATE, today released their inaugural annual report entitled, "Capital Behind Venture 2020." The report provides insights on Venture Capital (VC) firms looking to raise funds from Limited Partners (LPs) such as pension funds, university endowments, government agencies, fund-of-funds, and high net worth (HNW) individuals or family offices who actively invest in Europe's growing VC ecosystem. "There is very little information in the public domain on best practices, preferred terms and practical advice on raising a VC Fund in Europe, even less so for emerging fund managers," says Jonathan Hollis, Managing Partner at Mountside Ventures. "Our goal in writing this report was to reduce barriers for VC fund managers, but also show LPs how their peers are exploring investing in this space." Mountside Ventures and ALLOCATE surveyed over 60 LPs that invest in European Venture Capital funds.   No one size fits all when it comes to what LPs are looking for in their next VC fund manager, however, some trends rose to the top of the survey's findings.

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Morgan Stanley Says Go Risk-On and ‘Trust the Recovery’ in 2021

Brief: Morgan Stanley strategists said an expected “V-shaped” economic recovery, greater clarity on Covid-19 vaccines and continued policy support offer a favorable environment for stocks and credit next year. In an outlook for 2021, a team including Andrew Sheets recommended investors overweight equities and corporate bonds against cash and government debt, and sell the U.S. dollar. Volatility is set to decline, and investors should be “patient” in commodity markets, the strategists said. “This global recovery is sustainable, synchronous and supported by policy, following much of the ‘normal’ post-recession playbook,” they wrote. “Keep the faith, trust the recovery.” A gauge of global stocks headed toward a record Monday amid optimism that the expected roll-out of vaccines and additional U.S. fiscal stimulus will bolster the world economy. Still, skeptics argue the short-term outlook is challenging as nations resort to lockdowns to fight a resurgence in virus cases and lawmakers bicker over the size of U.S. relief spending. Morgan Stanley joins JPMorgan Chase & Co. and Goldman Sachs Group Inc. in painting a positive outlook for equities. JPMorgan strategist Marko Kolanovic said U.S. election results create a bull case for markets, while David Kostin at Goldman Sachs expects society to normalize gradually next year.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Friday November 13, 2020:

  • In the United States, CNN is reporting President Elect Joe Biden’s transition team is using back channels such as governors, the private sector and the medical community to prepare its COVID-19 response as the Trump administration continues to block Biden’s access to key information. As President Trump has still refused to concede the election, President Elect Biden’s team doesn’t have access to key COVID-19 pandemic data and government agency contacts. Elsewhere, other members of President Elect Biden’s COVID-19 advisory committee are trying to pour cold water on comments made by one of their colleagues earlier in the week. Dr. Michael Osterholm suggested a four-to-six-week national lockdown would be good for the country, however Dr. Celine Gounder said it was “not of the opinion” of the group to institute such widespread restrictions across America. While Dr. Vivek Murphy, another member of the advisory group, said national lockdowns were recommended in the spring when scientists knowledge about the coronavirus was less well known.
  • In Canada, Ontario Premier Doug Ford will meet with his health minister and top doctor after learning updated COVID-19 modelling showed the province could be dealing with 6,000 cases a day within weeks if more isn’t done to add more public health restrictions. Premier Ford has been facing an onslaught of backlash from the medical community in the province from his new colour coding system after he allegedly ignored their suggestions. Speaking at a news conference on Thursday, Premier Ford was quick to defend his government’s decision, calling the claims totally inaccurate and adding the following: “The easy thing to do, folks, is just shut down the whole province. How do you deal with the mental health again of people? It’s easy for people to say, shut everything down, when they’re guaranteed a paycheck every week.”
  • In the United Kingdom, another member of Prime Minister Boris Johnson’s inner circle will be leaving. The Financial Times is reporting Dominic Cummings, the prime minister’s chief adviser and person recognized as the architect of the 2016 Brexit vote confirmed his departure late Thursday night. The article noted Cummings initially intended to leave by the end of 2020. Senior government officials claim it was Cummings and Lee Cain, who resigned earlier in the week, that leaked the government’s plan to introduce a lockdown to England last week to the media. The leak infuriated Prime Minister Johnson, but both men have categorically denied they were the members behind the leak.
  • Despite expressing “cautious optimism”, Germany will not be easing their coronavirus restrictions anytime soon. A spokesperson for the Angela Merkel government made that announcement on Friday after the country’s Robert Koch Institute said Thursday the COVID-19 infection rate was flattening. Germany has been in partial lockdown since November 2nd and Chancellor Merkel is set to meet with state leaders this Monday to review the lockdown, but the government spokesperson said the easing of restrictions is not to be expected. 
  • Japan recorded a new daily high of 1,651 COVID-19 cases on Thursday. The new daily record issued a response from Economy Minister Yasutoshi Nishimura, who also doubles as the country’s leader in the coronavirus response, warning stricter measures might be introduced if numbers continue to spike. “We are not at a point where a state of emergency must be declared, but we need to have the strongest sense of caution,” said Nishimura. Health experts are particularly worried as most socioeconomic activity has returned to pre-pandemic days in Japan. For instance, health officials are worried about infections risks posed by after-work drinking parties that are common at workplaces, or among friends.
  • A senior official at China’s national health authority said the country is facing an increased risk of local transmission of the coronavirus in the winter due to imported cases. While other countries across the world are dealing with surges, China has largely controlled the spread of COVID-19 since the early summer, with some clusters of community infections periodically hitting parts of the country. China has continued to stop issuing visas to some foreign nationals while restricting non-urgent outbound movements by Chinese citizens. While Hong Kong and Singapore agreed to a travel bubble earlier in the week, China has no plans to arrange a travel bubble with any country saying right now is not the time.

Covid-19 – Due Diligence And Asset Management

“Radical Change”: Covid-19 is Ultimate Stress Test for Hedge Funds’ Cybersecurity

Brief: The shift to remote working as a result of the coronavirus pandemic proved to be the ultimate stress test for hedge funds’ cybersecurity and business continuity processes – but speakers at this year’s Hedgeweek LIVE Europe digital summit believe the industry has coped well with the unprecedented disruption. Opening day two of this year’s summit, the cybersecurity and business resilience panel fleshed out the many practical challenges thrown up by the remote working environment. These include data access, monitoring and protection, dealing with increased call volumes in a home environment, video conferencing, the potential software and hardware headaches, as well as staff wellbeing. Patrick Trew, chief risk and compliance officer at Maniyar Capital, described how his firm, which spun out of Tudor Investment Corporation, was in the unique position of launching right in the middle of lockdown. “We spent plenty of time preparing for the launch which, pre-March, would have been a fairly routine launch,” Trew said. “But the dynamic changed quite dramatically as events unfolded.”

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U.K. Fund Liquidity Rule Breaches Soared in Covid Early Days

Brief: British money managers ran afoul of liquidity regulations 13 times at the height of this year’s market volatility, exposing their investors to the kinds of risks that can trap billions of pounds for months. Nine funds, whose names were kept confidential, breached the 10% limit on holdings of unquoted securities between March and May, according to Financial Conduct Authority data obtained by Bloomberg through a public records request. Most of the breaches occurred in March, when Covid-19 spread to Western economies and the value of investors’ more easily tradeable securities plunged. While the breaches subsided by June, the revelation may increase pressure on investment managers to reduce their stakes in upstart companies and thinly-traded shares, which became more popular in an ultra-low-interest-rate environment. More attention has been paid to the issue after illiquid investments tripped up money managers Neil Woodford and H2O Asset Management. “Should funds that offer daily liquidity have 10% in unquoted stocks in the first place? My answer is no,” said Ben Yearsley, investment director at Shore Financial Planning. “It comes back to a failure of regulation. It’s been 18 months since Woodford blew up and still nothing has happened.”

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Goldman Sees Strong Economy in 2021, but it’s Going ‘To Get Worse Before it Gets Better’

Brief: Goldman Sachs sees a prosperous 2021 but is cautious about the bumpy road the U.S. economy will ride before it gets there. In a forecast that is well above Wall Street consensus, the bank’s economists see gross domestic product accelerating at a 5.3% pace next year, considerably stronger than the 4% median forecast from the Federal Reserve. However, the firm sees several obstacles along the way, particularly the damage that quickly accelerating coronavirus cases will have on the recovery. “The pace of recovery is likely to get worse before it gets better,” Goldman economist David Mericle wrote in a report. “Fiscal support has largely dried up for now, leaving disposable income lower in the final months of the year. But the largest risk is that the third wave of the coronavirus is likely to worsen with colder temperatures.” Indeed, the pandemic’s toll has swelled in recent weeks, with new daily cases eclipsing the 150,000 mark on Thursday and poised to continue rising as winter weather sets in. Few states have reimposed major restrictions yet, but are more likely to do so as the virus spreads.

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Onex Earns US$501 Million in Third Quarter as it Shakes Up Portfolio

Brief: Onex Corp. says its private equity investments increased in value this year, despite the economic volatility caused by the COVID-19 pandemic. The company, which manages a fund that bought WestJet Airlines Ltd. in a $5-billion deal last December, didn't announce details about the Calgary-based airline. Overall, the Toronto-based investment firm says it earned US$501 million, or US$5.29 per fully diluted share, in the three months ended Sept. 30. In the same period last year, the company reported earnings of US$100 million, or 99 cents US per diluted share. The company, which makes money in several ways including buying and selling companies, lending and fees for managing assets for clients, declared a dividend of 10 cents per share for the fourth quarter — unchanged since mid-2019. Despite recent hardships for airlines, including WestJet, Onex says its private equity investments yielded gross returns of 14 per cent during the third quarter, while shareholder capital rose by about 10 per cent. Chief executive Gerry Schwartz says Onex has been improving its portfolio, making investments in benefit insurer OneDigital, trade-show company Emerald Holdings and a clinical services group.

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Pining for Peers, Majority of Investors Are Comfortable With Local Events Next Spring

Brief: After eight months of virtual meetings and Zoom conferences, institutional investors are looking to ease back to in-person events next year, according to an Institutional Investor survey of nearly 300 allocators and consultants. The majority — 53 percent — said they would feel either somewhat or entirely comfortable attending outdoor regional events in the spring, even as most said they would still not want to travel for more traditional indoor conferences. Respondents from consulting firms, endowments, and foundations were among those who were most willing to attend regional events, while health care investors expressed the least amenability. II conducted the survey over the last four weeks, as coronavirus infections rose once again in the U.S. Most of the responses came in before this weekend, when Pfizer and BioNTech reported promising preliminary results on their Covid-19 vaccine. Participants in the survey were asked to describe their level of comfort about attending three types of events: regional, “resort-style,” and traditional. Regional events were defined as local, outdoor gatherings with no air travel, while resort-style events would take place outside at destinations like Miami or Aspen. Traditional events described indoor gatherings in major cities.

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The Giant Schism in Asset Management Paychecks

Brief: Experts see a small pay cut coming for executives at traditional asset managers, hedge funds, and private equity shops, particularly at smaller firms, given disruption in the underlying economy because of the coronavirus. The predicted five-to-10 percent compensation drop would make for two down years in a row, according to Johnson Associates’ third-quarter report on year-end incentives. But that average belies striking differences between the haves and have-nots in asset management. The consultant expects compensation changes to range widely, from 20 percent cuts to 7.5 percent hikes. Costs have continued to grow as investors want more hand-holding, data, and analytics, while compliance burdens expand, according to Johnson Associates. At the same time, investors continue to pressure managers for fee deals. Some asset managers are still cutting staff given shrinking asset bases or only modest inflows as the industry consolidates. Last month, for example, Morgan Stanley announced plans to buy asset manager Eaton Vance.

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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 November 12, 2020:

  • In the United States, one of President Elect Joe Biden’s COVID-19 advisors says a four-to-six-week national lockdown could drive down surging coronavirus cases across the country. Dr. Michael Osterholm, director of the Center for Infectious Disease Research and Policy at the University of Minnesota made the suggestion during an interview on Wednesday. Dr. Osterholm suggested government support for a package to cover the wages lost for individual workers, while also covering losses for small to medium sized companies. If the lockdown happened, Dr. Osterholm said, “then we could really watch ourselves cruising into the vaccine availability in the first and second quarter of next year and bringing back the economy long before that.”

  • In Canada, the western part of the country is struggling on how to deal with its surging COVID-19 case count. Manitoba’s strict “code red” COVID-19 restrictions went into effect on Thursday with schools staying open, but everything from non-essential retail stores, theatres and restaurant dining will be closed. In neighbouring Saskatchewan, more than 300 doctors have signed a letter asking provincial leaders to do more to fight the coronavirus. The letter stated: “If more is not done to change our course we are confident that winter will bring overflowing hospitals, cancelled surgeries, overwhelmed health-care providers and needless death.” Alberta’s health officials including doctors and three major unions representing health-care workers sent a similar letter to Premier Jason Kenney asking for tighter restrictions, including a suspension of many indoor group activities.

  • United Kingdom Prime Minister Boris Johnson’s inner circle seems to be falling apart due to the stress of Brexit and the coronavirus pandemic. Prime Minister Johnson’s communications chief, Lee Cain resigned. One of the prime minister’s longest serving aides, Cain quit after Johnson reversed his decision of making him chief of staff. Other key members of Prime Minister Johnson’s team threatened to quit if Cain was placed in that role. Many Conservative MPs actually see this being potential good news as they blame Prime Minister Johnson’s advisers for a series of mistakes made in handling the coronavirus.

  • France will maintain its current lockdown for another two weeks and laid out what potential future plans may hold on Thursday. Prime Minister Jean Castex hopes the current restrictions being in place until the beginning of December will allow the country to slightly ease the restrictions thereafter and loosen a little more in time for Christmas. The “R” number, which indicates how many new infections are caused by each infected person have fallen below one. This suggests that new infections should continue to decline over time. Prime Minister Castex said the government would continue to provide support to businesses, such as restaurants forced to close as a result of the pandemic. 

  • Just two days after a Brazilian health regulator halted a clinical trial of China’s Sinovac COVID-19 vaccine, it has been allowed to resume. The original decision by Brazil’s Anivsa was severely criticized by trial organizers who said the move had taken them by surprise. The “adverse, serious event” mentioned on Monday for the reason behind the suspension was a death, but later deemed via suicide, so it was determined there was no need to stop the trial. Brazil’s President Jair Bolsonaro, who has criticized China in the past, has baselessly dismissed the Sinovac vaccine as lacking in credibility. President Bolsonaro was happy with the decision to stop the trial on Monday, so it remains to be seen how he will respond to its reboot.

  • In Australia, the secretary of the Victorian state health department has resigned from her position. Kym Peake faced significant pressure and criticism during the hotel quarantine debacle that was ground zero for the coronavirus outbreak, which sent the state’s largest city Melbourne, into one of the world’s longest and strictest lockdowns. Peake had served in the role for the past five years and will be replaced by Professor Euan Wallace.

Covid-19 – Due Diligence And Asset Management

Top Performing Fund Isn’t Swayed by Travel, Stay-at-Home Trends

Brief: A high-performing equity fund manager isn’t buying into Covid-19 thematics like the so-called stay-at-home or reopening trades that are sensitive to virus developments. Instead, Castle Point Funds Management Ltd.’s Richard Stubbs said he’s targeting companies with strong fundamentals that he expects can withstand such short-term market gyrations. Focusing on near-term earnings, election outcomes and other uncontrollable factors can often prove unproductive in times of volatility, said the Auckland-based fund manager, who invests in Australian and New Zealand shares. News about a possible vaccine breakthrough earlier this week prompted a global shift among equity investors from fast-growing companies into parts of the market that have struggled with lockdowns and economic pain. That transition has since tempered on the realization that a return to normalcy is still a ways off. “Trying to predict what sectors are going to do better than others in this period of extreme uncertainty is unlikely to be successful,” said Stubbs. His Castle Point Ranger Fund has returned about 22% this year, beating 92% of peers, according to data compiled by Bloomberg.

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Powell Warns of U.S. Economy Risk with Pandemic at Deadliest Yet

Brief: Three of the world’s top central bankers warned Thursday that the prospect of a Covid-19 vaccine isn’t enough to put an end to the economic challenges created by the pandemic. “We do see the economy continuing on a solid path of recovery, but the main risk we see to that is clearly the further spread of the disease here in the United States,” Federal Reserve Chair Jerome Powell said during a panel discussion at a virtual conference hosted by the European Central Bank. “With the virus now spreading, the next few months could be challenging.” Powell was joined on the panel by Bank of England Governor Andrew Bailey and ECB President Christine Lagarde. Both echoed his caution, and added to recent warnings from other central bankers against complacency. Bailey called recent vaccine news “encouraging” and said he hoped it would reduce uncertainty but added “we’re not there yet.” Lagarde said while it’s now becoming possible to see past the pandemic, “I don’t want to be exuberant.” The words of warning come as much of the U.S. and Europe is enveloped in a new wave of coronavirus outbreaks. In the U.S., hospitalizations are at record highs. In Europe and the U.K., governments have moved to reimpose lockdowns to limit the spread of the virus. Worldwide, cases top 52.3 million and deaths exceed 1.28 million.

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Insurer Legal & General Scales Back Dividend Plans, Shares Fall

Brief: Shares in Legal & General LGEN.L fell more than 3% on Thursday as the British life insurer kept its final dividend payment for 2020 flat due to the coronavirus pandemic and cut its dividend growth target for the next five years. L&G has not suffered a major impact from the pandemic but executives told reporters that housing sales dropped in Britain following the country’s first lockdown in March, while U.S. life insurance claims increased due to the virus. L&G is a direct investor in housing and commercial real estate. L&G is also a major player in the market for annuities, which pay pensioners a fixed income for life. It also invests in infrastructure and is one of the largest investors in the UK stock market. On the 2020 dividend, Chief Financial Officer Jeff Davies said: “We felt that a pause year was a good balance between rewarding shareholders - where many aren’t rewarding at all - versus holding back for potential uncertainty.” L&G paid its final dividend for 2019, unlike other British insurers such as Aviva AV.L and RSA RSA.L.

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Private Equity Cash Boosts Fortunes of America’s Mid-Sized Firms

Brief: America’s mid-sized companies are faring better than industry watchers feared at the start of the pandemic, as private equity owners step in to help tide them over. Sponsors have provided more cash to portfolio companies compared to the 2008 crisis, with a view that keeping businesses afloat will be more advantageous than potential restructurings or lender takeovers, according to Lincoln International, a middle-market advisory firm. Private equity owners have also been very proactive in coming up with new ways to generate revenue and cut costs to keep companies going, according to Ron Kahn, co-head of Lincoln’s valuations and opinions group. “Sponsors and lenders have worked very well together to make sure these companies have staying power,” Kahn said in an interview. Some analysts had predicted that credit quality for business development companies, a roughly $100 billion industry that mainly lends to mid-sized borrowers, would get worse before it gets better. But those dire forecasts are now being dialed back in certain cases amid a slowdown in soured loans. Businesses that initially positioned their budgets conservatively are now revising projections upward, according to Lincoln. Mid-sized companies have updated earnings projections to show an expected 13.1% Covid-related decline, down from forecasts for a 23.4% drop just three months ago.

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Varde Partners Closes Fund Targeting Pandemic Induced Dislocation Opportunities

Brief: Alternative investment firm Värde Partners has held a final close of The Värde Dislocation Fund with more than USD1.6 billion of commitments. Raised entirely with no in-person meetings, 55 per cent of commitments to the fund come from new investors. “The strong demand for this strategy from a diverse, global investor base underscores expectations for a deep credit cycle,” said president Jon Fox. “We took innovative steps to engage investors through virtual platforms and were able to exceed our target in just five months.” The fund will invest in opportunities presented by the market dislocations and economic disruption following the pandemic. It has a global mandate to pursue a broad universe of mispriced, stressed, and distressed credit, according to the firm. “We believe the profound impact of Covid-19 has marked the start of a major, connected cycle,” said George Hicks, co-founder and co-chief executive officer.  “Having established a deep expertise in credit over the past 27 years, we bring to bear our experience investing through many credit cycles to guide us as the crisis unfolds,” added Hicks.

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Marathon CEO Cites NYC Costs, Covid, Crime for New Miami Outpost

Brief: Marathon Asset Management is setting up an office in Miami as the Covid-19 pandemic upends New York City as a financial hub, according to co-founder and Chief Executive Officer Bruce Richards. “Marathon South will be an option for our employees,” Richards said in an interview on Bloomberg Television Wednesday. The Miami office will mainly be for non-investment professionals and the investing team will remain in New York, he said. “I’m certainly committed to New York City,” Richards said. “I love New York City.” But he sees cities like Atlanta, Nashville and Charlotte benefiting from travel and business in the next few years, with New York not as attractive as it once was. Lower taxes and less crime outside of New York will also lure companies elsewhere, Richards said.  The distressed-debt specialist looked at Charlotte, Atlanta and Miami as possible locations for another office, ultimately choosing the Florida city, he said. Marathon has had a presence in New York, London and Tokyo, according to its website. Marathon follows peers like Balyasny Asset Management and Bluecrest Capital Management in establishing an office outside of New York City as the pandemic pushes office dwellers to work from home for the foreseeable future. Currently 20% of Marathon’s workers are in the office Monday through Thursday, with 10% on site on Friday, he said. “New York is not what it once was,” he said. “Vacancy rates are going to go up, and it’s going to be ugly for property owners.”

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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 November 11, 2020:

  • In the United States, Texas has become the first state to surpass one million COVID-19 cases. Health experts are concerned as America is reporting more than 120,000 new COVID-19 cases a day and the country is just a few weeks out from celebrating its Thanksgiving holiday and Christmas shortly thereafter. “The upcoming holidays of Thanksgiving, Diwali, Christmas, Hanukkah and New Year’s create the potential for innumerable super-spreading events across the country,” said Dr. Isaac Bogoch, an infectious disease specialist at the University of Toronto. According to statistics from the University of Washington more lives will be lost to COVID-19 in December then what America saw in March and April. The United States was reporting more than 2,000 deaths a day in the spring.
  • In Canada, its most populous province set a new record high for COVID-19 cases for the fourth time in the past five days. Ontario reported 1,426 new cases on Wednesday prompting Toronto’s medical officer of health to move the city into the “red” level of the provinces colour-coded system, along with added stricter measures on top of those restrictions. As of this Saturday, indoor dining at restaurants and bars will remain prohibited, meeting and event spaces, along with casinos and bingo halls will remain closed and the health officer recommended not socializing with people outside of their household. The “red” category restrictions will remain in place for 28 days. 
  • In an effort to have university students at home with their families for the holidays, the United Kingdom issued its plan on how to make that happen on Wednesday. University students will have staggered departure dates over the next month with the government and universities working in tandem on mass testing. The plan is to have learning move online by December 9th. If by that deadline, students develop symptoms and test positive for COVID-19, they will still have a two-week window that could get them home in time for Christmas.
  • According to people familiar with the matter, Italy may need to spend €10 billion a month to aid businesses and workers hit by coronavirus restrictions. The Bloomberg report cites a person who declined to be identified because the discussions are confidential, but lockdown measures similar to the ones imposed on Italy earlier this year are estimated to cost the government between €40 to €50 billion if they last until March. Before the pandemic hit, Italy was the Euro region’s third-largest economy, but has struggled to deal with the fallout from the coronavirus.
  • One day after announcing they have their third COVID-19 vaccine ready for regulatory approval, it really appears Russia doesn’t want to be outdone on the vaccine front. The Gamaleya Research of Epidemiology and Microbiology, along with the Russian Direct Investment Fund announced via social media on Wednesday that the Sputnik V vaccine is showing a 92% efficacy rate. This news comes just a few days after Pfizer announced their vaccine produced a 90% efficacy rate. The preliminary Phase 3 findings are based on results from 20,000 volunteers, including more than 16,000 who also received a second injection of the vaccine. The western world was skeptical of the Sputnik V vaccine when it was registered by Russia in August and the timeliness of this apparent 2% bump in efficacy isn’t likely going to squash those concerns.
  • Singapore and Hong Kong have announced the world’s first air travel bubble. The air travel bubble will replace quarantine with COVID-19 testing starting November 22nd officials said in separate briefings on Wednesday. There will be several flights a week on Singapore Airlines Ltd. and Cathay Pacific Airways Ltd., which will become daily as of December 7th. Flying within the travel bubble will require more paperwork than usual. Tests should be taken within 72 hours prior to departure, with travel approval being done online at least seven days ahead of time. Should travelers obtain the virus in either city during their stay, they would need to bear the full cost of any medical treatment provided to them. The two Asian financial hubs hope the travel bubble can be a template for other countries to follow, if successful.

Covid-19 – Due Diligence And Asset Management

Hedge Fund Managers Face ‘Survival of the Fittest’ Test for 2020

Brief: For years, hedge funds have blamed placid markets for their uninspiring returns. That excuse won’t fly this year. Volatile markets in which stocks move less in lockstep should be a recipe for making money. But much of the industry is struggling, and clients are losing patience. “This year separates the adults from the children,” said Tim Ng, chief investment officer of Clearbrook Global Advisors, which invests in hedge funds. “If you are a fundamentally driven, bottoms-up securities manager across any asset class, this should have been the year when you did well. Everything you’ve wanted for years exists.” The $3.3 trillion industry gained 0.4% through October, according to the Bloomberg Hedge Fund Indices, trailing both stocks and bonds. Hedge Fund Research Inc.’s index looks worse, showing a drop of more than 4%. Big winners include Brevan Howard Asset Management and Coatue Management, and in the losing column are firms such as Bridgewater Associates, whose flagship fell 19% through Nov. 5. Some investors in struggling funds are asking: If they couldn’t make money before and still can’t now, why keep them? “It’s getting harder to have conviction in hedge funds,” said Adam Taback, chief investment officer of Wells Fargo Private Wealth Management, another allocator. “Many have not protected enough on the downside and others haven’t provided enough upside.” Taback said he isn’t cutting funds from client portfolios, though the bar for getting recommended is higher. He believes more fund shutdowns are coming.

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Deutsche Bank Sees Hurdles to Consolidation: Future of Finance

Brief: The coronavirus crisis, Brexit, climate change and the end of the Donald Trump-era will disrupt markets and challenge investors and policy makers heading into 2021. To help sort through the issues, Bloomberg is hosting the Future of Finance conference, a virtual event with leading figures from banking, insurance, regulatory agencies and central banks. On Tuesday, Robert Kaplan, head of the Federal Reserve in Dallas, told the event that the resurgence of Covid-19 jeopardizes the next two quarters for the U.S. economy, which is poised to bounce back. On Thursday, speakers include Felix Hufeld, head of Germany’s financial regulator BaFin, Austrian Finance Minister Gernot Bluemel and Erste Group CEO Bernd Spalt. Key Developments on Wednesday: Deutsche Bank’s Americas chief Christiana Riley said a wave of trading has been unleashed in recent days by vaccine news and clarity in the U.S. election Allianz CEO Oliver Baete said the risks are increasing for a “massive shock” to the global economy as businesses and consumers become less willing to invest in the future.

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Alternative Fund Managers Demonstrated Resilience in Adapting to the New COVID-19 Reality

Brief: Despite extreme levels of market volatility, increased trading volumes and disruptions to society due to Covid-19, alternative fund managers have persevered, and even exceeded, performance expectations from investors. Nonetheless, managers continue to face challenges in addressing important areas of focus, including environmental, social and governance (ESG) products, and diversity and inclusion (D&I), according to the 2020 EY Global Alternative Fund Survey. In times of change, does accelerated adaptation present obstacles or opportunities? – the 14th annual survey (formerly the EY Global Hedge Fund Survey) – reveals that total allocations to alternative investments remain relatively unchanged; however, the competition between asset classes continues to intensify. Following a multiyear trend, allocations to hedge funds shrunk again to just 23 per cent in 2020, compared to 33 per cent in 2019 and 40 per cent in 2018. Investments in private equity and venture capital remained stable at 26 per cent, while investments in private credit increased from 5 per cent to 11 per cent as many market participants anticipate Covid-19 initiating a credit cycle that will create opportunities for these managers. A shift in alternative products is not the only change this year. Hedge funds have been expanding their offerings, or tapping into new markets, such as private asset classes in particular, via a variety of unique structures. More than 40 per cent of hedge fund managers are currently offering co-investment vehicles or best-idea portfolios, and, additionally, almost 20 per cent of managers are creating side pockets, which allow investors an election to participate in illiquid investments within a broader portfolio.

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Pfizer CEO Sold $5.6 Million of Stock as Company Announced Vaccine Data That Sent Shares Soaring

Brief: Pfizer CEO Albert Bourla sold almost $5.6 million worth of stock on Monday, the same day the drugmaker announced positive early data on its experimental coronavirus vaccine that sent shares soaring. Shares of Pfizer jumped by almost 15% on Monday after the company and its partner BioNTech said its vaccine was more than 90% effective in preventing Covid-19 among those in the trial without evidence of prior infection. Bourla sold 132,508 shares at an average price of $41.94 per share, or nearly $5.6 million, according to securities filing. The sale was part of a pre-scheduled 10b5-1 trading plan, which was adopted on Aug. 19, the filing shows, as the company was enrolling participants in its late-stage trial. The sale accounted for 61.8% of the shares owned both directly and indirectly by Bourla. He still owns 81,812 both directly or indirectly, the filings show. Pfizer confirmed the sale in a statement and added that Bourla has a larger holding in the company through the company’s “qualified and nonqualified savings plans,” which likely means stock options. “After being with the company for more than 25 years, Albert owns a substantial amount of Pfizer stock under our qualified and nonqualified savings plans,” a Pfizer spokesperson said in a statement. “He now holds approximately nine times his salary in Pfizer stock after the sale this week.”

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Pandemic Payment Holidays Mask Wave of European Problem Debt

Brief: Pandemic payment breaks on European loans totalling billions of euros threaten to undermine efforts by the region’s banks to put the coronavirus crisis behind them. Some of the millions of borrowers who were given repayment holidays by banks and governments across Europe shortly after the outbreak of the pandemic still need relief as a second wave of lockdowns squeezes the economy and puts people out of work. But the longer their loan repayments are kept on ice, the bigger the potential problem for banks as debts stack up, making them more difficult to tackle. The European Central Bank’s chief supervisor Andrea Enria has warned of a “huge wave” of unpaid loans that could top 1.4 trillion euros and has cautioned against postponing writing them off, warning that waiting for loan moratoria to expire could see many borrowers “unravel at once”. Although the volume of loans on pause fell sharply over the summer, a Reuters survey and analysis of the latest data available shows that loans totalling about 320 billion euros ($380 billion) were still on a payment holiday at 10 of Europe’s biggest banks. In Ireland, banks started to phase out payment holidays in September, a move Michelle O’Hara, a manager at a charity advising those in debt difficulty, said prompted a call surge.

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How the MiFID II Review and Covid-19 are Reshaping the Hedge Fund Operational Landscape

Brief: With certain aspects of the EU’s ongoing MiFID II review affected by the coronavirus pandemic, Hedgeweek explores how a fresh overhaul of the framework may further impact hedge fund operations, and why the Covid-19 crisis may provide an easing of the regulatory burden. Introduced in January 2018, the European Union’s Markets in Financial Instruments Directive (MiFID) II brought sweeping changes to transparency rules and transaction reporting requirements across the financial markets spectrum. Among the major reforms impacting hedge funds was a package of measures covering third party research. These included extra scrutiny over the ways that asset managers pay for sell-side analysis, and the unbundling of research from brokerage fees, a move aimed at curbing inducements to trade. Almost three years on, industry consensus indicates MiFID II has led to a reduction in hedge fund research spend. But anecdotal evidence also suggests portfolio managers have sought to capitalise on the reduced amount of stock analysis with targeted research budgets to help them gain an edge. The European Commission kicked off an industry-wide consultation on its planned MiFID II review in February this year. But certain parts of the review have been delayed as a result of the Covid-19 pandemic, with ESMA expected to report back on these in early 2021.

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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 November 10, 2020:

  • In the United States, the initial news of the apparent effectiveness of Pfizer’s COVID-19 vaccine was well received throughout the country, but according to a report from CNN, some state health officials are worried about the prospect of the inoculation becoming widely available soon. The report acknowledges the vaccine’s handling requirements are stringent – it has to be stored at minus-75 degrees Celsius (minus-103 Fahrenheit), more than 50 degrees Celsius lower than any other vaccine currently available on the American market. Health officials admit the required conditions for the potential Pfizer vaccine are far colder than any freezers currently kept in doctors’ offices, pharmacies and public health clinics. “It would be hard to with a straight face say, ‘Oh, we’re all set’. This equals a challenge I don’t think we’ve ever seen before,” said Christine Finley, Vermont’s immunization program manager.

  • Speaking at a news conference on Tuesday and seeing COVID-19 spikes across Canada, Prime Minister Justin Trudeau called on the country’s premiers and mayors to “do the right thing” and impose restrictions where needed. Ontario, which recently eased restrictions in some areas through their new colour coding system reported a record 1,388 new cases on Tuesday. On Monday, a group of physicians in Alberta sent Premier Jason Kenney and his chief medical officer of health a letter imploring for more to be done to halt the curve of the virus. Manitoba made their move as starting this Thursday the entire province will move into the red zone, or critical level, which means a ban of social gatherings of any kind and the closure of non-essential businesses. 

  • In a ministerial statement to the House of Commons on Tuesday, United Kingdom Health Secretary Matt Hancock said the country is “one step closer” to a mass COVID-19 vaccine roll out. Hancock said he has given word to the country’s National Health Service (NHS) to be tasked with being ready from any date starting December 1st. Earlier in the day, Hancock appeared on the BBC and said it was his “central expectation” that as long as the Pfizer BioNTech vaccine passes all its regulatory checks, Britons could expect to receive vaccinations in the first part of 2021.

  • In Russia, the mayor of the capital city of Moscow has introduced tighter quarantine measures as COVID-19 cases continue to rise in the region. Starting this Friday and lasting until mid-January, bars, restaurants and cafes will be subject to a 11 PM curfew, while colleges and universities will work remotely. Theatres and cinemas will be limited to 25% capacity and all spectator events are to be suspended. Not wanting to be outdone on the vaccine front, Russian President Vladimir Putin also announced that the country would be registering its third COVID-19 vaccine. According to Russian news agencies via President Putin, “all” Russian vaccines were effective, although the leader failed to give further details about the latest vaccine or its registration. 

  • Citing an “adverse, serious event”, Brazil has halted the clinical trials of a potential Chinese vaccine called CoronaVac. Beijing based Sinovac was carrying out the phase three trial jointly with Sao Paulo’s Butantan Institute, a biomedical research centre. The National Health Surveillance Agency or ANVISA, a Brazilian regulatory agency made the statement on Monday, much to the surprise of the parties producing the vaccine. Sao Paulo’s government said in a statement it “regrets being informed by the press and not directly by Anvisa, as normally occurs in clinical trials of this nature.” Over the last several weeks, Brazilian President Jair Bolsonaro has made it well known he wasn’t a fan of potentially paying for a Chinese-based vaccine.

  • The World Health Organization (WHO) has been criticized by the United States for its current terms on the inquiry into COVID-19’s origins. Garrett Grigsby, a member of the U.S. Department of Health and Human Services told the WHO’s assembly that member states had been informed of the investigation’s terms of reference only a few days ago and stressed the need for it to be “transparent and inclusive”. The United States and the Trump administration have long criticized the WHO for being too China centric and not tough enough on the country where the outbreak first began.

Covid-19 – Due Diligence And Asset Management

Fed’s Kaplan Says Virus Surge Threatens Next Two Quarters

Brief: The U.S. economy is likely to have a strong recovery from the pandemic-induced slump in the second half of the 2021 though the resurgence of Covid-19 jeopardizes the next two quarters, Federal Reserve Bank of Dallas President Robert Kaplan said. “We have a couple of very difficult quarters in front of us,” Kaplan said Tuesday in a virtual interview with Michael McKee at Bloomberg’s Future of Finance 2020 event. Citing business contacts, Kaplan said, “Over the horizon, the future looks bright and we’ll have a strong year next year but we have got to get through the next couple of quarters.” Kaplan, echoing comments from Fed Chair Jerome Powell, said additional fiscal policy support would be helpful, especially for unemployed workers and small businesses that need support to survive the next few months. The Federal Open Market Committee last week kept interest rates near zero and discussed potential changes in its asset purchase program, Powell told reporters after the meeting. “If we don’t renew it, we will see a drop-off at some point in household income and consumer spending,” Kaplan said, referring to fiscal aid for the unemployed and small businesses. “It will hurt the entire economy because it will weaken consumer spending.”

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Nearly $2 Trillion Traded on COVID-19 Vaccine News

Brief: News of a breakthrough in the race to find a COVID-19 vaccine sparked one of the heaviest trading days since the height of the pandemic crisis, according to early data analysed by Reuters, with nearly $2 trillion changing hands on Monday. Traders stampeded to the riskier plays in equities, foreign exchange and bond markets after Pfizer Inc PFE.N released positive data on its vaccine trial, while rotating out of safe havens such as technology stocks, Japanese yen JPY= and top-rated bonds. “Volumes (are) also surging as programmes and baskets go to work to either correct portfolio balances or address margin calls,” said Mark Taylor, sales trader at Mirabaud Securities, highlighting a jump in volumes in the airlines and banking sectors. In the United States, nearly $500 billion worth of trades went through stock markets on Monday, one of the busiest days since March, when coronavirus lockdown fears rattled financial markets. Europe saw $120 billion traded, according to Refinitiv data. Value stocks, typically companies that are more sensitive to economic cycles, notched their best one-day performance against their growth-focused peers ever in the United States after Monday’s news of an effective vaccine against the coronavirus.

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Hedge Fund Allocations Start to Revive as Covid-19 Crisis Proves Industry’s Worth to Investors

Brief: Investor allocations to hedge funds have fallen for the third consecutive year – but the industry’s ability to weather economic turbulence and market volatility through active management will continue to attract investor attention, according to two new industry studies. EY’s 14th annual ‘Global Alternative Fund Survey’ quizzed alternative investment managers and investors on a range of topics, including portfolio performance, allocation plans, and the impact of the coronavirus pandemic, as well as ESG and other investment trends. It found that although hedge fund strategies have shrunk as a proportion of investor portfolios, their impressive outperformance during 2020’s Covid-19 crisis has not gone unnoticed. Preqin’s ‘Future of Alternatives 2025’ study meanwhile suggests that despite outflows, hedge fund AUM will surge over the next few years, driven by actively-managed strategies overcoming higher volatility environments. EY’s annual study shows allocations to hedge funds now make up just under a quarter (23 per cent) of portfolios’ total allocations in 2020, a 10 per cent tumble from 2019, and sharp slide from the 40 per cent recorded in 2018. Investor capital has been drawing away from hedge funds and towards other alternatives – such as private equity/venture capital, real estate and credit, which have seen positive inflows – while hedge fund flows have been net flat.

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Schroders Affiliate Debuts EM Covid Support Fund

Brief: BlueOrchard, an impact investment manager connected to Schroders, has launched a fund designed to provide financial support to medium and small businesses (MSME) in emerging markets hit by Covid-19. The BlueOrchard Covid-19 Emerging and Frontier Markets MSME Support Fund has so far gathered $140 million along with the backing of Schroders and development finance bodies in the UK, US and Japan. BlueOrchard said other backer including the German Federal Ministry of Economic Cooperation and Development (BMZ) are expected to join after due diligence. The fund, which qualifies under the ‘2x Challenge’ criteria devised by the development agencies of the G7, is targeting total investment of $350 million. with which it intends to finance 20 institutions and three million micro-entrepreneurs while saving 60 million jobs per $100 million in capital.  According to the fund, while government support has been apparent in developed economies via various stimulus packages and employment furlough schemes, there has been an absence of support in emerging and frontier markets.

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Hedge Fund Selling Was Not ‘Primary Driver’ of Treasury Market Turmoil, Fed Study Says

Brief: Hedge funds were not the primary villains of the turmoil in the Treasury market as the grip of the coronavirus intensified in March, according to a Federal Reserve report released Monday. While hedge funds selling of Treasury’s did play a role in the dysfunction of the market, “so far, the evidence that large-scale deleveraging of hedge fund Treasury positions was the primary driver of the turmoil remains weak,” the Fed said. The conclusion was contained in the Fed’s twice-per-year report on financial market stability. “Conversations about the crisis always mention hedge funds. Everyone acknowledges they were key contributors,” said Jeremy Kress, a former Fed staffer and now a professor at the University of Michigan’s Ross School of Business.  Banks have been under tighter control in the wake of the Dodd-Frank reforms put in place after the financial crisis. The Fed report suggests hedge funds won’t be singled out and other firms like mortgage REITs, and electronic trading firms may all come under scrutiny as market extremes are reviewed.

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COVID-19 is Accelerating Asset Manager’s Use of Social Media

Brief: The coronavirus pandemic has been a catalyst for social media activity across the European asset management industry in 2020 and the focus on this form of marketing is set to intensify, according to the latest issue of The Cerulli Edge―Global Edition. “The importance of a strong online presence has been underlined by the COVID-19 lockdown measures,” says Fabrizio Zumbo, associate director of European asset and wealth management research at Cerulli. Around 12% of the asset managers Cerulli surveyed in Europe last year did not have a dedicated digital and social media marketing team, but this figure dropped to only 2% in the 2020 survey. The firm’s research shows that managers plan to bolster their digital presence in the coming 12 to 24 months. In addition, some 44% of the managers surveyed expect their social and digital media activities to consume a greater proportion of their marketing budgets over the next two years. Despite the progress managers have made this year in terms of increasing their social media activities, fewer than half of the managers surveyed are satisfied with their level of activity. However, more respondents to this year’s survey believe they have a satisfactory social media presence across Europe. Cerulli’s research shows that, overall, business-focused LinkedIn is still the social media channel most frequently used by asset managers in Europe, ahead of Twitter and Facebook. However, with appetite for engaging video content increasing, managers are likely to use YouTube more. Some 73% of managers expect to create and share more video content via social media channels over the next 12 to 24 months.

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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 November 9, 2020:

  • In the United States, President Elect Joe Biden unveiled the members of his 12-person COVID-19 advisory board. The board includes Dr. Rick Bright, a vaccine expert and whistleblower who resigned from the Trump administration last month after earlier in the year being demoted to a lesser position after raising concerns about the Trump administration’s response to COVID-19 and nepotism within the Department of Health and Human Services. Another member of the panel is Dr. Michael Osterholm, a director for infectious disease research and policy at the University of Minnesota. Before President Elect Biden spoke on Monday, Dr. Osterholm said America is “about to enter COVID Hell.” The seven-day average for COVID-19 cases in America is over 108,700, a 33% increase compared to a week ago.
  • Canada, along with several other countries received some promising news on the vaccine front on Monday. COVID-19 vaccines being developed by American company Pfizer and Germany’s BioNTech have been found to be 90% effective in the final stage 3 trials – a breakthrough that could make the shots start to become available by the end of the year if drug authorities give them the green light. Speaking at a news conference on Monday, Prime Minister Justin Trudeau said if all goes well, the Pfizer vaccine should be available to Canadians sometime over the first three months of 2021. Canada already has placed orders for 20 million doses of the two-dose vaccine produced by Pfizer and German partner BioNTech.
  • In the United Kingdom, the government’s mass trial to test the entire population of Liverpool hit a bump on the road over its first weekend. The city of Liverpool has 500,000 residents and the government had asked anyone who lived or worked in the area to be tested by November 16th. As of 12 PM local time on Monday – 23,170 people were tested in six centres. Officials also sent out 14,000 postal tests.  That works out to under 8,000 people tested a day. The armed forces, who are running the trial, would need to process more than 67,000 tests a day for the next week to reach the November 16th target.  
  • Over the weekend, France announced three straight days of new single day coronavirus cases records – almost 87,000 of which were reported on Saturday. Prime Minister Jean Castex took to Twitter after visiting a hospital ward nearing capacity and stated the second wave in France has arrived brutally and violently. Prime Minister Castex urged citizens to respect new restrictions and limit their social contacts. As of Saturday, 87.2% of intensive-care capacity was occupied by patients infected with the virus. 
  • An IHS Markit survey found that Dubai’s private sector outgrew at its slowest pace in five months in October as post-lockdown third quarter economic recovery faltered. The survey which tracks business conditions, said positive sentiment in Dubai had fallen to its lowest level since the index began in 2012. David Owen, an economist at IHS Market noted the following for Dubai: “Businesses also showed weaker optimism towards the economic recovery from COVID-19, amid reports of weak demand and uncertainty about the future impact of the pandemic on activity and jobs.”
  • After reporting no new positive COVID-19 cases for over a week, residents of Melbourne, Australia will be allowed to travel freely to other areas of Victoria state. What was aptly named the “ring of steel” surrounding Melbourne during its almost four-month lockdown took transmission from a daily peak of 700 to no new cases over multiple consecutive days. Melbourne and Australia though suffered a substantial economic and social toll with one of the world’s strictest and longest lockdowns – the government estimated 1,200 jobs have been lost on average a day across Victoria state, while demand for mental health services surged more than 30%.

Covid-19 – Due Diligence And Asset Management

Hedge Funds Fend Off Election Uncertainty and Coronavirus Spikes to Finish October in Positive Territory

Brief: Hedge funds have notched up positive returns in recent weeks, positioning around the investment uncertainty surrounding the US presidential election and fresh Covid-19 lockdowns with gains inversely correlated to the sharp stock market declines seen at the end of October. New data from Hedge Fund Research shows the industry as a whole was up 0.4 per cent last month, which took the HFRI Fund Weighted Composite Index’s year-to-date performance to 1.2 per cent. As governments reimposed lockdowns in a bid to contain a renewed increase in coronavirus cases in many countries, HFR president Kenneth Heinz described October’s performance as “impressive”. Equity-based hedge fund managers added 0.90 per cent during October, which took the HFRI Equity Hedge Total Index’s year-to-date returns to 3.45 per cent.

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Lockdown Winners Fade as Reopen Trade Roars After Covid Data

Brief: Investors cashed out of companies that benefited from virus-induced lockdowns after promising results for a Covid-19 vaccine developed by Pfizer Inc. and BioNTech SE reawakened hopes that a return to normal is on the horizon. Zoom Video Communications Inc. plunged as much as 20%, the most on record, while Peloton Interactive Inc. dropped 25%, a record of its own, and Netflix Inc. dropped 9.2% as investors piled into risk assets and dumped shares of firms that have been winners during global lockdowns. The Nasdaq 100 edged higher but markedly underperformed other key gauges like the S&P 500. High-flying payment stocks PayPal Holdings Inc. and Square Inc. also sank. “The rotation that the market is doing is beyond any imagination with Nasdaq in negative territory and Russell 2000 in limit up,” said Alberto Tocchio, a portfolio manager at Kairos Partners. “We will continue to see some rotation out of “winners” into the laggards.” The preliminary results, which Pfizer’s chief executive called the most significant medical advance in the last century, dealt a blow to some of the lockdowns’ biggest winners as a push to reopen would mean less time on video chats and working out from home. Those expectations in turn lead to a roaring boom for companies that operate things like cruises, concerts, and hotels.

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KKR Sees Significant Philippines Investment Opportunities Amidst Pandemic

Brief: Global investment firm KKR continues to see the Philippines as an attractive market amid the global pandemic, citing the fundamental strength of the country’s economy as well as its young and dynamic population.  KKR believes the Philippines’ stable currency and strong level of foreign reserves, its focus on keeping inflation low, and the introduction of reform programs aimed at improving the investment climate are additional characteristics that drive the country’s attractiveness in the global arena. Since 2018, US-based KKR has invested over USD1 billion into the Philippines across four investments, starting with Voyager Innovations whose flagship product is digital payment platform PayMaya. KKR then invested into Metro Pacific Hospitals in December 2019 and First Gen in June 2020. This month, it invested into Pinnacle Towers, which aims to strengthen and expand the Philippines’ telecom infrastructure.  Ashish Shastry, co-head of Private Equity for KKR Asia Pacific & head of Southeast Asia, says: “We see significant opportunity in the Philippines and will continue to invest where we believe we can add value to companies and the economy.” While the Covid-19 pandemic has been challenging for investors across the globe with economies posting sharp declines in growth due to varying stages of shutdowns, Shastry said KKR is “a strong believer in the underlying Philippines’ growth story and not deterred by the short-term impact of Covid-19.”

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Financial Services Leaders Offer Gloomy Outlook as European Lockdowns Return

Brief: The continuing economic fallout stemming from Covid-19 restrictions has prompted financial services leaders to lower their revenue expectations for 2020 and prepare to cut operating budgets ahead of a challenging 2021, according to a new snap poll organised by Luxembourg for Finance. Following on a survey conducted in May 2020, Luxembourg’s development agency for the financial services industry, in October, asked nearly 400 senior or c-suite executives working at international financial services firms – including major banks, asset managers, insurers, and private equity firms – for their views on the macro economic situation. With one quarter of respondents seeing the operating environment becoming more volatile and major disruptions ahead, the results revealed that 60 per cent are now forecasting lower than expected revenues for the end of 2020, while 75 per cent of respondents expect to see no international investment growth in 2021, with 31 per cent even expecting a decrease. In one bright spot in their outlook, 55 per cent of respondents said they were “rather confident” about revenue growth next year, with a further 9 per cent purporting to be “absolutely confident”. This could however be linked to the fact that over half (56 per cent) plan to reduce their operating budgets for 2021.

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Blackstone’s Co-Head of Real Estate Describes the Post-Pandemic Office

Brief: Many offices now sit empty as many shops hang by a thread. Casinos, hotels, and amusement parks are fading into memory as consumers turn toward socially distant activities. So what does the future of real estate—and cities—look like? That’s the question Fortune posed to Blackstone Global Co-Head of Real Estate Kathleen McCarthy. Even before the pandemic, American malls were on the decline as e-commerce soared, and office spaces were being rejiggering to fit quirky amenities (ahem, beer taps and meditation rooms) common among top companies. The coronavirus, says McCarthy, may well mean that some malls and department stores turn into e-commerce centers, while office spaces undergo more renovation to include, say, better air filtration. Blackstone, known for its sprawling corporate real estate portfolio, has been remarkably resilient in the pandemic, a phenomenon it attributes to betting early on the rise of the technology and life sciences industries. Blackstone’s biggest real estate bets in recent years have featured warehouses rather than retail spaces: Last year, it acquired assets of Singaporean-based giant GLP for $18.7 billion and U.S.-based Colony Industrial for $5.9 billion. Those all sit within a group of assets it calls logistics, which now make up 36% of its real estate portfolio and is valued at about $90 billion including debt.

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New CAMRADATA Whitepaper Explores Emerging Markets Opportunities For Equity & Fixed Income Investors Post Covid-19

Brief: As countries worldwide rally financially to offset the economic effects of the Covid-19 crisis, CAMRADATA’s latest whitepaper on Emerging Markets focuses on the developing markets and considers opportunities in both the equity and fixed income arena of this dynamic region. The whitepaper includes insight from guests who attended a virtual roundtable hosted by CAMRADATA in September including representatives from Amundi Asset Management, Mackenzie Investments, Muzinich & Co, Aon, Blue Sky Pension Fund, Riscura and Willis Towers Watson. The report highlights that whilst the growth outlook may be uncertain in many emerging markets at present given the pandemic and the differing government and policy responses, there is a general consensus in the investment community that Asian countries have contained the virus better than many Western countries, with swifter implementation of lockdown measures, resulting in earlier recovery. Sean Thompson, Managing Director, CAMRADATA, says: “It is vital that, rather than lumping all emerging markets into a single monolithic group, investors recognise the varying responses in handling the coronavirus as this will translate into market performance. “Investors will also need to keep an eye on the US presidential election given the spill-over effects on emerging markets and limited capacity for further fiscal or monetary stimulus. But there are opportunities for investors in emerging markets.

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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 November 6, 2020:

  • In the United States Federal Reserve Chairman Jay Powell has reiterated his plans to hold the federal funds rate at its lowest level (0-0.25%) and keep it there until America’s pandemic-hit economy reaches full employment with higher inflation. “The recent rise in new COVID-19 cases both here in the United States and abroad is particularly concerning,” said Powell. The Fed Chairman stated even in the absence of widespread lockdowns there could be a hit to economic activity from consumers staying put on their own after they had just started returning to bars, restaurants and hotels. On Thursday, the United States reported 121,888 new COVID-19 cases, nearly 20,000 more than the previous single-day record set on Wednesday.

  • In Canada, the country’s fiscal watchdog has sounded the alarm on how some provinces, territories, local and Indigenous governments are spending money during the pandemic. The parliamentary budget officer says the federal government has leeway to add billions more in permanent spending but estimates permanent tax increases or spending cuts totalling about $12 billion and growing in line with gross domestic product over time would be needed to stabilize the finances of those governments. Only three out of Canada’s ten provinces – Ontario, Quebec and Nova Scotia have finances that are considered sustainable in the parliamentary budget officer’s view.

  • In the United Kingdom as the country settles into a second lockdown, new figures released on Friday aren’t going to go over well with those that think a lockdown wasn’t needed. The Office for National Statistics reported that the rise in the infection rate was “less steep” in the tests it carried out in the week before the lockdown began on Thursday. The official evidence of apparent stabilization is not welcome news to some Conservative MPs who went along with Prime Minister Boris Johnson’s idea of a second lockdown even though they were against it. On top of the Office of National Statistics new data, the Johnson government also admitted on Friday there was an error in projections conveyed to the public, which suggested the coronavirus death toll could surge 1,500 per day by December. The figures weren’t as dire as the government had suggested and have since been amended.

  • Four regions in Italy were placed into “red zones” as of midnight Friday which led to protestors venting their anger in streets and local government officials disagreeing with the new measures put in place. Italy’s central government placed Lombardy, Piedmont, Valle d’Aosta and Calabria in the “red zones”. The leaders of Lombardy and Piedmont claimed the government’s decision to impose new restrictions on their areas was based out of data that was out of date. Italy’s health minister defended the government’s decision saying the new restrictions can’t be the field for a political battle and that the only enemy is the virus.

  • While Germany was praised for its coronavirus response during the first wave compared to other European hotspots, it appears they haven’t been spared the second time around. Germany recorded nearly 20,000 new COVID-19 cases on Thursday – a record for the country since the pandemic began. Germany is just days into a new partial lockdown and is bracing itself for a large anti-lockdown protest in the eastern city of Leipzig. Demonstrations have been taking place since June, but government officials are becoming increasingly concerned as the movement known as “Querdenker” gains momentum and has become more aggressive in their dislike of how the government has handled coronavirus restrictions.

  • In Japan, Prime Minister Yoshihide Suga has only been on the job for a few months after taking over for Shinzo Abe and is now warning his people of signs of a resurgent virus. Daily infections topped 1,000 nationwide for the first time since August 21st. The uptick in cases is being blamed on the government easing restrictions and promoting travel within Japan to support the economy, which like others throughout the world, has been hit hard by the pandemic. Most of the cases have been contained to large urban centres such as Tokyo and Osaka, but Hokkaido, a popular tourist destination, has reported its highest single day increase since the pandemic began.

Covid-19 – Due Diligence And Asset Management

Bridgewater Loss Stuck at 18.6% in Main Fund After Model Tweaks

Brief: Ray Dalio’s Bridgewater Associates spent weeks earlier this year tweaking its investment models to account for unprecedented government stimulus and the worsening pandemic. That hasn’t helped performance. The flagship Pure Alpha II fund has lost 18.6% through Thursday, according to a person familiar with the matter. That’s little changed from the decline it reported through the end of August. This year’s loss in Dalio’s main fund is shaping up to be its worst ever, putting him far behind other macro managers who have posted strong gains in 2020. The fund has gained little ground since the end of March, despite a strong market rebound. It was down about 23% in the first quarter as the spread of Covid-19 brought much of the global economy to a standstill. After central banks flooded markets with liquidity, Bridgewater investment managers spent more than a month turning off strategies they deemed to be ill-suited for the new environment, and adjusted others they believed would work. By August, a person close to the firm said risk levels, which had been cut earlier in the year, were back to historic norms.

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McConnell: Signs of Economic Recovery Point to Smaller COVID-19 Stimulus

Brief: U.S. Senate Majority Leader Mitch McConnell said on Friday that economic statistics, including a 1 percentage point drop in the unemployment rate, showed that Congress should enact a smaller coronavirus stimulus package that is highly targeted at the pandemic’s effects. The Republican senator told a news conference in Kentucky that the fall to a 6.9% jobless rate, combined with recent evidence of overall economic growth, showed the U.S. economy is experiencing a dramatic recovery. “I think it reinforces the argument that I’ve been making for the last few months, that something smaller – rather than throwing another $3 trillion at this issue – is more appropriate,” McConnell told reporters. But his call for a narrow package was quickly rejected by House of Representatives Speaker Nancy Pelosi, a Democrat, who has been working to broker a COVID-19 stimulus deal near the $2 trillion mark with Treasury Secretary Steven Mnuchin. “It doesn’t appeal to me at all, because they still have not agreed to crush the virus. If you don’t crush the virus, we’re still going to have to be dealing with the consequences of the virus,” Pelosi told a news conference on Capitol Hill.

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Allianz Cancels Buyback as Pandemic Hit Reaches $1.5 Billion

Brief: Allianz SE canceled a share buyback program that it had suspended earlier in the year as the hit from the Covid-19 pandemic continued to mount in the third quarter. Virus-related hits rose to 1.3 billion euros ($1.5 billion) by the end of September, up from about 1.2 billion euros in the first six months of the year. Allianz said it won’t repurchase some 750 million euros of shares that were still left in a buyback program for 2020, “in light of the ongoing economic uncertainties.” While the insurer doesn’t keep a ranking of loss events, the pandemic has already cost it more than the 470 million euros it reported for hurricane Katrina in 2005, the most expensive single loss event for the industry so far. Virus expenses are now approaching those of the 9/11 terror attacks that cost the company about 1.5 billion euros in 2001. The pandemic is posing a major challenge for insurers, which have to contend with simultaneous claims across multiple industries and business lines. A single unit of Allianz, which says it’s the largest insurer of Hollywood studios, reserved hundreds of millions of dollars this year for coronavirus-related claims after movie and television studios were forced to curtail production during lockdown. More losses might be on the way as the second wave of the pandemic is hitting Europe, though the experience of the first lockdowns will help insurers limit losses. Chief Financial Officer Giulio Terzariol said in an interview on Friday that claims from new lockdowns will be contained after Allianz stopped covering pandemic-related losses in most new property-casualty insurance contracts.

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“We Help Fund Managers Build a Dictionary of Themselves,” says Renowned US Performance Coach

Brief: Portfolio managers face conflict every day as their ideas and levels of conviction are constantly tested. But as we all continue to adapt to remote working, finding a level of detachment from the office environment seems to be helping PMs re-affirm their edge and listen with greater clarity to their intuition. Could the home office now become a semi-permanent arrangement in pursuit of improved portfolio performance? The hustle and bustle of a trading floor and free flow of ideas inside hedge funds can be energising but for even the best portfolio managers, it can also stoke the flames of sub-conscious doubts and fears. It is all too easy to become swayed by an analyst’s counter-argument, or lose conviction on a trade because the chief economist throws a curveball. Such is life in the high-pressure world of fund management, where maintaining one’s conviction – or one’s investment edge – comes under constant bombardment. And while we human beings will never shed our cognitive biases, changing one’s environment can make a difference. In the strangest of years, remote working in 2020 is helping portfolio managers maintain their edge, away from the day-to-day distractions of the office.

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‘Now is a Time to be Cautious’: The World’s Largest Distressed-Securities Investor Breaks Down Why an Unstable Economy Leaves the Market Vulnerable to Further Shocks

Brief: While some analysts have said that a V-shaped recovery is underway, Oaktree Capital Management high yield portfolio managers Madelaine Jones and David Rosenberg are more skeptical. In an "Oaktree Insights" letter published Thursday, Jones said the economy hasn't fully recovered from the depths of the coronavirus crash. "Until fundamentals really do improve, conflicting economic data and political shocks could spark more market ructions," they said, adding that the economic recovery largely depends on when the pandemic can be resolved. "The fundamentals tell us we're not out of the woods yet," the portfolio manager said, citing the historically high unemployment level in the US, and a GDP that rebounded strongly but is still well below pre-pandemic levels.  Spiking levels of the coronavirus will undermine the economic recovery for the rest of the year, said Jones. "Now is a time to be cautious," said Jones. "There are limits to what central banks can do to prop up markets if underlying economy conditions don't heal. Given the speed of this broad market rally, we have no interest in going out too far on the risk curve in the search for that last bit of yield." 

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The Pandemic Hasn’t Kept Pensions from Hiring Private Equity Managers

Brief: The inability to meet with asset managers in person has not kept public pension funds from investing in private equity, according to eVestment. The investment data firm said in a private markets report that pension funds committed $20 billion to private equity in the third quarter, more than the $17.8 billion invested in the same period last year. The second quarter had been even busier, with commitments totaling nearly $25 billion. In total, eVestment said 455 private equity commitments were made by public pensions from April through September, following the transition to all-remote work in March. This compares to 413 private equity commitments recorded in the same six months a year earlier. “Despite the remote nature of fundraising today, public plans are continuing to execute on their commitment plans and deploy capital,” eVestment said in the report. The California Public Employees’ Retirement System, New York State Teachers’ Retirement System, Washington State Investment Board, and State of Wisconsin Investment Board were the most active investors during the third quarter, according to eVestment.

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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 November 5, 2020:

  • In the United States, the country recorded 102,831 new cases of COVID-19 on Wednesday – the first time America has topped 100,000 on a single day. Due to these increasing numbers, the US Centers for Disease Control and Prevention (CDC) director says this is a good time to develop a strategy to better detect asymptomatic cases. The CDC estimates 40% of people with COVID-19 show no symptoms. 

  • In Canada, the CBC is reporting the Public Health Agency of Canada (PHAC) quietly revised its guidelines on how COVID-19 spreads to include the risk of aerosol transmission. The PHAC updated its guidance without notice this week to say the following: “SARS-CoV-2, the virus that causes COVID-19, spreads from an infected person to others through respiratory droplets and aerosols created when an infected person coughs, sneezes, sings, shouts, or talks.” The update comes weeks after other countries and international health organizations made similar changes. For instance, the CDC in the United States updated its guidelines in early October and the World Health Organization amended its guidelines to acknowledge the possibility of aerosol transmission back in the summer.

  • The United Kingdom government has extended the furlough scheme until the end of March. The furlough program, which pays 80% of wages for the hours that workers are unable to work because of the effects of the pandemic, had been scheduled to end on December 2nd. The move is considered to be a stunning reversal from Chancellor of the Exchequer Rishi Sunak who originally wanted the program to end on October 31st and now will have the government on the hook for workers’ wages for 13 months.
  • In another move by France to bend the curve of the pandemic, the city of Paris will ban all food delivery and takeouts, as well as the sale of alcohol and outdoor consumption between 10 PM and 6 AM. The new restrictions will come into effect as of Friday. Paris police said the measures are being enforced to prevent groups of people from gathering outside restaurants, eateries and stores that sell alcohol – meetings that are in violation of France’s health measures. Earlier this week, the WHO said France accounted for the third highest number of new cases globally, with more than 275,000 cases in the last week.
  • China has barred non-Chinese travellers from Britain, France, Belgium, the Philippines and India. The restrictions cover those with valid visas, residence permits and take effect in conjunction with more restrictive testing for arrivals from several other countries. Starting Friday, all passengers from the United States, France, Germany and Thailand bound for mainland China must take a nucleic acid test and a blood test for antibodies against the coronavirus no more than 48 hours before boarding. China, ground zero for COVID-19 now has some of the most stringent entry curbs of any country in the world.
  • While China is tightening control on their boarders, Singapore seems to be taking a different approach. The country intends on using a plan involving ratios and testing to open its borders to as many international visitors as possible, based on their home country of risk. Singapore is a small island nation that is dependent on international tourism and trade and would also like to set itself up as a viable plan B for the asset management industry with the situation between Hong Kong and China continuing to evolve. Singapore’s Minister for Trade and Industry has said the country is working on travel bubbles with other countries and is urging them not to “wait for the conditions to be right” before discussions start.

Covid-19 – Due Diligence And Asset Management

Future Market for Covid Vaccines ‘Could Be Worth More than $10bn a Year’

Brief: The future market for Covid-19 vaccines could be worth more than $10bn (£7.6bn) in annual revenues for pharmaceutical companies, according to industry experts, even though some drugmakers have pledged to provide their vaccines on a not-for-profit basis during this pandemic. The calculations by analysts at Morgan Stanley and Credit Suisse assume people will need to be vaccinated every year, similar to the traditional flu jab, with an average price of $20 for a Covid-19 vaccine dose. Prices range from $3 a dose to $37. Matthew Harrison, an analyst at Morgan Stanley, estimates that even if only those who receive an annual flu jab take a Covid-19 shot, this would generate $10bn a year in revenues for the pharmaceutical industry in the US, Europe and other developed countries. He put the cost of producing a vaccine at $5-$10 a dose. The size of the market depends on whether people need to take the vaccine every year, or less frequently, as well as vaccination rates, and could be worth up to $25bn a year globally, he said. Evan Seigerman, an analyst at Credit Suisse, said the US market alone could be worth $10bn, based on Pfizer’s vaccine pricing of $19.50 a dose, and assuming that 330 million citizens receive two doses each.

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StanChart Moves to Permanent Flexible Working

Brief: Standard Chartered will make permanent the flexible working arrangements for most employees that were put in place during the coronavirus pandemic, it said on Thursday. The Asia, Africa and Middle East-focused bank said it aims for around 50% of its markets, comprising around 70% or 60,000 of its employees, to be able to adopt hybrid working patterns by the end of 2021. That would mean those staff can choose to work entirely at home, entirely in offices or a mix of both. The bank said it aims for 90% of its staff to be offered flexible working by 2023, albeit some will have to work full-time in offices given the nature of their roles. The move by StanChart to formalise flexible working habits is one of the most concrete signs yet from a major bank of how lenders are moving swiftly to adopt new ways of working forced on them by the pandemic.

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Modi Vows to do All it Takes to Make India Investor Friendly

Brief: Prime Minister Narendra Modi invited global funds and businesses to invest in India, pitching the nation as a safe and stable destination. Demand with democracy and stability with sustainability are things that India offers, Modi said Thursday in a virtual address to global investors including British Columbia Investment Management Corp., GIC Pte, and Korea Investment Corp. It is also a place that provides growth with a green approach, he said. “A strong and vibrant India can contribute to stabilization of the world economic order,” Modi said, pledging to “do whatever it takes to make India the engine of global growth resurgence. There is an exciting period of progress ahead. I invite you to be a part of it.” Modi’s meeting with the world’s largest pension and sovereign wealth funds, which have about $6 trillion of assets under management, follows his government’s measures in the recent past to make India more investor-friendly. That includes offering incentives to some manufacturers, amending labor laws and lowering tax on companies to among the lowest in Asia. Still, India has had marginal success in attracting investments with businesses preferring Vietnam and other South East Asian nations in their quest to reduce reliance on China, and matters have been made worse by rising coronavirus infections.

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Lone Star said to Weigh Options for $3 Billion Stark Group

Brief: Lone Star Funds is exploring options for its building-materials retailer Stark Group A/S, which could fetch about 2.5 billion euros ($3 billion), according to people familiar with the matter. The U.S. private equity firm is working with Lazard Ltd. to consider a potential sale or initial public offering of Stark, the people said, asking not to be identified discussing confidential information. Deliberations are ongoing and no final decisions have been made, the people said. Representatives for Lone Star and Stark declined to comment. A representative for Lazard didn’t immediately respond to request for comment… Lone Star bought Stark three years ago for 1 billion euros from U.K.-listed plumbing and heating group Ferguson Plc. A sale would add to $2.6 billion of transactions targeting building-materials companies in Europe this year, according to data compiled by Bloomberg. While the coronavirus lockdowns of 2020 have hit construction companies by halting projects, the sector is expected to play an important role in post-pandemic recoveries.

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BoE Stimulus Package Sparks Concerns Over UK Economy

Brief: The Bank of England (BoE) has extended its quantitative easing measures at a much higher level than anticipated, highlighting concerns about the welfare of the UK’s economy as the country enters a second lockdown. On Thursday morning, the Bank announced it would extend its gilt asset purchases by £150 billion (€165.9 billion), bringing the total to £875 billion. Extending the stimulus package came as a surprise to analysts, with many forecasting that further measures would be around £100 billion. As the economic fallout of Covid-19 lockdowns continues to make itself known, BoE’s announcement is a cause for concern. The Bank reported a “softening” of consumer conditions and warned that growth in the fourth quarter would likely contract, possibly by 2.5%. Derrick Dunne, chief executive of UK-based Beaufort Investment, said: “Desperate times might call for desperate measures, but the Bank doesn’t think we’re ready for negative rates quite yet.” He called the stimulus - £50 billion more than was forecast - a “bold move” that shows the Bank’s concern over the financial state of the country. 

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Amid Election Turmoil, Institutional Investors Stay Focused on the Pandemic

Brief: While much of the United States is zeroed in on the outcome of the 2020 election, institutional investors are more focused on other issues — at least when it comes to investment decision-making. According to industry insiders, the coronavirus pandemic and central banks’ actions are seen as outweighing the significance of the contentious election for institutional portfolios. “The truth is for markets, it’s not just terribly important,” Michael Rosen, founder of Angeles Investment Advisors, said of the election. “It's important for a lot of reasons. For our country, society, our children, their children. But not the markets.”  Although the markets popped on Wednesday as votes were being tallied, Rosen and his peers in the industry do not believe the effects are long-lasting.   “We think that there may be noise in the short term,” said Scott Freemon, head of strategy and risk at Secor Asset Management. He added that the attractiveness of one asset class over another will not change based on the election’s results. “The primary issue for the market remains recovering from Covid-19 and the speed of that recovery,” he said. Institutional consulting firm North Pier Search Consulting echoed this sentiment in a report published ahead of the election. “At the end of the day, it will likely come down to the trajectory of the virus,” the search firm 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 Wednesday November 4, 2020:

  • In the United States, those hoping for a clear-cut answer on who their new President would be to lead their country out of the coronavirus pandemic, will likely have to wait a few more days. Several states are still counting mail-in ballots such as Michigan, Pennsylvania, Arizona and Nevada. With many states being decided by razor-thin margins, the Trump administration has already made it known they plan to challenge apparent close loses by demanding recounts, such as Wisconsin and even suing to stop the count in Michigan. On election day, data from Johns Hopkins University reported 91,530 new coronavirus cases in the country – their second highest since the pandemic began. 

  • United Kingdom lawmakers have approved Prime Minister Boris Johnson’s plan for a new national lockdown in overwhelming fashion. A total of 516 MPs voted for the restrictions while only 38 voted against. The lockdown restrictions will come into effect as of midnight on Thursday and last until December 2nd. Prime Minister Johnson said he hoped the country could return to the tiered system on a local and regional basis after the lockdown period ends.

  • In Canada, the country’s most populous province has introduced a new colour-coded system to communicate what regions are under what restrictions when it comes to the coronavirus. Ontario revealed the details on Tuesday where a region could be placed into one of five colour-coded categories based on the level of virus spread within their communities and the capacity of their hospitals. Under the new system four regions – Toronto, Peel, Ottawa and York will be set into the “orange” restrict category, as of November 7th or November 14th in Toronto’s case. Those regions would be allowed to reopen gyms and serve patrons in bars or restaurants, under certain restrictions. Some public health experts have come out against the new colour-coded system expressing concern that the threshold for tightening restrictions in the hardest hit areas is set too high. 

  • Italy is set to launch into its newest form of coronavirus restrictions as of Thursday. Prime Minister Giuseppe plans to impose a 10 PM to 5 AM curfew across the country until December 3rd. Along with the curfew, Italians in the highest risk zones will be told to stay within their city or town and will be allowed to leave only for specific business or health reasons. Stores deemed to be non-essential, as well as bars and restaurants would also be closed in high-risk zones.

  • In Indonesia, a senior government minister announced on Wednesday the plans to inoculate nine million citizens with an experimental COVID-19 vaccine from China. The shot will come from Chinese drugmaker Sinovac Biotech and the vaccination drive is separate from Phase 3 clinical trials, also from Sinovac, which is happening in conjunction with Indonesia’s state-owned biotech firm Bio Farma. The government official said the inoculation plan would likely start in the third week of December. 

  • The Premier for New South Wales in Australia said via social media the borders between the country’s two most populous provinces will open soon. “On Monday, 23 November, the NSW/Victoria border will reopen. We will need to keep moving forward as we live with COVID-19. I have confidence that everyone will continue to work hard to keep everyone safe,” said Premier Gladys Berejiklian in a tweet. The border between New South Wales and Victoria has been closed since July when the second wave hit Victoria state and forced Melbourne into an almost four-month lockdown.

Covid-19 – Due Diligence And Asset Management

British Banks Denied Pandemic Loans to Over 150,000 Companies

Brief: British banks turned down more than 150,000 applications for government-guaranteed business loans during the Covid-19 outbreak in an effort to prevent fraud, according to the industry watchdog. The Financial Conduct Authority told lenders not to relax their checks on potential borrowers when they offered credit under the Coronavirus Business Interruption Loan and Bounce Back Loan programs, according to Chief Executive Officer Nikhil Rathi. “Our understanding is that approximately 14% of CBILS loans were denied because of concerns around diligence and 8% of BBLS loans upon first application,” Rathi told a virtual session with a U.K. parliament committee on Wednesday. The programs, intended to fund smaller companies, have received more than 1.6 million applications since their introduction in May. Bounce Back loans have proved most popular, with companies receiving about 40 billion pounds ($52 billion) so far, but some critics have pointed to loose eligibility criteria that left lenders open to potential fraud. The initiative was launched “at great speed” to meet the need for corporate funding after the country went into lockdown, said Rathi, who took over as head of the FCA in October. The regulator made it clear that “banks must maintain relevant systems” especially when taking on new customers, he said.

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Investors Sell Out of European and UK Equity Funds as Second Wave Sweeps Continent

Brief: Investors sold UK and Europe-focused equity funds in October as governments battled to curb Covid-19 infections with another round of restrictions. Across Europe, a record 1.5 million new cases of the virus were registered last week, prompting Germany, France, and Belgium to declare nationwide lockdowns. Equity funds focused on UK were the worst hit, shedding GBP358 million of outflows over the month according to data from Calastone. The UK has also announced a new national lockdown, which has done further damage to investor sentiment, already suffering from the failure of negotiations with the EU to agree a trade deal. Income funds, which are disproportionately exposed to UK equities, also suffered their worst ever month as GBP763 million left the sector. Meanwhile, European equity funds suffered outflows of GBP69 million, to the benefit of funds focused on North America and Asia, which saw inflows. Data from Morningstar shows that European funds performed poorly in October, with Europe-focused funds from Robeco, Schroders, Janus Henderson, Fidelity, and J O Hambro all ranking among the 10 lowest returning funds for the month. 

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Working From Home Spurs Investment in Real Assets

Brief: Institutional investors are planning increased allocations to real assets over the next 12 months due to the lasting impact of Covid-19 on world economies, including the working-from-home trend, research has suggested. Nearly half of insurers and 37% of pension funds globally say they expect to increase investment in real asset strategies amidst ongoing uncertainty, according to the study by Aviva Investors. ‘Real estate long income’ was identified as the preferred asset class by over 50% of insurers and 45% of pension funds, while debt strategies were also favoured highly. The report also highlighted the increased efforts of investors to align their portfolios with net-zero emissions targets. Nearly 60% of insurers and 48% of pension funds are looking towards “energy-efficient real estate assets”, the report found. Meanwhile, the acceleration of the working from home trend by the pandemic is expected by many institutions to provide the “greatest opportunity” for real assets investing over the long-term.  Mark Versey, chief investment officer of Aviva Investors’ real assets division, said: “Whilst Covid-19 clearly had an immediate and profound impact on the built environment, many investors have seen these changes as the acceleration of existing structural shifts. 

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A Unique Opportunity for Private Equity Firms

Brief: The private equity industry is currently navigating a number of challenges in addition to the Covid-19 pandemic, which the whole world is facing. As regulation and political will around environment, social and governance (ESG) factors grows, PE firms are coming under increased pressure to incorporate this approach into their investment strategies. These firms are also keeping a close eye on the progress of the Brexit negotiations to make sure to maintain their access to Europe. “Covid-19 has presented much uncertainty and many challenges to the global private equity industry and market perspectives are mixed. However, this uncertainty has offered some private equity firms, who are fortunate enough to have plenty of dry powder, or who may have recently completed large closings, a unique opportunity to invest in assets at interesting price points.  “It also affords private equity firms the opportunity to be closer to their portfolio companies, invest in businesses suffering from the pandemic and demonstrate added value by putting the sizeable amounts of capital they have to work. It would not be surprising, once the economic impact of Covid-19 filters through, to see private equity taking a more active role in the debt markets and continuing a trend, which has been prevalent since the global financial crisis,” says Johan Terblanche, Managing Partner and head of the Luxembourg Funds & Investment Management team at the Maples Group. So, while markets have been hit by downturns and recessions in the past, the rapidly changing situation is also presenting challenges for private equity firms and private equity fund vehicles globally.

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Adapting and Responding to Change

Brief: Uncertainty remains the order of the day as the world heads into a period of slow recovery which risks being scuppered by a variety of factors including the US elections, trade tensions and the prolonged impact of the Covid-19 pandemic. Financial services practitioners in Luxembourg, like their peers in other jurisdictions, have had to navigate this volatile environment while continuing to provide a seamless service to clients. “The crisis has been a strong accelerator of change by spotlighting our resilience, as well as our ability to adapt. While organisations are considering how to accommodate working from home to a greater extent, the reduction of face-to-face contact may in turn have a detrimental impact on collaboration, connectedness and productivity. To that end, the need for support in this profound cultural change should not be minimised,” details a report published by the Digital Banking and FinTech Innovation Cluster of the Luxembourg Bankers’ Association (ABBL) and KPMG Luxembourg.  Although much in the world has obviously changed, ALFI chair Corinne Lamesch told delegates at the organisation’s virtual conference that following the initial Covid shock in February and March, total assets under management in Luxembourg rebounded to EUR4.6 trillion at the end of July, approaching the all-time peak set in January. “At least for now, Luxembourg’s role as the world’s leading cross-border fund centre remains unchallenged,” she said.

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Fund Managers Flag Concerns About Proposed FCA Rules

Brief: Property fund managers have raised concerns over the City watchdog’s proposals to enforce a six-month redemption period, claiming the rules could reduce consumer choice and create problems for other parts of the market. Earlier this year the Financial Conduct Authority published a consultation paper floating rules which would require investors to give notice — potentially up to 180 days— before their investment is redeemed from an open-ended property fund. But some fund managers have raised red flags for how the rules would work in practice as the consultation comes to an end today (November 3). A spokesperson from Columbia Threadneedle said the asset manager did not support the FCA’s proposals, arguing the rules would limit investors’ access to such portfolios. The spokesperson said: “The proposed change would mean these funds become unavailable to retail investors, reducing customer choice and preventing access to an asset class that is an important risk and return diversifier and income-generator.

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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 November 3, 2020:

  • In the United States, millions of Americans are heading to the election polls on Tuesday. More than 100 million votes have already been cast, either via mail, or early voting, which is needed as according to Johns Hopkins University data, 21 states hit records in the number of average daily new coronavirus cases reported. Key battleground states including Michigan, Ohio and Pennsylvania are among the 21 states with cases ranging anywhere from 2,300 to 3,500 per day. The coronavirus pandemic has become a defining issue for the 2020 election with health experts claiming the country is heading for a dark winter with a steady increase in cases, while the Trump administration is stating vaccines will be ready within weeks, which will be key to turning the corner.
  • Canada’s opposition government leader is saying Justin Trudeau’s federal Liberal government support programs for COVID-19 still aren’t doing enough to help businesses and workers survive. Conservative Leader Erin O’Toole will present a motion on Tuesday demanding the government provide “additional flexibility” in the commercial rent subsidy, wage subsidy and other support programs. “We aren’t talking about enriching businesses here. We want to make sure requirements are made more flexible so businesses can simply stay open and their employees don’t lose their jobs,” said O’Toole. The opposition leader’s criticisms come one day after Finance Minister Chrystia Freeland tabled legislation to make changes to the commercial rent subsidy. 
  • The United Kingdom government announced they plan to test all residents and workers in Liverpool for COVID-19 – regardless of whether they have symptoms on Friday. The region was first to be placed on the “very high” tier by the Boris Johnson government’s COVID-19 alert system. The Liverpool mayor said the mass testing in a few days would help to quickly identify people who have the virus and reduce transmission. According to government data, the Liverpool region has some of the highest infection rates in Britain – weekly cases currently stand at 410.4 per 100,000 as of October 25th. 
  • In France, government officials are becoming increasingly frustrated with too many people ignoring COVID-19 lockdown rules as cases soar in the country. Therefore, government officials are considering reimposing a night curfew on Paris and possibly the surrounding region. “It’s unbearable for those who respect the rules to see other French people flouting them,” said a government spokesperson. 
  • In the Philippines, military camps will store coronavirus vaccines once they become available. President Rodrigo Duterte has chosen a retired general to lead efforts to secure and distribute vaccines. President Duterte has said in the past he will prioritize COVID-19 vaccines from China and Russia and wants soldiers to take the first inoculations.
  • According to state media in Dubai, the Prime Minister and Vice President of the United Arab Emirates (UAB), Sheikh Mohammad Bin Rashid al-Maktoum has received a COVID-19 vaccine inoculation. Al-Maktoum shared the moment on social media, showing him receiving the shot from a medical worker, although it is unclear which vaccination inoculation he received. The country’s health minister stated UAB has approved China’s state owned Sinopharm vaccine for use on the country’s emergency frontline workers.

Covid-19 – Due Diligence And Asset Management

New Yorkers and Londoners are Ditching Cities for Suburbs

Brief: Real-estate companies are seeing clear evidence of New Yorkers and Londoners ditching city centers for suburbs as the pandemic changes the way people live and work. IWG Plc, which operates Regus-branded serviced offices in cities around the world, has seen a “a strong pick-up in demand” for suburban space versus major cities, especially in places reliant on commuting. While deals for its downtown New York offices have collapsed by 30% since the virus outbreak earlier this year, activity in southern Connecticut has surged more than 40%, according to a statement Tuesday. Across the pond, U.K. housebuilder Crest Nicholson Holdings Plc’s expected slump in full-year profit may not be as bad as previously flagged, partly thanks to developments in southern England outside of London, it said in a quarterly update. A “structural change to the balance of office and home working” featured strongly in customers’ buying decisions, it said. Shares in IWG climbed as much as 11% in Tuesday morning trading in London, while Crest Nicholson shares jumped as much as 22.5%, the most on record. The pandemic has turned the world’s financial capitals into ghost towns as nervous workers avoid mass commuting. While cities across Europe showed signs of recovery in the summer, a resurgent wave of the virus has prompted a series of new lockdowns in the region. New York is also tightening restrictions amid rising infections nationwide.

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SEC Enforcement Office Hits $4.7 Billion Record

Brief: SEC enforcement officials posted a record $4.7 billion in disgorgements and penalties in fiscal year 2020, the Securities and Exchange Commission reported Monday in its annual enforcement report for the period ending Sept. 30. Parties charged by the SEC were ordered to disgorge $3.6 billion and pay penalties of $1.1 billion, an 8% increase from the previous fiscal year. More than $600 million was returned to harmed investors. The fiscal year also saw a record for the SEC's whistleblower program, which awarded $175 million. The agency's 715 enforcement actions covered a range of issues, including issuer disclosure, foreign bribery, market manipulation and insider trading. The number of actions fell 17% as agency officials adjusted to COVID-19 work restrictions. Stephanie Avakian, SEC enforcement director, said in the report that one focus during the past year was accuracy in financial statements and issuer disclosures. Along with traditional sources for such cases, SEC enforcement officials also used risk-based analysis to identify potential violations, including earnings management practices that could be masking unexpectedly weak performances and disclosure of corporate perks.

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Jeremy Grantham Says This Is the Solution to America’s Biggest Problems

Brief: There’s a “magic bullet” for some of the biggest challenges facing the U.S. economy, according to famed value investor Jeremy Grantham. In an investor note dated October 30, the GMO co-founder called for a “new Marshall Plan” to combat problems including “depressed” economic growth, rising wealth inequality, and climate change. “The economy of the developed world has been steadily becoming less dynamic for the last 50 years and the GDP growth of the developed world has fallen from over four percent a year to less than two percent a year,” Grantham wrote. “We need a long, sustained, and massive public works program — a second coming of the Marshall Plan, if you will — to jolt the U.S. and the global economy into a few decades of accelerated growth.” The Marshall Plan, also known as the European Recovery Program, was a U.S. foreign aid initiative to help rebuild Western European cities and infrastructure that were damaged during World War II. Grantham said a similar program could be enacted now to build green infrastructure that would mitigate climate change. “We face the shorter-term economic threat from Covid-19 and the long-term economic threat from climate change,” he wrote. “We have a clear incentive, I would argue an imperative, to produce a very large and sustained public works program.”

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Remote Working Could Accelerate a Regionalisation of the US Hedge Fund Industry

Brief: Zoom has been the ultimate success story for 2020 as firms, globally, have adjusted to remote working. If I think about what the next best thing to Zoom will be, I would say it needs to be something that gives you the ability to walk into someone’s computer just as easily as walking into their office. At the moment, my experience of Zoom is that everything is still formalised and diarised…I’ll talk to you at 10am, let’s set the meeting for 5pm. What’s wrong with doing a quick meeting at 10.15? It still feels a bit regimented, in that regard. But Zoom and other platforms like Microsoft Teams have at least shown fund managers a glimpse into the future of how we might all be working.  In the past months I have noted that firms have managed to transition far more seamlessly than they might have anticipated to being able to efficiently collaborate with their entire team connected only by their screens and telephones. One idea to help create community is conduct “office hours” on Zoom.  When we are in our offices we are able to be seen either at our desk that may be in an open environment or if in an office through the glass walls. Anyone can see you as they walk by. Those spontaneous conversations are what is missing by members of the team working independently, remotely. Why should working outside of the office environment mean that no one can see us unless they arrange in advance and schedule it?

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Private Equity Rides to Support European Firms

Brief: Private equity funds injected €36 billion into European companies in the first half of the year, helping them combat the “intense liquidity crisis” caused by lockdowns. The investment came as private equity funds in Europe raised €49 billion in H1, matching the previous half-year’s total. Invest Europe, an industry body, said the industry was on track to raise a sum of money for the full year that would be on a par with average fundraising levels achieved over the last three years. However, the overall figure for private equity investment was 17% lower in value . Invest Europe’s ‘Investing in Europe: Private Equity Activity H1 2020’ also shows that private equity backed 3,401 companies during the period, with about 60% of investment value going into follow-on investments. In addition, venture capital investment achieved a new half-year record with €5.6 billion invested into start-ups and scale-ups.

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Oaktree Braces for Turmoil as Elections, ‘Economic Strain’ Loom

Brief: Oaktree Capital Management is warning credit investors to brace for unpleasant surprises in the fourth quarter, as U.S. elections loom amid the persisting pandemic. “More than ever, it is important to be wary of market exuberance and to avoid chasing risky investment opportunities to tighter levels or weaker legal protections,” Oaktree said in its third-quarter credit report, released this month. “September’s turbulence interrupted what had been a resounding recovery from the depths of the selloff in the spring, and markets now look to have entered a sideways period.” The alternative investment firm, co-founded by Howard Marks, cited its concerns over the rising cases of Covid-19, the U.S. elections, and Brexit. Industries are under stress as business activities fall off in the pandemic, while companies are shouldering heavier debt loads, the firm said.  “The economic strain produced by Covid-19 will be felt for several more quarters, if not years,” Oaktree said in the report. “We remain focused on protecting the downside in our investments.”

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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 November 2, 2020:

  • In the United Kingdom, it was a chaotic weekend to say the least. It started Saturday evening after Prime Minister Boris Johnson was forced to announce a nationwide month-long shutdown will come into effect as of Thursday after the government’s plans were leaked to numerous national newspapers Friday evening. The original plan was to announce these new measures on Monday. Instead, Prime Minister Johnson is now dealing with the fallout today from his announcement that will see a strict lockdown with the closure of pubs, restaurants and non-essential businesses, including hair salons and gyms. Prime Minister Johnson’s Conservative MPs are questioning the move, some already stating they won’t be voting in favour of the lockdown once it goes to a parliamentary vote on Wednesday. The opposition Labour Party is slamming the government for not moving on the nationwide lockdown sooner. Even the aviation industry is chiming in after finding out via the Prime Minister’s announcement on Saturday the lockdown also included a ban on leisure travel, something the industry was not consulted on or made aware of until the rushed news conference.

  • In the United States, the White House administration has criticized the country’s leading infectious disease expert, Dr. Anthony Fauci after comments made to the Washington Post over the weekend. Dr. Fauci, a key member of the coronavirus task force, criticized President Donald Trump’s administration’s response to the coronavirus pandemic, along with Dr. Scott Atlas, who has taken a more prominent role in the administration’s thought process on the pandemic. “It’s unacceptable and breaking with all norms for Dr. Fauci, a senior member of the President’s Coronavirus Taskforce and someone who has praised President Trump’s actions throughout the pandemic, to choose three days before an election to play politics,” said White House deputy press secretary Judd Deere. During one of his many pre-election rallies over the weekend, President Trump tossed out the idea of firing Dr. Fauci after the election following the crowd chanting, “Fire Fauci”.

  • In Canada, British Columbia’s health minister is warning of a record number of COVID-19 cases starting as of Monday, after seeing record numbers last week. The province’s latest case count will include results from Friday through Monday with the health minister already warning the cases in Metro Vancouver, the province’s most populous city and third largest in the country, will be especially high. On Halloween night over the weekend, large crowds gathered on Vancouver city streets partying and gathering, which irritated the health minister, especially after Provincial Health Officer Dr. Bonnie Henry asked people last week to avoid the exact kind of behavior that occurred. 

  • German Chancellor Angela Merkel is referencing back to World War II when describing the country’s ability to deal with the coronavirus pandemic. “This is a very big test of our resolve, one that we haven’t seen since World War II,” said Merkel after a meeting with the German virus task force. Chancellor Merkel called the pandemic a once-in-a-century challenge and urged Germans to remain vigilant and abide by hygiene and social distancing rules, so that their health care services have a fighting chance. The latest pandemic restrictions, which started on Monday in Germany are aimed at reducing social contact by closing bars and restaurants.

  • Italy will tighten national health restrictions as of Wednesday. Prime Minister Giuseppe Conte told parliament on Monday and called for action to stop the rapid spread of the coronavirus “as quickly as possible”. The new measures include the option of night-time curfews, distance learning for middle schools, cutting back on using public transport as well as limiting movement between regions with large numbers of cases if needed.

  • With all the news of oncoming restrictions for countries dealing with the second wave, the recent success of Australia can be a demonstration of what a lockdown can do to turn the tide in the pandemic. On Sunday, Australia recorded its first day with no local cases of coronavirus transmission since June. The milestone comes as some state governments ease domestic travel restrictions and Melbourne, the country’s second largest city continues to emerge from its three-month lockdown. Prime Minister Scott Morrison has a goal for Australia to be a country without domestic border restrictions by Christmas.

Covid-19 – Due Diligence And Asset Management

Ken Griffin’s Macro ‘Dream’ Propels Net Worth to $20 Billion

Brief: Ken Griffin was facing a calamity. As Covid-19 roiled the economy in March, equities tanked and bond markets went haywire. Hedge funds run by Griffin’s Citadel were taking losses as the computer models that guide some of their decisions struggled to comprehend the pandemic. For Griffin, it was also a chance to profit from some of the biggest opportunities in his 30-year career. His traders went to work scouring beaten-down credit markets, snapping up finance-company debt and taking advantage of wild fluctuations globally. “It was a macro trader’s dream,” Griffin, 52, said during an event last week for the Robin Hood Foundation, a New York-based non-profit. Citadel wanted to put money to work “when people are panicking,” he said. Like many hedge funds, Griffin’s firm suffered drops during those harrowing days in March, and, like many rivals, also benefited from unprecedented moves by the Federal Reserve and the promise of a $2 trillion stimulus package from Congress. Paul Tudor Jones, who interviewed Griffin at the event, described the Fed’s actions as “so incredible and breathtaking you almost couldn’t even believe it at the time.” So much so, even the legendary hedge fund manager said he didn’t take advantage as much as he should have.

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Institutional Investors Continue to Build Real Assets Exposure, says Aviva Investors Report

Brief: Global institutional investors are set to prioritise investments into real assets over the next 12 months, as the Covid-19 pandemic continues to have a lasting impact on global economies and financial markets, according to the latest edition of Aviva Investors’ Real Assets Study. The Study, based on responses from over 1,000 decision-makers at insurers and pension funds representing over EUR2 trillion of assets under management, found that 49 per cent of insurers and 37 per cent of pension funds are expecting to increase their allocation to real assets investment strategies. When asked which real asset markets they expect to increase allocation to over the next 12 months, both insurers and pension funds (54 per cent and 45 per cent respectively) identified real estate long income as their preferred asset class. Beyond this, insurers highlighted the desire to increase their exposure to debt strategies, with infrastructure debt (48 per cent), real estate debt (46 per cent) and private corporate debt (46 per cent) all expected to see increased investment. Pension funds demonstrated a similar view, expecting to increase their exposure to real estate debt (39 per cent), private corporate debt (39 per cent) and infrastructure debt (37 per cent).

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Oaktree, Reef Technology Launch $300 Million Property Fund

Brief: Reef Technology Inc., a startup that manages hubs in parking lots used for food delivery and other services such as Covid-19 testing, launched a $300 million fund in partnership with Oaktree Capital Management LP. Reef and Oaktree’s infrastructure arm have formed the Neighborhood Property Group to acquire strategic real estate assets, the companies told Bloomberg News on Monday. The new business will partly target areas experiencing population booms after people left cities such as New York and San Francisco because of the pandemic. Miami-based Reef is also exploring a capital raise to fund its expansion, according to people familiar with the matter. The targeted valuation of the startup, formerly known as ParkJockey, couldn’t immediately be learned, but Reef was valued at $1 billion when SoftBank Group Corp. acquired a stake in 2018. “Reef fits our thesis that core parking facilities should be augmented with technology to transform these core assets into mobility infrastructure hubs,” Josh Connor, co-portfolio manager of Oaktree’s infrastructure investing strategy and chairman of Neighborhood Property Group, said in an emailed statement. “These alternative uses support communities with critical last block logistics solutions such as food delivery, micro-mobility, same-day parcel delivery, essential groceries and electric charging infrastructure.”

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Lazard Snaps up PJT Restructuring Banker as COVID Second Wave Hits

Brief: Lazard Ltd has hired restructuring banker Sam Whittaker from PJT Partners to oversee negotiations between companies and their creditors across Europe, the Middle East and Africa as a second wave of COVID-19 leaves many businesses fighting for survival. Whittaker, who started his banking career at Lazard LAZ.N in 2005 and then moved to fellow investment bank PJT in 2015, will re-join Lazard as a London-based managing director in its EMEA restructuring franchise The 45-year old Briton will work closely with David Burlison, who co-heads Lazard’s EMEA restructuring practice, and Chris Mallon, who joined Lazard in April as a senior adviser. “One of the many benefits of having Sam back is that he has an extensive network of relationships with banks, hedge funds and lawyers which clearly is a big plus for us,” Burlison told Reuters. The U.S. bank, which leads Refinitiv’s league tables for this year’s global restructurings ahead of PJT Partners and Houlihan Lokey, has also hired James Simpson as a director in October as part of a push to win business on behalf of companies with liquidity issues and their creditors.

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Assessing the Impact of COVID-19 Across Real Estate Sectors

Brief: The COVID-19 pandemic has had a devasting toll on human life, and has impacted economies and industries globally. The effect on real estate is significant, as real estate can be considered a service sector that fulfills end-user demand. But the sectors within real estate have not been equally affected. So which are the sectors that have shown to be more resilient during the pandemic and could potentially provide downside protection to a real estate portfolio? It is important to determine whether the negative impacts we have already experienced are short term and temporary in nature, or if they are part of longer lasting structural changes in real estate demands. Recently, CAIA Association and MSCI Real Estate discussed some of the long-term trends in real estate, as well as the pandemic’s impact on various real estate sectors. In this article, I explore two perspectives to further understand the pandemic’s effect. The S&P 500, a key US stock market index, has made a V-shaped recovery and has since posted a YTD return of 7.9%[i]. Other US indexes have also rebounded. This robust recovery shown by US equity markets is largely fueled by the unprecedented central bank stimulus and government fiscal policies. Importantly, the recovery is led by the technology sector, while many other sectors continue to languish.

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Family Offices Increasingly Popular in Mainland China, Hong Kong

Brief: More high-net-worth (HNW) families in Hong Kong and mainland China are setting up family offices as a way to manage their assets and address any potential challenges of passing these assets down to the next generation, according to a recent KPMG report. “An increasing trend in mainland China, and even more so in Hong Kong, is establishing a family office to operate the family business and manage assets,” says Karmen Yeung, partner, KPMG Private Enterprise in China. “Family members often don’t have the knowledge to work through governance, legal, tax and succession issues and, therefore, are looking for outside expertise. Especially for families that have assets in multiple countries, the family office model can help them to better understand and manage the complex rules they are subject to around the world.” The report also highlights how the impact of the Covid-19 pandemic could increase the pressure on families in the coming years and argues that the pandemic has added to the urgency of managing family businesses and carefully planning generational transfers.

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