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Covid-19 Diligence Briefing

Our briefing for Friday December 18, 2020:

  • Vice President of the United States, Mike Pence, became the highest-ranking U.S. official to receive a coronavirus vaccine on Friday. In a live television appearance, Pence, his wife Karen and the surgeon general of the United States, Jerome Adams, all received the first of two doses of the Pfizer vaccine. The on-air stunt was an attempt to convince the American public that the vaccine is indeed safe for general use. Pence confidently proclaimed that he “didn’t feel a thing,” and that the “the American people can be confident: We have one and perhaps within hours two safe vaccines.” His remarks came as the American Food and Drug Administration is expected to validate a second COVID-19 vaccine from pharmaceutical company, Moderna, later in the day. Surprising absent from being publicly vaccinated is sitting U.S. President Donald Trump, who has remained relatively quiet about the massive medical breakthrough. As of Friday, Trump has yet to hold a public event related to vaccine’s distribution. 

  • According to Prime Minister Justin Trudeau, the majority of Canadians can expect to be vaccinated against COVID-19 by September 2021. However, immunizing the entire population is still a giant task, one that could see Canadian borders closed for years to come. “It’s the old adage, ‘no one is safe until everyone is safe,’” Raywat Deonandan, an epidemiologist with the University of Ottawa said, meaning that until most other countries have been vaccinated, Canadians should expect to remain in the confines of the country. COVAX, an international initiative aimed at providing coronavirus vaccines to low-income countries has suggested the current distribution model could leave poorer countries without access to a vaccine until at least 2024. The COVAX program cited multiple hurdles in the way of mass-distribution of the vaccine including lack of funding and supply-chain risks.

  • A survey from the United Kingdom’s Office for National Statistics has revealed that over two-thirds of the country intends to form a Christmas bubble including members from up to three households. The U.K. government has lifted some restrictions ahead of the holiday season, but experts are suggesting that this might not have been the right call. The World Health Organization’s regional director for Europe, Dr Hans Kluge, said “there remains a difference between what you are being permitted to do by your authorities and what you should do.” With most of the country entering tier three lockdown over the weekend, Prime Minister Boris Johnson has refused to rule out another large-scale lockdown after the Christmas holiday. In the last 24 hours, the country has diagnosed 24,507 new cases with another 1726 people being admitted to hospital since yesterday.

  • A cluster of new cases in Sydney, Australia has prompted Victoria’s Health Minister, Martin Foley to urge the public to avoid the area and has suggested that travel may be restricted if a person is found to have been in contact with someone from the Sydney area. As new cases of the virus have been spreading rapidly in Sydney, other states have now deemed it unsafe to travel to. “Don't come from Sydney if you're planning to come to Melbourne,” Foley says. “Don't go to Sydney if you're [already] planning to go to Sydney. It won't be a holiday. It won't be a Christmas.” New South Wales Premier Gladys Berejiklian is urging the public to comply with mask wearing protocols and has limited travel to Sydney’s northern beaches as the number of new cases grew by 10 overnight to a total of 28 in the area. Meanwhile, Queensland, Victoria, Western Australia and Tasmania have all introduced some measure of border restrictions on Friday.

  • Despite French President Emmanuel Macron testing positive for COVID-19 yesterday, a top government advisor said in a statement that it will take more time than expected for people in France and the rest of Europe to receive a vaccine. Immunologist and government adviser Jean-Francois Delfraissy said "the production of vaccines will be slower than envisioned 15 days or three weeks ago. We will not face a vaccine shortfall but we will have something that is more spread out over time." European nations have not yet been given access to the Pfizer vaccine like the U.K. and Canada, as they await the approval from the European Medicines Agency, which expects to have the approval passed before the end of December. France has recorded the most coronavirus cases in Europe with estimates ranging around 2.4 million people having been infected. "Vaccines are a major source of hope,” said Delfraissy. “But if you look at the vaccination capabilities that we will have in France and elsewhere in Europe, we will need time.”

Covid-19 – Due Diligence And Asset Management

J&J enrolls about 45,000 participants for late-stage Covid vaccine trial

Brief: Johnson & Johnson said on Thursday it has enrolled about 45,000 participants for the first late-stage trial of its Covid-19 single-dose vaccine candidate and that it expects interim data by late-January. The company, however, is lagging rivals Pfizer and Moderna in the race for a vaccine to combat the Covid-19 pandemic that has infected about 75 million people globally. J&J’s study, named Ensemble, is being conducted by its unit Janssen, the drugmaker said in a statement. While seven countries have already authorized the emergency use of Pfizer and German firm BioNTech’s candidates, Moderna’s rival vaccine was set for regulatory authorization this week in the United States.

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Lloyds Banking Group cancels bonuses after profit drop

Brief : Staff at Lloyds Bank won't be receiving bonuses for this year after the pandemic hit profits at the lender. It said the decision was not a reflection of the work its employees had done this year and that lower-paid staff will get pay rises above inflation. Bankers were told in a memo on Thursday first reported by the Financial Times. The bank will not meet the minimum threshold of profit for 2020 to make the payouts. The bank has said before that if profit for 2020 was more than 20% below its target bonuses would be cancelled. The lender will announce 2020's earnings on 24 February. "In 2021 we're making above-inflation pay increases for most of our people and these will be geared toward those colleagues on lower pay," the bank said in a statement. "Given our expected levels of profitability for 2020, we are unable to pay group performance share (or bonus) awards to our people for this year.

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Small lenders lose out as Big Six banks capture bulk of Canadians' pandemic savings

Brief: Canadians are stuffing savings into bank deposits at some of the fastest rates since the global financial crisis, but smaller lenders are losing out to bigger rivals, facing a tough time when the economy and lending begin to recover. The biggest banks grew personal deposits by 21 per cent in the three months to Oct. 31 from a year earlier to a record $1.7 trillion (US$1.3 trillion), driven by government stimulus and business closures that have crimped spending. Smaller lenders, however, struggled to record growth figures in the single digits, despite offering higher interest rates, as savers stuck with familiarity and size in an uncertain economic climate, analysts said. “If you have to pay more for deposits in a weak lending environment, it makes it tough,” said Avenue Investment Management Portfolio Manager Bryden Teich.

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IFC invests USD 30 million in Biological E Ltd

Brief: International Finance Corporation, a member of the World Bank Group, on Thursday said it is providing a loan of up to USD 30 million (around Rs 220 crore) to pharma company Biological E Limited. The loan will support the pharmaceutical firm's expansion of low-priced, generic vaccines for routine immunisation of children and to boost capacity for manufacturing any future COVID-19 vaccine, it added. An investment in one of India's top vaccine manufacturers BioE will expand access to low-cost vaccines for children in developing countries and help increase the production of a COVID-19 vaccine when developed, a key step in saving lives and restarting economies, IFC said in a statement. "IFC, a member of the World Bank Group, is providing a senior loan of up to USD30 million to BioE to support the Hyderabad-based company's expansion of its range of low-priced, generic vaccines for routine immunisation of children," it added.

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Private Equity Offers Survival Tactic to Fund Industry in Crisis

Brief: When Niklas Ringby spots a stock worth buying, he ignores decades of diversification advice that most investors live and die by. In the words of hedge fund legend Stanley Druckenmiller, he bets the ranch. The EQT AB money manager’s approach of wagering on just a handful of stocks may sound like excessive risk-taking to a generation of punters warned against chucking all their eggs in one basket, but it’s churning out bumper profits. The $1 billion fund he runs from Stockholm with Fredrik Atting for the private equity giant has gained 35% this year, while European stocks are down 5%, according to an investor letter. That’s on top of the 45% it returned last year. Ringby’s high-stakes strategy may offer a potential way forward for an industry in crisis. Stockpickers are persistently failing to beat their benchmarks and rapidly ceding ground to low-cost passive funds that just mimic an index. In a world awash with data and computer-driven trading where price-sensitive information is instantly factored into share values, active funds must find a way to stay relevant. That means depth instead of breadth in stockpicking and bolder, high-conviction long-term bets.

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Emerging Market Hedge Funds Are Outperforming In 2020

Brief: Although emerging markets had a difficult start to the year because of COVID-19's source in China, they have rebounded nicely, giving emerging markets (EM) hedge funds a boost. Hedge funds, in general, had a rough October, as the Eurekahedge Hedge Fund Index declined 0.5%. However, they beat the MSCI ACWI, which fell by 2.29%. Morning commuters wearing protective masks walk past Chinese flags displayed along Nanjing Road in Shanghai, China, on Friday, October 9, 2020. China's yuan strengthened, and stocks rose on mainland exchanges in a positive start to the month for traders. Emerging markets hedge funds are outperforming their developed markets (DM) counterparts this year, according to data from Eurekahedge. EM hedge funds gained 5.11% during the first nine months of the year. For comparison, North American hedge funds were up 3.00%, while European funds were down 1.51%, and Japanese funds were down 3.37%. 

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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 December 17, 2020:

  • French President Emanuel Macron is the latest world leader to test positive for COVID-19 on Thursday. The Elysée Palace, President Macron’s official residence confirmed the news in a statement and noted he will isolate for seven days and continue to work remotely. President Macron has been especially busy in the last week, putting him in close contact with senior French officials and other European politicians. For instance, on Wednesday President Macron met with Portugal Prime Minister, Antonio Costa for a joint press conference and a working lunch. Pictures form the meeting show both men in close contact. Spain’s Prime Minister Pedro Sanchez will isolate for 10 days after meeting with President Macron at an event in Paris on Monday.
  • In the United States, as Washington lawmakers continue to bicker back and forth on the latest round of coronavirus stimulus, Bloomberg is reporting a congressional watchdog panel has asked for an investigation into Treasury Secretary Steven Mnuchin. Two Democratic Congressional Oversight appointees addressed a letter that says there are “irregularities” on how Mnuchin came to the conclusion of cancelling U.S. Federal Reserve emergency lending programs at the end of the year. The irregularities include that Mnuchin may not have consulted legal counsel before determining the program should wind down by the end of December and he may have changed his position after Joe Biden won the presidential election.
  • In Canada, Ontario’s doctors are calling on the provincial government for more lockdowns as the province set yet another record for daily cases on Thursday. The latest tally was 2,432 new COVID-19 cases, which has the Ontario Hospital Association (OHA) calling for new 28-day lockdown in all regions currently in the red tier of the province’s COVID-19 framework. During a news conference on Thursday, Premier Doug Ford said he appreciates the OHA’s input, but failed to commit to any further lockdown measures, other then to say, “right now, everything is on the table.” 
  • The United Kingdom’s freedom from lockdown was short-lived as Health Secretary Matt Hancock revealed on Thursday more than two-thirds of England will enter tier 3 restrictions. With COVID-19 cases rapidly rising in London, Hancock also put nearby areas of Buckinghamshire, Peterborough and Hastings into the UK’s strictest category as of Saturday. Areas to the north weren’t spared as well with the Greater Manchester area forced to stay in tier 3 after local leaders believed they had done enough to have some rules eased. “I know that tier-3 measures are tough but the best way for everyone to get out of them is to pull together – not just to follow the rules but to do everything they possibly can to stop the spread of the virus,” said Hancock.
  • In the Philippines, a Presidential spokesperson said the country is eyeing four vaccines for use during the first three months of 2021. The four vaccines the country plans to use are from Russia’s Gamaleya Institute and China’s Sinovac, Sinopharm and CanSino. By the second quarter of 2021, the Philippines expects to receive 2.6 million doses of COVID-19 vaccine produced by Britain’s AstraZeneca, which was secured by the private sector. However, the Philippines have yet to receive emergency vaccine use applications for any of these drugs. 

  • The World Health Organization (WHO) has said they will send a team of 10 international scientists to the Chinese city of Wuhan next month to investigate the origins of COVID-19. Beijing government officials have been reluctant to allow WHO investigators conduct an independent inquiry and it has taken months just to get to this point. The virus was thought to have come from a Wuhan central market that sold animals. The outbreak has been a source of tension for China as they have been on a media blitz to debunk the theory that the coronavirus got its start in the country. A biologist on the team traveling to Wuhan told the Associated Press that the WHO was not seeking to appropriate blame, rather to prevent future outbreaks, such as this in the future.

Covid-19 – Due Diligence And Asset Management

New York’s Plummeting Real Estate Sales Cost City $1.2 Billion

Brief: The pandemic’s slowdown in real estate deals has cost New York City $1.2 billion in lost revenue so far this year. Sales of commercial and residential properties -- everything from office buildings to hotels and condo units -- are down 49% this year through November, according to a report Thursday by the Real Estate Board of New York. That’s led to a 42% decline in city tax revenue, compared with the same 11-month period in 2019, the trade group said. The money comes from a long list of levies that each transaction generates. A dearth of deals means fewer collections of transfer and mansion taxes, and less income from newly recorded mortgages. Real estate investors are taking a pause amid a pandemic that’s reordered how and where New Yorkers live and work -- and, in turn, undermined property values. The pullback has dealt a crippling blow to the city’s economy, which relied on the real estate industry for 53% of its annual tax revenue in the last fiscal year, the real estate group said. While vaccines offer some optimism, “New York’s economic crisis grows,” James Whelan, the group’s president, said in a statement. “From rental assistance and unemployment benefits to state and local aid, New York needs federal relief.”

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Swiss National Bank sees no Alternative to Expansive Policy to Tackle COVID-19

Brief : The Swiss National Bank paid no heed to being branded a currency manipulator by the United States, promising on Thursday to continue an expansive monetary policy and forex interventions it said were vital to cushion the impact of the coronavirus pandemic. The central bank kept its policy interest rate locked at minus 0.75%, the world’s lowest, and said it remained willing to buy foreign currencies “more strongly”, as unanimously forecast by economists in a Reuters poll. SNB Chairman Thomas Jordan said the central bank had made “considerable foreign exchange purchases this year,” but declined to give details on the level of interventions during the second half of the year. The SNB said the interventions were necessary to relieve pressure on the franc, which has attracted safe-haven inflows during the crisis. During the first half of 2020, it bought 90 billion Swiss francs ($101.94 billion) worth of foreign currencies, dwarfing the level of interventions in previous years. Those interventions have brought the SNB into the cross-hairs of the U.S. Treasury, which labelled Switzerland a currency manipulator on Wednesday.

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Pensions Coping Well with Covid Crisis, says PLSA Sruvey

Brief: The vast majority of pension schemes say that Covid-19 is not having a detrimental effect on them running their schemes and helping savers achieve a better income in retirement, but have warned against the ending of regulatory easements too soon, a PLSA survey can reveal. In the survey, the PLSA heard that over four fifths of pension schemes (81 per cent) believe Covid-19 is having only little or no impact on the day-to-day running of their scheme; a figure that is up from 67 per cent in April and 42 per cent in March. Furthermore, nine out of ten schemes (91 per cent) say they are currently operating all business processes smoothly to suit the current environment. Impressively, all (100 per cent) Master Trusts and LGPS members surveyed said that their contingency plans are dealing with Covid-19 either very well or fairly well.   Since the start of restrictions in the UK due to Covid-19 back in March, most schemes (85 per cent) have reported that they have not seen an increase in member queries. In fact, under one in ten (8 per cent) have said that they have seen a substantial increase since the start of the crisis, while the same proportion have seen a slight decrease. Amongst those who have seen an increase in queries, most say that this has been driven by new retirements while a smaller number report queries around changes in employment or transfers out.

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Ariana Huffington: For the First Time, There’s an ‘Unprecedented Interest From the C-Suite’ in Mental Health

Brief: “Now months into the pandemic, with a dark winter ahead of us, we are seeing the evidence of an increase in depression, anxiety, and worker burnout everywhere, both among those of us who have the luxury of being able to work from home and the frontline workers,” Huffington told Yahoo Finance Live. Huffington founded Thrive Global four years ago as a behavior change platform that combines data, storytelling, and an action plan to improve work culture and support staff. It serves mostly Fortune 500 companies, including Walmart and Accenture. “For the first time, we are seeing an unprecedented interest from the C-suite on this issue of mental health,” said Huffington. “So, it's not just a matter for HR professionals. The recognition is now clear, that the well-being and mental resilience of your employees is going to be crucial to productivity and the bottom line.”

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Wells Fargo Extends Work From Home Until at Least March 1

Brief: Wells Fargo & Co has extended the ability to work from home for employees until at least March 1 amid the ongoing coronavirus outbreak, a spokeswoman for the bank said on Wednesday. “Through at least March 1, we will continue with our current operating model, which includes about 200,000 employees working from home and maintaining safety measures in locations that remain open”, the spokeswoman said in an emailed statement. The statement added that it was not known when the bank would return to a more “traditional operating model” and that it would give employees “sufficient notice” before any changes.

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After COVID Shock, U.S. Treasury Market Set for New Scrutiny

Brief: The $20 trillion U.S. Treasury market is set to come under intense scrutiny by President-elect Joe Biden’s regulators, after seizing-up amid rising pandemic fears in March and threatening the stability of the broader financial system. A review of what went wrong and measures to boost the market’s resilience could be among the first regulatory challenges for incoming Treasury Secretary Janet Yellen, according to half a dozen regulatory and industry sources. After March’s massive sell-off prompted the Federal Reserve to buy $1.6 trillion of Treasuries to stabilize the market, consensus is growing in Washington that a review is urgently needed. But potential changes on the table, including loosening trading rules, allowing new players into the market, or introducing central clearing, could prove risky to implement and unleash industry infighting over the benefits and costs. “This is the most important financial market in the world. That fact demands policymakers exhibit both urgency and extreme care,” said Gregg Gelzinis, senior policy analyst at think tank the Center for American Progress.

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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 December 16, 2020:

  • In the United States, the deaths from COVID-19 surpassed 3,000 for the third time in a week. The death toll was 3,102 on Tuesday, the third highest total since the pandemic began and lifted the overall total to over 304,000. The case load of 16.7 million infections represents roughly 5% of the American population, according to Reuters. The United States are aiming to have 2.9 million doses of the Pfizer COVID-19 vaccine delivered by week’s end, but that is a far cry from where the country needs to be. Politicians and medical authorities have conducted a two-pronged media blitz aimed at vowing the safety of the vaccines, but also urging Americans to continue social distancing and mask wearing for the foreseeable future. 

  • In Canada, Quebec announced sweeping new coronavirus restriction measures as they face a rising number of hospitalization and daily cases. As of Thursday, and expected to last until January 11th, all offices and schools will close. Most retailers will be shut down as of December 25th until January 11th, which means no in-person Boxing Day shopping this year. Grocery stores, pharmacies, banks, hardware stores and pet stores will be allowed to remain open. Big box stores will be restricted to selling essential goods only. Canada’s other largest province – Ontario saw its daily case count climb above 2,000 for the second day in a row. Again, the two longest locked down areas of Toronto and Peel Region accounted for more than half of the new cases (1,308 of 2,139 reported cases).

  • United Kingdom Prime Minister Boris Johnson is trying hard to avoid all those Grinch cartoon caricatures being printed in the daily tabloids saying developed administrations have reached “unanimous agreement” to “proceed in principle” with existing holiday plans. Those plans of course are to loosen coronavirus rules over the Christmas break with Prime Minister Johnson stating during question period in the House of Commons that “we don’t want to criminalize people’s long-made plans.” However, the UK leader has urged Britons to have a smaller and shorter Christmas and to exercise common sense in gatherings, such as coming into contact with elderly people.

  • Germany shattered its record COVID-19 deaths on Tuesday, just as it entered a new hard national lockdown on Wednesday. According to the Robert Koch Institute (RKI), 952 people died due to COVID-19. The previous record was 598 on December 11th. The drastic spike in deaths though the RKI says could be a delay in reporting data from the large state of Saxony. Nevertheless, German officials said the current situation was “as serious as it has ever been during the pandemic.” A RKI spokesperson said Germans need to be prepared for the situation to get worse over Christmas.

  • China announced on Wednesday for the first time publicly that they have ordered a foreign inoculation in their fight against COVID-19. German firm BioNTech will supply 100 million doses to its Chinese partner Fosun Pharma for mainland use in 2021. BioNTech are now seen as the prime international competitor to domestic COVID-19 vaccines such as Beijing-based Sinovac and state-owned Sinopharm. However, with a population of 1.4 billion in China, there is still plenty of opportunity for the two Chinese firms as they have already begun expanding manufacturing capacity and distributing vaccines.

  • Reuters is reporting the World Health Organization’s (WHO) global scheme to deliver COVID-19 vaccines to poorer countries faces “a very high” risk of failure, potentially leaving billions without a vaccine until as late as 2024. Reuters is looking at the WHO’s COVAX programme as the main global scheme to inoculate the world’s poor and middle-income countries. The programme is struggling from a lack of funds, supply risks and complex contractual arrangements, which could make it impossible to reach their goals. The COVAX programme’s aim is to deliver at least 2 billion vaccine doses by the end of 2021 to cover 20% of the most vulnerable people in the world from countries mostly in Africa, Asia and Latin America.

Covid-19 – Due Diligence And Asset Management

Sun Life Bets US$7B on Japanese Workers Returning to Office Life

Brief: Sun Life Financial Inc. is wagering billions of dollars that Japanese workers will return to the office after the pandemic. The Canadian insurer’s real estate arm plans to double staff and invest US$10 billion in Japan over the next two to three years, of which as much as 70 per cent may go into office buildings in the country’s major business districts, said Sonny Kalsi, chief executive officer of BentallGreenOak. “We don’t think that work from home is going to be a big long-term trend in Asia overall and in Japan specifically,” Kalsi said in an interview. “That’s part of the reason we are bullish on Japanese offices -- more so than any other market.” Like their peers around the world, Japanese companies are grappling with how to use office space once the coronavirus is defeated. Some including Hitachi Ltd. and Nomura Holdings Inc. are embracing flexibility, while others like SBI Holdings Inc. want employees back on-site to ensure productivity. Offices in Tokyo have emptied during the pandemic, even as many workers continue to commute in a country where coronavirus cases remain lower than in Europe and the U.S. Vacancies in the city surged to a four-year high last month, according to real estate brokerage Miki Shoji Co. Yet Japan’s business culture suggests people will prefer to work together in person once the pandemic subsides, underpinning the need for offices, said Kalsi, who lived in Tokyo from 1998 to 2006. “I think Japanese companies are more traditional in how they are run and managed,” he said.

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Citi to Offer Workers a 12-Week Sabbatical, Extra Vacation Days

Brief : Citigroup Inc. will soon offer workers the ability to take a 12-week sabbatical as part of a bevy of new employee perks in the wake of the coronavirus pandemic. Staffers also will be able to buy as many as five extra vacation days annually starting next year, and the bank is debuting a program that will allow employees to work pro bono with a charitable organization for as much as four weeks while still receiving 100% of their base pay. The new perks are a byproduct of months of meetings among the firm’s top human resources professionals to discuss what work would look like after the pandemic subsides, said Diane Arber, who leads human resources for the bank’s institutional clients group. “So here we are now all working from home and being extremely productive -- it really gave us time to pause and think about what should we be doing differently for the employees,” she said. “People just sometimes need a break, and they don’t want to just stop their career.” Citigroup has seen record increases in employee satisfaction in an internal annual survey, with many staff members preferring to work from home and the flexibility it provides, Arber said. With the new benefits, the bank’s looking to make some of that flexibility permanent. With the sabbatical, employees at any level who have been with Citigroup for at least five years can take as long as 12 weeks to do whatever they want. Workers are limited to two sabbaticals, and will receive only 25% of their base pay during the time away.

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FINRA Seeks Comment on Lessons From the COVID-19 Pandemic

Brief: In response to the coronavirus (COVID-19) pandemic, member firms have made rapid and unprecedented changes to their business operations in order to prioritize the health and safety of firm personnel and investors, while maintaining the public’s access to capital markets. These changes include widespread use of remote offices and alternative work arrangements and new and expanded methods of engaging with personnel and investors. Member firms have also used new methods of engaging with FINRA and other regulators and complying with regulatory requirements. For its part, FINRA has taken numerous steps to assist member firms, firm personnel and investors as they navigate the effects of the COVID-19 pandemic. FINRA welcomes feedback on lessons learned from stakeholders’ experiences during the pandemic, including the impact of changes made to member firms’ operations and business models, and the effectiveness of business continuity planning. FINRA further requests comment on whether it should consider changes to its rules, operations or administrative processes to address lessons learned during the pandemic or to address anticipated long-term impacts of the pandemic on member firms and investors.

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Vaccines Have Arrived – And Investors Are Ready to Party

Brief: Investors are shedding cash and piling into risk assets as they seek to “buy the reopening,” according to new research from Bank of America. The bank’s latest survey of fund managers found that investor optimism has “skyrocketed” this month following news that coronavirus vaccines from Pfizer and Moderna had proven effective in clinical trials. The poll ended on December 10, after UK regulators had granted emergency authorization to the Pfizer-BioNTech vaccine but one day before the U.S. Food and Drug Administration did the same. According to BofA Securities, fund managers have responded to the vaccine news by increasing allocations to equities and commodities and decreasing cash holdings. In fact, the surveyed investors reported that they were underweight cash for the first time since May 2013. Most investors said they believed the vaccine would start having a positive impact on economic activity within the first half of next year, with the average respondent predicting that the turn-around would occur by May 2021. These vaccine hopes were accompanied by higher expectations for profit and economic growth, with a net 78 percent of respondents expecting corporate earnings to improve — the highest proportion in the survey’s history.

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US Bankruptcies Surpass 600 in 2020 as Coronavirus-Era Filings Keep Climbing

Brief: U.S. corporate bankruptcy filings continue to increase during the coronavirus crisis as 18 new companies joined the list of 2020 bankruptcies in the last two weeks, according to an S&P Global Market Intelligence analysis. There have been 610 bankruptcies this year through Dec. 13, exceeding the number of filings seen in any year since 2012. The 18 new filings match the number of bankruptcies reported during the prior two-week period, continuing a slowdown from earlier in the crisis. Market Intelligence's analysis is limited to public companies or private companies with public debt where either assets or liabilities at the time of the bankruptcy filing are at least $2 million. Private companies without public debt must report at least $10 million in either assets or liabilities at the time of filing. Companies that entered bankruptcy proceedings Nov. 30-Dec. 13 include Florida-based American Purchasing Services Inc., oil field services company Superior Energy Services Inc., boutique clothing chain Francesca's Holdings Corp. and coal companies White Stallion Energy LLC and Lighthouse Resources Inc.

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70% of Fund Managers See Better Economy by June 30 – Survey

Brief: Investor sentiment remains bullish as COVID-19 vaccinations begin, according to Bank of America's December Global Fund Manager Survey, with 7 in 10 managers expecting the global economy to improve in the first half of 2021. When asked when the COVID-19 vaccine will start positively impacting the economy, 42% of surveyed fund managers said it would begin in the second quarter, while 28% said the first quarter and 19% said the third quarter. A net 89% of fund managers surveyed expect stronger growth in 2021, while a record 87% expect higher long-term yields. COVID-19 continues to be the biggest tail risk, with 30% of respondents putting it at the top of their list this month, but that's11 percentage points less than November due to vaccine expectations. The other top tail risks are fears of inflation (24%) and fiscal policy drag (18%). Although 2020 was dominated by the global recession sparked by the global COVID-19 outbreak, managers' recovery expectations surpassed previous recessions both in terms of speed and magnitude, survey results showed. Seventy percent of fund managers said the global economy is in an early cycle phase, the highest percentage reported since January 2010. Meanwhile, only 12% said it is in a recession.

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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 December 15, 2020:

  • The United States Food and Drug Administration (FDA) has found Moderna’s COVID-19 vaccine to be safe and highly effective, which clears the way for a second vaccine to receive emergency use authorization later this week. Elsewhere in the country, support is growing for the $748 billion COVID-19 stimulus legislation put together by a bipartisan group of Senators. Lawmakers stripped out the highly contested provision regarding liability protections for businesses and assistance for states and local governments. With those clauses in, the price tag of the package was $908 billion. On Tuesday, the $748 billion plan received the backing of the Center for American Progress, a think tank group that is influential within the Democratic party. 
  • In a news conference on Tuesday, Canadian Prime Minister Justin Trudeau announced the country will be receiving up to 200,000 more doses of the Pfizer vaccine next week and potentially up to 168,000 Moderna vaccines by the end of December. The Moderna vaccine has yet to receive regulatory approval from Health Canada, but secure delivery can start within 48 hours of approval. Prime Minister Trudeau confirmed that doses of the Moderna vaccine will be directed to the North, as well as remote and Indigenous communities due to easier transfer of the product. Elsewhere in the country, Quebec is expected to announce a two-week shutdown for non-essential businesses starting on Christmas Day in an effort to slow down COVID-19 spread. As a compromise, the government will allow some outdoor gatherings in public places.
  • In the United Kingdom, two health journals have published a rare joint article warning a relaxation of COVID-19 restrictions over the Christmas holidays would be a “blunder into another major error that will cost many lives.” The message came from the BMJ and the Health Service Journal marking only the second time the two have come together to deliver a joint message. However, as of right now, Prime Minister Boris Johnson’s government still plans to move ahead with its plans to allow households to mix with people from two other households over a five-day period during the holidays. 
  • The European Union (EU) medicines regulator is planning to approve the Pfizer/BioNTech vaccine a week earlier than previously suggested. The European Medicines Agency (EMA) said it hopes to sign off on the inoculation for EU member states during a meeting on December 21st instead of December 29th after receiving additional data it had requested from the firms. Some EU nations, such as Germany, have questioned the speed of the EMA after seeing the United Kingdom, United States and Canada all have the Pfizer vaccine approved for use.
  • In an effort to reopen its borders, Singapore will start a new travel lane for business. The plan will allow high-economic value travelers to visit the city-state without quarantine for short-term stays and reside in a dedicated bubble facility near the airport. The travel lane was announced by Singapore’s Minister of Trade on Tuesday. According to a report from Bloomberg, Singapore government authorities are keen to position the country as a prime spot for meetings, events, conferences and exhibitions. Earlier this month it was announced the World Economic Forum was being moved from Davos, Switzerland to Singapore.
  • In Australia, a commission review said it is unlikely the first generation of COVID-19 vaccines set for the country in early 2021 will prevent virus transmission. The Australian Academy of Health and Medical Sciences stated in their review ongoing high levels of testing, strong contact tracing, isolation and quarantine will remain crucial for the foreseeable future. “Announcements of interim results from vaccine trials are promising, but even a vaccine that is 90% effective at reducing disease will take time to manufacture, distribute and administer, and may have limited impact on SARS-COV-2 (COVID-19) transmission and spread, or protection may be short-lived,” the review said.

Covid-19 – Due Diligence And Asset Management

Ponzi Schemes, Other Investment Fraud on Rise During Pandemic, SEC says

Brief: Criminals are defrauding investors in rising numbers as they try to exploit chaos unleashed by the Covid pandemic, the Securities and Exchange Commission said Monday. Investors should be on high alert for Ponzi schemes, fake certificates of deposit, bogus stock promotions and community-based financial scams, the SEC warned in an investor alert. “The SEC has recently experienced a significant uptick in tips, complaints and referrals involving investment scams,” the federal agency said. Fraudsters use times of uncertainty and change, such as the current Covid-19 pandemic, to lure victims into investment scams,” it continued. The extent of the increase in fraud documented by the SEC is unclear. A spokesperson for the agency did not return a request for comment. Investment scams promising high returns are a type of “income scam,” whereby con artists target victims who are trying to bring in extra income, according to the Federal Trade Commission. Other examples include work-from-home and employment scams and pyramid schemes. There was a 70% jump in income scams in the second quarter this year compared with the same period in 2019, according to an FTC analysis of consumer complaint data published Thursday.

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Apollo Group in $2.3 Billion Deal for ATM Firm Aided by Pandemic

Brief : A pair of investment firms agreed to shell out $2.3 billion for an ATM operator that’s benefiting from the wave of bank-branch closures during the pandemic. Cardtronics Plc agreed to be acquired for $35 a share by Hudson Executive Capital LP and Apollo Global Management Inc. on Tuesday. The all-cash deal is expected to be completed in the first half of next year, according to a statement Tuesday. Banks have shuttered almost 3,000 branches in the past 12 months, according to data compiled by S&P Global Market Intelligence. Cardtronics has benefited from the trend by partnering with lenders looking to offer their customers’ access to cash even when a full-scale branch isn’t available. Tuesday’s sale price was 35% higher than Cardtronics’ closing level on Dec. 8, the day before the company disclosed that Apollo and Hudson had proposed a deal at $31 a share. “Cardtronics faces a secular headwind on the one hand -- reduction of cash usage/ATM transactions -- offset by a secular tailwind -- banks closing branches, making its convenient ATM locations more attractive,” Robert Napoli, an analyst at William Blair & Co., said in a note to clients. Cardtronics, with a network of 285,000 ATMs across 10 countries, operates 10% of the world’s ATMs, but handles only about 1% of withdrawals made from cash machines.

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Mental Health Tech Startups Fetch Record Investments with COVID-19

Brief: The COVID-19 pandemic has put the spotlight on mental health tech startups, globally marking a record year for venture capital investment in the sector, according to data firm PitchBook. PitchBook data showed 146 deals raked in nearly $1.6 billion in venture capital investments as of Dec. 10. Last year the total was $893 million from 111 deals. A decade ago there were only 3 deals, worth $6.6 million. The investments come as employers are increasingly seen as customers for these startups. Consulting firm McKinsey reported last month that 52% of companies offer mental-health and bereavement counseling. Sleep and mediation app Calm, which raised $75 million last week, said one primary driver for its business was from employer partnerships. It was valued at $2 billion, making it the top valued mental health startup, according to PitchBook. Mental health and wellness platform Modern Health on Tuesday said it raised $51 million, with a valuation above half a billion dollars. Its services are offered through employers as well. Founder and Chief Executive Alyson Watson said since the onset of the pandemic, Modern Health doubled the number of customers to over 190 enterprises. “The way that we think about this is the fourth pillar,” said Watson, adding that employers are increasingly offering mental health care in addition to medical, dental and vision benefits.

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How Global Macro Hedge Funds Can Capitalise on the “Looming” Economic Normalisation

Brief: Global macro hedge funds from across the emerging market, systematic and discretionary spectrum may be well-placed to capitalise on prevailing equity valuations amid economic “normalisation”, Lyxor Asset Management strategists said this week. While discretionary global macro funds offer a tactical bias, which appears relevant “at the trough of the business cycle”, emerging market-focused macro managers benefit from stronger credit profiles of energy and metal exporters amid rising commodity prices. Risk assets have been setting new records in the US recently, Lyxor said in a note this week, with the S&P500 now up 13 per cent since the end of October, before the results of the Pfizer/BioNTech Covid-19 vaccine were announced. But the vaccine roll-out, and the subsequent economic “normalisation”, is preventing investors from being too defensive, despite rich equity valuations, strategists explained. Against this backdrop, certain alternative strategies which offer both performance and diversification would prove attractive. “Global macro strategies can deliver on both fronts,” senior strategists Philippe Ferreira and Jean-Baptiste Berthon, and hedge fund analyst Pierre Carreyn, wrote in the market commentary. “Global macro strategies are quite heterogeneous, from pure fixed income players to multi-asset strategies, discretionary or systematic, invested in developed or emerging markets, or both.” Splitting the universe into EM, systematic and discretionary, Lyxor’s analysis noted that strategies normalised their equity market beta at “higher levels but in moderate proportions”, particularly for discretionary funds.

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Credit Suisse Cuts Asset Management Headcount by 10% in Revamp

Brief: Credit Suisse Group AG cut 10% of the staff at its asset management business this year as it seeks to turn around a unit that has been hit by fund implosions in the wake of the pandemic. Switzerland’s second largest lender, which oversees 438 billion Swiss francs ($494 billion) in assets at the fund business, made the reductions as it closed some investment vehicles and wrote down the value of others, Eric Varvel, head of Credit Suisse asset management, said at the bank’s investor day. Varvel said that the unit has had a difficult year, with setbacks including a scandal involving a large client and a $450 million impairment to its stake in York Capital Management this quarter. He’s pledging to add 10 billion francs of net new assets in higher-fee alternatives and private markets offerings over the next two to three years while increasing sales to wealth-management clients. The business has 1,100 employees, according to a presentation on Tuesday.

Last week, the lender announced that two reinsurers it had backed through the asset management unit would stop underwriting new business after investors decided to pull their money from the funds. The bank has also shuttered a quantitative strategy and took a 24 million-franc charge on seed capital for a U.S. real estate vehicle in the third quarter. In addition, a joint venture with the Qatar Investment Authority is closing two groups of funds and returning capital to investors.

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The Asset Manager Arms Race Has Only Just Begun

Brief: For years, the asset-management industry has braced itself for shocks. In 2018, $369 billion poured out of long-term mutual funds in favor of exchange-traded funds, a record at the time. In 2019, the case for traditional actively managed mutual funds became even harder to make when Charles Schwab Corp. jump-started a race to the bottom among online brokerages by eliminating commissions for ETFs along with U.S. stocks and options. If those were tremors, 2020 will go down in history as an earthquake. Even before Covid-19 roiled global markets and brought the Robinhood crowd and Dave Portnoy of Barstool Sports into the Wall Street zeitgeist, there were already signs of seismic change. On Feb. 18, just a day before the S&P 500 Index set a pre-pandemic record, Franklin Resources Inc. announced a deal to acquire asset manager Legg Mason Inc. for almost $4.5 billion, a move that would bring its combined assets under management to $1.5 trillion. For both Franklin, an iconic investment manager that started in 1947, and Legg Mason, whose precursor firm dates to the 19th century, it was a tacit admission that they could no longer compete with BlackRock Inc. and Vanguard Group Inc. on their own. The global pandemic could only constrain this consolidation for so long. In early October, Morgan Stanley announced it was acquiring Eaton Vance Corp. for about $7 billion. Bringing in the Boston-based company’s more than $500 billion in assets meant Morgan Stanley Investment Management would manage about $1.2 trillion, finally reaching Chief Executive Officer James Gorman’s goal to join the $1 trillion club.

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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 December 14, 2020:

  • In the United States, the bipartisan group of US lawmakers will unveil their $908 billion coronavirus pandemic relief plan with the hopes Congress will pass it this week. The latest bid, which shows how much the two sides are divided, has two separate bills. The one proposal is for $748 billion in spending will include all provisions other than state and local aid and liability protections for employers. The second bill has two provisions – $160 billion in state and local aid allocated through a needs-based system, and liability protections. According to Bloomberg, a source close to the negotiations said it is unlikely all members who worked on the plan would sign off on both measures.

  • Similar to the United Kingdom last week, Canada celebrated their version of “V-Day” on Monday with the first person inoculated with the Pfizer vaccine. Anita Quidangen, a personal support worker at a long-term care centre in Toronto was the first person to receive the shot in Canada. Quebec – the hardest hit province in the country is expected to launch their vaccination efforts on Monday as well. Quebec’s first doses will be given in long-term care homes while Ontario are set to offer their shots in designated hospitals in Toronto and the nation’s capital – Ottawa.

  • According to the United Kingdom’s Health Minister, a new variant of COVID-19 has been identified in southeast England. Health Secretary Matt Hancock made the revelation on Monday while announcing London would return to the UK’s strictest version of a lockdown this week. Hancock said more than 1,000 cases with this new variant have been identified and the World Health Organization has been notified because similar variants had been identified in other countries in recent months. “I must stress at this point there is currently nothing to suggest that this variant is more likely to cause serious disease, and the latest clinical advice is that it’s highly unlikely that this mutation would fail to respond to a vaccine,” said Hancock.

  • Germany announced another hard lockdown over the weekend, causing economists to fear a likely double-dip recession to Europe’s largest economy. Chancellor Angela Merkel said the hard lockdown will begin on Wednesday as officials have conceded they have lost control over containing virus spread. As of Wednesday, non-essential stores will close, employers urged to close workplaces, and school children encouraged to remain at home. Stricter curbs such as a ban on gatherings over the New Year and drinking alcohol in public will remain in place until January 10th. Germany was receiving rave reviews for the handling of the first wave of the pandemic but have struggled with this second wave. The outbreak has been less severe than France, UK and Spain, but the government’s plans to help bend the curve haven’t worked. 

  • “The Most Beautiful Winter in the World” is the United Arab Emirates (UAE) tagline as it looks to encourage local travellers and promote desert winters in its attempt to recover from the coronavirus pandemic. The program which comes with an $11 billion USD price tag was launched via a tweet over the weekend from Vice President and Prime Minister Sheikh Mohammed Bin Rashid Al Maktoum. The UAE relies on energy and tourism to fuel its economy and both took a severe hit in 2020. The region is hoping the potential full public use of a China-backed COVID-19 vaccine could allow for a re-opening of the economy.

  • A quarantine free travel bubble for Australia and New Zealand could begin as early as 2021. New Zealand Prime Minister Jacinda Ardern addressed the possibility with reporters after a Cabinet meeting and said it would be dependent on levels of COVID-19 in both countries not getting worse. Australia and New Zealand already have a limited travel corridor, but anyone returning from a trip to Australia, must quarantine for 14 days upon their return. Prime Minister Ardern said the travel bubble could begin in the first quarter of 2021 once final details have been worked out.

Covid-19 – Due Diligence And Asset Management

EQT Offers to Buy Recipharm of Sweden in $2.1 Billion Deal

Brief: Private equity firm EQT AB has offered to take over Swedish pharmaceuticals company Recipharm AB for $2.1 billion, marking the latest in a string of deals underpinning demand for health-care targets. EQT is offering shareholders 220 kronor in cash per share, compared to Friday’s closing price of 179 kronor. It’s also proposing to give holders of Recipharm’s senior unsecured convertible bonds 1.43 billion kronor ($170 million) in cash per 1 million kronor in aggregate principal of the convertible bonds, according to a statement on Monday. The bid comes just two days after AstraZeneca Plc agreed to buy Alexion Pharmaceuticals Inc. for $39 billion in cash and shares. Other deals announced recently include Gilead Sciences Inc.’s $1.4 billion purchase of German hepatitis drug maker MYR GmbH and Boehringer Ingelheim’s 1.2 billion-euro acquisition of NBE-Therapeutics. EQT’s bid also follows news from Recipharm that a molecule it’s developing, Erdosteine, appeared to help Covid patients recover after they were discharged from hospital. The company, whose biggest shareholder is the Swedish state with a roughly 16% stake, has seen its share price gain about 36% this year. Stockholm-based EQT has already secured ownership of about 25.7% of the shares and 74.3% of the votes in Recipharm through its chairman, Lars Backsell, and Thomas Eldered, its chief executive. The deal is worth 17.9 billion kronor, or about $2.1 billion.

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Gammon Capital Up 449% is Betting on New Wave of Market Turmoil

Brief :A New York hedge fund that’s gained 449% in this year’s pandemic roller-coaster is betting on a new wave of volatility in the event Congress fails to extend a key bank provision in any new stimulus bill. As time runs short on breaking the legislative impasse, Gammon Capital LLC has been loading up on bearish stock options to wager on the prospective market fallout. One big risk: An accounting provision in the Cares Act that lets U.S. banks suspend the recognition of some coronavirus-related loan changes is due to expire by the end of the year. Without an extension, banks’ financial results would look worse, according to Michael Mescher, founder of the $22 million fund, with the potential to hit the economic recovery and stock rally. “In the absence of stimulus getting extended, all of this treatment ends,” Mescher said. “We’re adding more left-hand tail risk because it’s clear the market doesn’t realize this.” The 39-year-old former Barclays Plc trader is referring to measures that allow banks to defer labeling Covid-related loan modifications as troubled debt restructuring, as well as the temporary easing of capital requirements for community banks. The rising number of U.S. coronavirus cases combined with the risk of tougher lockdowns under an incoming Biden administration also make it more likely bearish wagers will pay off, he added.

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Investment Companies Hit All-Time Record For Assets Despite Dip in Fundraising

Brief: Investment companies recovered from pandemic lows to hit a fresh all-time high in assets, totalling GBP221.4 billion at the end of November, according to data from the Association of Investment Companies (AIC). Nevertheless, fundraising for existing investment companies fell to GBP5.7 billion over the year, which was 22 per cent lower than the previous year’s total of GBP7.3 billion.  “Despite the disruption and uncertainty caused by Covid-19, 2020 has seen the continuation of long-running themes in the investment company industry: healthy asset growth, strong fundraising from existing companies and falling fees,” says Ian Sayers, the AIC’s chief executive. Out of the year-to-date total, GBP1.3 billion was raised in the Renewable Energy Infrastructure sector, the highest-raising sector of the year. “Investment companies in the Renewable Energy Infrastructure sector continue to be in high demand for their attractive yields and their ability to contribute to a greener future.” The largest fundraising by individual company was by Hipgnosis Songs Fund, which raised GBP426 million for its royalties fund which includes songs by Mariah Carey, Fleetwood Mac, and Blondie.  Greencoat UK Wind followed with a raise of GBP400 million in the Renewable Energy Infrastructure sector, and then Smithson raised GBP349 million in Global Smaller Companies sector. There were also six IPOs of new investment companies, raising a total of GBP855 million. Investment companies returned an average of 10.2 per cent in the year to date, with many also making their fee structures more attractive for shareholders such as lowering management fees, introducing tiered fees and removing performance fees.

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Deutsche Bank Strategist Hasn’t Seen Investors Agree This Much in 25 Years

Brief: With the massive coronavirus vaccination campaign underway, the market is feeling bullish. The S&P 500 index (^GSPC) continues to climb near all-time highs and 2021 outlooks are sanguine. This has given some strategists — even bullish ones — a bit of pause. Deutsche Bank strategist Jim Reid wrote in a note to clients Monday that a key takeaway for the market in 2021 is that this risk-friendly, U.S. equities-heavy approach is “extremely consensus for the next 12 months.” The consensus felt so extreme that Reid wondered if this bullish case for 2021 S&P forecasts was the “biggest consensus in history.” “It’s fair to say that in the 25 years I’ve been doing this I can’t remember a time when so few (if any) disputed the central narrative,” Reid wrote. “Is this a warning sign or a reflection that the vaccine news has been uniformly positive and game-changing over the last 5 weeks?” In the last Deutsche Bank monthly survey of over 900 market professionals, 48% of respondents said they thought the stocks in both the U.S. and Europe would be higher in three months. This is as bullish as it was last month, Deutsche Bank strategists, led by Reid, wrote. The 12-month expectation was the second-most bullish of the year, also at 48%. The growth in the market has not converted many bulls to bears.

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Coronavirus Woes Supersede Longevity Risks in Asia for Now

Brief: The coronavirus pandemic has made it even tougher this year for Asia-Pacific governments to grapple with unprecedented longevity risks to retirement savings, analysts say. Governments' focus on "cushioning the economic effects of the coronavirus" has pushed demographic challenges from the headlines even as the window of opportunity to address issues — such as how to finance retirements that will stretch over 20 to 30 years — is closing, said Michaela Grimm, a Munich-based senior economist with Allianz Group. Ms. Grimm helped author the Allianz Pension Report 2020 the company issued in May. The pandemic "has distracted us," shifting the focus of governments in the region from the threat longevity poses for retirement savings even as a number of countries here get old "at a pace never seen on earth before," agreed Ashley Palmer, Hong Kong-based regional managing partner, Asia retirement and investment, with Aon Hong Kong Ltd. The U.S., U.K. and Europe took 80 years to transition from "aging societies," with 7% of their populations at 65 years of age or over, to "super-aged societies" with 20% in that age bracket. But that's happening "in about 10 years in some Asian markets," Mr. Palmer noted. Asset owners called that shift in government focus this year understandable even if steps to provide immediate relief for workers have sometimes undercut programs designed to ensure they won't outlive their savings.

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Boutique Firms Steal the Show on Year’s Top Health-Care Deal

Brief: Boutique advisory firms are taking most of the limelight on the year’s biggest health-care deal. AstraZeneca Plc tapped Evercore Inc. and Centerview Partners as lead financial advisers on its $39 billion takeover of Alexion Pharmaceuticals Inc. This deal helped Evercore jump three places higher in the mergers and acquisitions league tables, to No. 9 globally, while Centerview moved up five spots to No. 12, according to data compiled by Bloomberg. Morgan Stanley and JPMorgan Chase & Co. were listed as financial advisers as well as lead debt underwriters to Astra, while Goldman Sachs Group Inc. was also one of the main banks helping fund the deal.  Astra’s boutique-heavy lineup was reminiscent of another big U.K. transaction this year, the $40 billion sale of British chip designer Arm Ltd. In that deal, smaller advisory firms Zaoui & Co. and Raine Group led the discussions for Arm’s owner, SoftBank Group Corp. Goldman Sachs also had a role with the Japanese company. In contrast to Astra, Alexion did have a Wall Street bulge-bracket firm in its corner, hiring Bank of America Corp. to advise on the transaction. They know Alexion well, having worked with the company last year on its takeover of Achillion Pharmaceuticals Inc. as well as the purchase of Swedish drugmaker Wilson Therapeutics AB in 2018. One notable name missing from this latest deal was Robey Warshaw LLP, the U.K. boutique that advised Astra when it was the target of Pfizer Inc.’s abortive takeover bid in 2014 -- a deal on which Centerview and Evercore were also present. London-based Ondra LLP, which works on a retainer basis, did show up as it provided advice to Astra as part of its ongoing work with the company.

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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 December 11, 2020:

  • In the United States, the Food and Drug Administration (FDA) will move rapidly toward issuing an emergency authorization for Pfizer’s COVID-19 vaccine after a key panel endorsed the drug on Thursday. The Biological Products Advisory Committee voted 17-4 with one abstention to recommend the vaccine for emergency use. According to CNN, most governors have informed Operation Warp Speed that they will exhaust their Pfizer vaccines within days of receiving the first shipment. Warp Speed officials have said additional shipments of the vaccine should arrive on a weekly basis. 
  • Canada’s Public Health Agency has released their latest COVID-19 modelling, which forecasts projected cases and it is not looking like it will be a very happy holiday season. Speaking at a news conference on Friday, Chief Public Health Officer Dr. Theresa Tam said if Canadians maintain their current contact levels, more than 12,000 new cases will be recorded daily by January. Canada is currently at around 6,000 cases a day so far this week. According to the modelling sheets if Canadians increase their contacts, which is entirely possible over the holiday season, the numbers could surge to 30,000 cases by January. “We have yet to see the kind of sustained decline in daily case counts that would indicate we are bringing the pandemic under control,” said Dr. Tam.
  • The United Kingdom government said on Friday they would cut the self-isolation period from 14 days to 10 days and will apply to both those presumed to have been in contact with someone who had COVID-19 and those arriving from abroad. The shorter self-isolation period will begin on Monday December 14th, and will apply in England, Scotland and Northern Ireland. The shorter isolation period is already in effect in Wales. The Chief Medical Officers in the UK released the following statement on the move: “After reviewing the evidence, we are now confident that we can reduce the number of days that contacts self-isolate from 14 days to 10 days.”
  • The European Union agreed to an historic $2.2 trillion budget and stimulus package, but it didn’t come without a little controversy. The deal was agreed on Thursday after Hungary and Poland angrily protested a clause in the agreement that tied funding to upholding democratic norms. The rule-of-law mechanism both countries objected to will remain in place. The seven-year budget includes a $909 billion USD pandemic relief package that will be financed by joint debt and is badly needed as the coronavirus tears through the European bloc of nations for a second time this year.
  • Philippines Food and Drug Administration (FDA) confirmed on Friday that UK based drug firm AstraZeneca withdrew its application to conduct COVID-19 vaccine trials in the country. FDA Director General Eric Domingo clarified that even without holding clinical trials in the Philippines, AstraZeneca can still supply the country with coronavirus vaccines once they are approved for use. The FDA didn’t disclose what made the UK drug company change their mind after it had passed separate evaluations by a panel of vaccine experts last week. In October, Chinese state-owner Sinopharm also called off plans to hold vaccine trials in the Philippines stating they were only interested in supplying vaccines and not in clinical trials anymore.
  • In Australia, the University of Queensland and pharmaceutical company CSL have pulled the plug on their COVID-19 vaccine candidate after an unusual result occurred in clinical trials. The COVID-19 vaccine candidate was abandoned after several participants returned “false positives” for HIV during testing. The University and CSL assured there was no possibility the vaccine could lead to HIV infection but didn’t want to progress for fear it would interfere with existing HIV testing procedures and dent public confidence in using the vaccine even if it were to eventually work. The Australian government has already entered into agreements to purchase vaccines from Pfizer/BioNTech, Novavax and AstraZeneca/University of Oxford.

Covid-19 – Due Diligence And Asset Management

Buyout Firms Bet Smaller is Better With Covid Trimming Deals

Brief: Private equity bosses have found a way to keep deals flowing during the economic crisis: going small. With blockbuster buyout activity hit by the pandemic early in the year, the industry has turned to smaller acquisitions that are aimed at expanding their stable of companies. These purchases are another tool in the arsenal that private equity firms have to build their portfolio companies before selling for a profit. Add-on transactions from firms including Cinven and HarbourVest Partners comprised 51% of global buyouts in the third quarter, a new high, according to data compiled by PitchBook. These transactions, where private equity-backed firms acquire businesses using their owner’s capital, are also on pace for a record year. “You’re seeing most investors working more closely with their existing relationships, focusing on assets and segments they know,” Brian Gildea, head of investments at alternative asset manager Hamilton Lane, said in an interview. Cinven of London has been among the most active European firms in this arena this year. The 34 portfolio companies in its fifth and sixth funds have made more than 300 add-on deals since the funds began, according to a company spokeswoman. In October, Cinven almost doubled the size of Dutch ingredient distributor Barentz International with the purchase of Maroon Group, a North American supplier of specialty chemicals.

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A Hedge Fund Vet Makes a Fresh Start in the Pandemic

Brief : It’s been a good 2020 for John Thaler, who decided to stage a comeback in January after shutting down JAT Capital in 2015. After delivering eye-popping returns so far this year, Thaler’s new firm, Hampton Road Capital Management, is forming a strategic relationship with Leucadia Asset Management, the asset management division of Jefferies Financial Group. Leucadia will invest capital in Hampton Road’s long-short equity strategy, which is focused on technology, media, telecommunications, and consumer sectors globally. According to an investor letter distributed early Friday and obtained by Institutional Investor, Hampton Road is up 39.4 percent net year-to-date through December 10. The fund has garnered $250 million in assets under management so far, according to sources. “Leucadia will be beneficial to us as we scale our business over time and will allow us to concentrate on investing,” Thaler said in a statement. “Our team is very excited about the opportunities we are seeing in our core sectors on both the long and short side. We are pleased with the results we have delivered in our strategy this year and are optimistic about the future.” Thaler returned to fund management early this year, joining Wexford Capital as a portfolio manager of the Wexford Core Equities Fund. In August he spun out the fund and renamed it Hampton Road Capital Management. Thaler has ties to Julian Robertson Jr.’s Tiger Management through his work at Shumway Capital, a firm founded by a former Tiger analyst. He launched JAT Capital in 2007, specializing in the kinds of tech and media stocks popular with Tiger alumni.

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Institutional Investors’ Long-Term Forecasts Brighter than a Year Ago Despite Covid-19, says State Street Study

Brief: Despite the impact of Covid-19, State Street's survey annual Growth Readiness Study reveals that more than two-thirds of European institutional investors (67 per cent) were able to meet or exceed their investment performance targets over the last 12 monthsConfidence in the one-year growth outlook has dropped ten per cent since 2019, with 44 per cent of respondents now optimistic about meeting their growth objectives over the next 12 months. Long-term forecasts are also bright, with just over three-quarters (76 per cent) optimistic about achieving their growth targets in the next five years, representing a 10 per cent increase from 2019 – even though the majority believe that new regulations or taxation as a result of Covid-19 or an economic recession and vendors’ financial vulnerability will likely hinder expansion plans moving forward. Somewhat surprisingly, only 34 per cent of European respondents are worried about geopolitical tensions being a top threat to growth, compared to 40 per cent globally.

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COVID-19 Concerns Won’t Spring Jailed State Street Exec

Brief: A former State Street Corp. vice president convicted of tacking on unauthorized charges to huge international transactions will not be able to get out of prison five months into his 18-month sentence, as a judge ruled Thursday he does not face a substantial COVID-19 risk. Ross McLellan had sought compassionate release from the minimum security prison camp in central Massachusetts where he is serving his term, citing Type 2 diabetes and obesity as factors that put him at a heightened risk should he contract the virus. But U.S. District Judge Leo T. Sorokin denied the request, saying that the novel coronavirus is not a pressing concern at the prison camp in question and that McLellan has not met the standard for early release. "The camp is presently less than half full and has no active COVID-19 cases among its inmates," Judge Sorokin wrote. "Nothing in the record suggests that McLellan is currently exposed to unduly harsh or excessively risky conditions of confinement." The judge also wrote that "McLellan committed a serious crime for which he has served less than a third of his sentence — and less than the amount of time his less culpable co-conspirator served as a result of a sentence also imposed by this court." A jury convicted McLellan in 2018 of wire and securities fraud for supervising a scheme in which pennies per share were tacked on to massive international transactions for huge foreign clients without their knowledge.

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Asset Management Deals Are About to Get More Interesting

Brief: In 2020, asset managers joined up together to survive the Covid-19 downturn and industry pressures that had been mounting for years. Next year, tie-ups might be driven by more strategic motivations and new business initiatives, one firm predicted in a report issued Thursday.  The shift comes as a number of recent deals haven’t rewarded the acquiring asset manager with a higher stock price, even though the transactions have resulted in successfully integrated firms, concluded PricewaterhouseCoopers in its 2021 outlook on asset and wealth management deals. Even when some firms have reduced costs and increased earnings, they’ve still watched their price-to-earnings multiples decline in the aftermath of deals, according to PwC.  “As the Street may be downplaying the value of cost reduction, we’re already seeing a shift from deals driven by cost-cutting to deals driven by potential revenue synergies,” wrote Greg McGahan, deals leader for U.S. financial services and asset and wealth management, one of the report's authors. “These moves to broaden product offerings and expand distribution are designed to drive top-line growth, rather than expanding profit margins by reducing expenses.”  McGahan noted that both Morgan Stanley’s $6.8 billion purchase of Eaton Vance and BlackRock’s $1 billion deal for Aperio are examples of what might be in store for 2021. Aperio and Parametric Portfolio Associates, owned by Eaton Vance, both offer what's called direct indexing, which allows individuals or institutions to design a custom portfolio where they hold the individual securities. It’s an alternative to an index fund that is customized. 

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Wall Street Sees World Economy Surging in 2021 From Rocky Start

Brief: Wall Street’s biggest banks are predicting the coronavirus-hit world economy will crawl through the early days of 2021 before bouncing back as vaccines and more fiscal stimulus flow into it. After a year which saw the unanticipated shock of the deepest recession since the Great Depression, economists are bracing for a shaky start to the new year as 2020 ends with a spike in infections and further rounds of restrictions. The most upbeat are the analysts at Morgan Stanley, who predict an expansion of 6.4% in the coming year and maintain their call for a V-shaped recovery. Less confident are the economists at Citigroup Inc., who predict growth of 5%.Both would be dramatic improvements on the 4.4% contraction the International Monetary Fund has penciled in for 2020.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Thursday December 10, 2020:

  • In the United States, the number of COVID-19 deaths in a single day surpassed 3,000 for the first time on Wednesday. The one-day death toll exceeded the number of lives lost from the terror attacks on America during September 11th, 2001. Healthcare experts are pleading with Americans not to gather this holiday season. “No Christmas parties. There is not a safe Christmas party in this country right now,” said Dr. Michael Osterholm, a member of President-Elect Joe Biden’s COVID-19 advisory board. With America hoping to have two vaccines signed up for approval in a matter of weeks, President-Elect Biden has set a goal of vaccinating 100 million people within the first 100 days of his administration. 

  • In Canada, another day, another record for Ontario. The country’s most populous province recorded 1,983 new COVID-19 cases on Thursday with over half of those happening in the heavily restricted areas of Toronto and Peel Region. Elsewhere in the country, Quebec recorded 1,842 new cases with Premier Francois Legault threatening fines for those who don’t follow the rules. “We cannot allow a minority of people to put the majority at risk,” said Legault. Earlier in the week, the other hotspot in the country, the province of Alberta, imposed tougher restrictions including a mask mandate and ban on social gatherings to get their numbers down. Alberta had 1,460 new cases on Wednesday – only about 500 less than Ontario on Thursday even though they have three times less of a population.

  • In the United Kingdom, London Mayor Sadiq Khan has warned his residents the England capital could be subject to the country’s toughest COVID-19 restrictions due to its high case rate. The UK’s tier 3 restrictions include the closure of pubs and restaurants for in-person service. The latest weekly data as of December 6th from Public Health England shows London has a rate of 191.8 cases per 100,000 of the population, the highest of any region in England.

  • Germany on Thursday reported a daily record of 23,769 new COVID-19 infections, prompting health officials and government leaders to sound the alarm. The president of the Robert Koch Institute told journalists people need to reduce their contacts by 60% or “other measures” will have to be considered. The president of Germany’s government organization for disease control went on to add the restrictions that have been in place since November 2nd are working when implemented correctly as noted by numbers in certain regions. Chancellor Angela Merkel has called on a full lockdown to be implemented after Christmas – for potentially as long as two weeks in order to bring down infection rates.

  • France will lift a six-week-long nationwide lockdown on December 15th, but it won’t be business as usual upon exit. A curfew from 8 PM will be imposed and that will include New Year’s Eve, but Prime Minister Jean Castex said families would be allowed to travel to celebrate Christmas together. Museums, theatres and cinemas will remain closed for an extra three weeks past the December 15th lockdown exit. France’s COVID-19 rate has improved since the country entered its second lockdown on October 30th with new infections dropping from nearly 50,000 a day at the start to around 10,000 now. 

  • Reuters is reporting India, the world’s largest vaccine maker, is getting set to enter the COVID-19 vaccine race. India manufactures more than 60% of all vaccines sold across the globe, but its $40 billion pharmaceutical sector has been quiet so far with no role in the production of the Pfizer and Moderna COVID-19 vaccines. Indian companies though are set to produce eight more affordable vaccines, including AstraZeneca’s Covishield. “There are many vaccines being produced in countries around the world, but there’s only one nation that has the manufacturing capacity to produce sufficient quantities to satisfy the demands of citizens in every country, and that’s India,” said Australia’s ambassador to India, Barry O’Farrell.

Covid-19 – Due Diligence And Asset Management

Hedge Fund Citadel’s Commodity Investments Up More Than $1 Billion This Year

Brief: Hedge fund Citadel’s investments in commodities returned more than $1 billion this year, according to three people familiar with the matter, helping to drive strong overall performance for one of the world’s largest funds. Citadel, led by Chicago billionaire Ken Griffin, benefited from gains across the commodities business in oil, power, natural gas and agriculture markets this year, the people said. Citadel’s flagship Wellington fund, which practices a multi-strategy array of investments on stocks, bonds, commodities and other securities using teams of traders, is up by 21.2% this year through November, putting it on track to have its best year since 2012, one person familiar with the matter said. All five of the fund’s core investment strategies have positive returns for the year, the person added. A spokesperson for the company declined to comment. Energy markets swung wildly this year as the coronavirus pandemic crushed global fuel demand and created distortions, allowing trading opportunities for hedge funds, oil majors and commodities merchants.

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Private Credit Manager Notches Up 55% Return on Pandemic Fund

Brief : AlbaCore Capital LLP is closing the $1 billion fund and managed accounts it set up to invest in beaten-up credits during the pandemic after the strategy yielded a 55% gross return through the end of last month. The turmoil caused when the first wave of Covid-19 infections shook markets in March meant many fundamentally strong borrowers fell into the target price range for its vehicle, known as AlbaCore Investment Opportunities, the London-based firm said in a statement. The strategy paid off as the market rallied strongly when the U.S. Federal Reserve announced purchases of corporate debt and the European Central Bank launched its emergency quantitative easing program. AlbaCore’s managers took a relatively cautious approach, allocating most of their investments to industries such as software, telecommunications and consumer staples that were spared the worst impact of the pandemic, David Allen, the firm’s founder, said in an interview. “We bought a lot of senior secured debt and investment grade securities as low as 60-70 cents on the dollar,” said Allen. “Around 80% of our buying activity was in the safest parts of the market.” Finding an appropriate benchmark to measure Albacore’s fund against is tricky. The firm uses a blend of the S&P European Leveraged Loan Index and Bloomberg Barclays Pan-European High Yield (Euro) Index as a proxy, which generated 1.7% in the year through Nov. 30, according to the statement. The fund does not employ a typical hedge fund strategy and far outstrips the 1.01% returned year to date by an index of credit hedge funds tracked by Bloomberg.

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Mnuchin Questioned on Treasury Loan to Apollo-Backed Firm

Brief: Treasury Secretary Steven Mnuchin faced questions on Thursday from a congressional oversight panel over his department’s decision to extend a $700 million loan to a trucking company backed by private equity firm Apollo Global Management Inc. The Treasury Department approved a loan to YRC Worldwide Inc., a Kansas-based shipping company, drawing on funds from the March Cares Act that were intended to help bolster companies critical to national security. The watchdog has raised concerns that the loan could put taxpayer money at risk and that YRC, which ships supplies between military bases, isn’t critical to national security. Congress and outsiders “encouraged us to take losses” on the program, Mnuchin said Thursday at a Congressional Oversight Commission hearing about the national-security loans. “We are not saying this is a market loan. Had it been a market loan, Treasury would not have been involved.” “Fortunately, we’ve made a significant profit” on the YRC deal, Mnuchin said. “I am going to recommend that next year whoever is Treasury secretary seriously look at selling this loan and recovering what I think will be a profit to taxpayers, because this was a success.” Representative French Hill, an Arkansas Republican on the panel, said that taxpayer money is at risk because he didn’t believe that the collateral pool backing the loan was worth as much as Treasury estimates.

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Manufacturers Hunt for Deals Amid Pandemic Wreckage

Brief: The COVID-19 pandemic has been a disaster for many U.S. manufacturers, but it is also creating acquisition opportunities. Cary Wood, chief executive of Grede Holdings LLC, saw business plunge 90% earlier this year as the auto plants and heavy equipment producers that use his metal parts shut down, followed by a bumpy recovery. But he’s upbeat these days and, in the last two months, he’s opened negotiations aimed at acquiring seven smaller foundries. “I can wait out the cycle,” Wood said, “but many of these guys can’t. Grede, carved out of publicly traded American Axle & Manufacturing Holdings Inc last year, is backed by a private equity firm and was already hunting for acquisitions before the crisis hit. But Wood said the rate of deal talks is far higher than a year ago, when he was running the foundry company that merged with Grede as part of the buyout. And it is similar to a wave of restructuring he saw just after the 2008-2009 financial crisis. A similar story is playing out across the U.S. economy. A recent survey of leaders of companies with over $250 million in sales found 65% of manufacturers said they planned to make acquisitions in response to economic conditions created by the pandemic. Other sectors show a similar push for acquisitions, though not to the same degree. Only 36% of consumer goods companies said they were looking for acquisitions, while 41% of health care companies said they were on the hunt.

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Oil Ascends From Covid Abyss Six After Falling Below Zero

Brief: Oil futures in London blew past $50 a barrel for the first time since the pandemic ground the global economy to a halt in a remarkable rally that few predicted would happen this soon. The return to prices levels not seen since March while the pandemic grinds on represents a startling turnaround for a market that just months ago was brought to its knees by an unprecedented loss of demand. With places to store unused oil running out and low prices pushing U.S. shale drillers into bankruptcy, OPEC and its partners collaborated to stanch outflows and stabilize markets while the world awaited a vaccine. Announcements last month from Pfizer Inc and others that safe vaccines could be rolled out by spring, lending a crucial boost to global demand for fuels, provided the boost that was needed to send crude spiraling above $40. Futures in London rose as much as 4.5% Thursday. Asia continues to lead the rebound in physical demand with robust purchasing by China’s private refiners. A top Indian processor has issued multiple tenders to acquire oil. The U.S. dollar also weakened, which raised the appeal for commodities priced in the currency. Still it appears the suddenness of Thursday’s rally caught some oil watchers off guard. “I am a bit surprised that it happened now,” said Bart Melek, the head of global commodity strategy at TD Securities. “I have been advocating $50+ Brent, but I thought that would happen after we see inventories and demand look better.”

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Omers Tells Staff They Can Remotely Work Through March

Brief: Ontario Municipal Employees Retirement System, the pension fund for local government workers in Canada’s largest province, told staff they may continue working remotely until March 31. The policy applies to employees who have the ability to do their jobs from home. “We recognize and thank our colleagues whose roles require them to be on site and who’ve been going into the office for the duration of the pandemic,” said a memo signed by Rodney Hill, Omers’s chief risk officer, and Dean Hopkins, chief operating officer of its real estate investment arm, Oxford Properties Group. “Ultimately, we’re an office-based culture,” the two executives said, adding that Omers plans to reopen its office when conditions allow. The Toronto-based pension fund managed C$109 billion ($85 billion) as of the end of 2019. Canada became one of the first countries to approve a vaccine from Pfizer Inc. and BioNTech SE on Wednesday, but will have limited quantities at first. Prime Minister Justin Trudeau has said the government expects a majority of the population will be able to get a vaccine by September. “We continue to monitor our approach, adjust as needed, and expect to work this way until at least March 31, 2021, when we will re-evaluate based on conditions,” Omers spokesperson Neil Hrab said. Financial institutions on Wall Street and beyond have delayed return-to- office plans as coronavirus cases have spiked. Some, including Deutsche Bank AG and Nomura Holdings Inc., are weighing or have decided on making flexible work arrangements permanent.

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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 December 9, 2020:

  • In the United States, Washington politicians are still struggling to find common ground to push through another round of COVID-19 relief funds. Democrats have called the bipartisan talks towards a $908 billion relief bill the most realistic chance of a plan getting through a divided congress. House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer rejected the latest Trump Administration offer as it didn’t include extra jobless benefits. The sticking points on the bipartisan relief bill are disagreements over legal immunity for businesses and state and local government relief.
  • Health Canada has given the green light to the Pfizer-BioNTech vaccine, which is key to Canadians receiving inoculations likely by next week. Canada became the third country in the world to authorize the vaccine after the United Kingdom and Bahrain. Health Canada announced the approval after finishing a two-month review of Pfizer’s clinical trial data. It will be up to provincial leaders to decide who get shots when, but Prime Minister Justin Trudeau and the premiers are in agreement that the National Advisory Committee on Immunization (NACI) recommendations should be followed and the most vulnerable, such as those in long-term care homes, will be first in line.
  • United Kingdom’s medical regulator warned Wednesday that people with a history of serious allergic reactions shouldn’t receive the COVID-19 vaccine from Pfizer and BioNTech. The reason for this is investigators want to look into whether two reactions on the first day of country’s vaccination program were linked to the inoculation. The two people who reported reactions were National Health Service staff who had a history of significant allergies and carried an adrenaline shot – such as an EpiPen. Both had serious reactions but recovered after treatment. Such advice on vaccines isn’t uncommon as several on the market already carry warnings about allergic reactions. Pfizer and BioNTech said they were working with investigators “to better understand each case and its causes.”
  • According to a United States Centers for Disease Control and Prevention (CDC), the coronavirus was circulating in Italy months before the first COVID-19 cases were identified in the country. The CDC report refers to an early December 2019 case in Milan where a child contracted severe acute coronavirus respiratory syndrome. The symptoms at the time were diagnosed as a mistaken case of measles. Upon analysis carried out retroactively on samples, tests showed the child tested negative for measles, but positive for COVID-19. A separate study published in June indicated that virus was present in sewage systems in Milan and Turin as early as December 2019.
  • The United Arab Emirates (UAE) said Wednesday the Chinese state-owned Sinopharm’s COVID-19 vaccine was 86% effective in the federation of sheikdoms trial run. The news marks the first public release of information on the efficacy of Sinopharm’s COVID-19 vaccine. The UAE conducted a trial beginning in September, which involved 31,000 volunteers from 125 nations. It’s not clear whether the 86% efficacy is based on those taking part in the testing in the UAE or include results from China and elsewhere. The statement described the vaccine as receiving “official registration” without elaborating on what that meant.
  • In Brazil, media are reporting President Jair Bolsonaro is making moves to assert control of the nation’s independent health regulator, Anvisa. Reuters is reporting on November 12th, President Bolsonaro nominated a retired soldier with no background in medicine or vaccine development to be the person to lead the charge with greenlighting vaccines. If he is to be confirmed through Brazil’s Senate, which is likely the case, President Bolsonaro would have three allies for Anvisa’s five directorships, thus giving him control on all major decisions taken by the agency. President Bolsonaro has routinely spoken out against COVID-19 vaccinations and health experts in Latin America’s largest country are concerned Bolsonaro’s political message will now be passed through the public health system.

Covid-19 – Due Diligence And Asset Management

UK Fund Managers Optimistic for 2021

Brief: Healthcare and emerging markets will deliver some of the best returns next year, according to a study that shows UK fund managers' optimism about the post-Covid world. The imminent rollout of vaccines across the globe and the receding threat of Covid-19 mean UK fund managers expect rising markets next year, the Association of Investment Companies (AIC) found. AIC, the UK trade body for closed-ended funds, found that 38% of managers see the arrival of vaccines as the biggest cause for optimism. Other significant factors included technology-driven economic growth and a value-growth rotation which both received 14% of the vote. Close to a quarter (24%) of managers tipped emerging markets as the sector most likely to reward investors, despite the fact that many developing economies have been hardest hit by the pandemic.  The UK and the US were also highlighted by 19% and 14% of managers, respectively. Respondents were similarly positive on these markets over the longer-term with emerging markets and Asia Pacific ex-Japan both tipped by 19% to outperform over the next five years, followed by the UK and the US both tied on 14%.   According to the AIC’s communications director, Annabel Brodie-Smith, “the prospect of a much longed-for return to normal is influencing managers’ thinking”. 

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Europe Loosens MiFID II for Research-Driven Economic Bounce

Brief : After three years of criticism, administrative headaches for banks and an exodus from stock research, the pandemic prompted Europe to water down its key financial market rules. The MiFID II regulation, conceived at a time when Britain was a driving force behind the European Union’s financial-services regime, will be relaxed in a bid to boost the recovery from the pandemic. The changes lighten administrative burdens on experienced investors, alter rules on commodity derivatives, and revise the controversial “unbundling” rules that forced investors to pay for investment research separately from trading fees. The European Commission, the EU’s executive arm, said Wednesday that the changes to the revised Markets in Financial Instruments Directive will encourage the investment community to pay more attention to smaller and mid-sized firms, attracting investment as they grow and helping lift the region’s economies out of a historic recession. Under the new policy, equity research on firms with a market capitalization below 1 billion euros ($1.2 billion) can be “rebundled,” or offered for free to a firm’s trading clients. “This will help make it easier for our markets to support European businesses during this difficult time,” Mairead McGuinness, European commissioner for financial services, said in a statement. The Commission proposed changes to the rules in July as the economy took a hit from the Covid-19 pandemic.

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Institutional Investors Choose Defensive Allocations Amid Negative Rates Anxiety

Brief: Institutional investors are taking defensive positions into 2021, as they attempt to cushion portfolios against the long-term impact of the pandemic, including the fallout from government and central bank responses to the Covid-19 crisis. According to a recent survey of institutional investors by Natixis Investment Managers, eight in ten institutional investors say markets have underestimated the long-term impact of the global pandemic.  The prospect of negative interest rates is considered the biggest portfolio risk for the next year, with four out of five institutional investors saying low rates have already distorted market valuations. In the UK, the Bank of England has kept its base rates at 0.1 per cent for eight months, but is considering taking rates negative in order to support economic activity and increase market liquidity.  Other central banks including the European Central Bank, Swiss National Bank and the Bank of Japan, have already been using negative interest rate policies for several years. The risk of interest rates falling even lower is mounting, with Fidelity International saying in a recent note that ever-easier monetary policy “likely to become structural, especially in developed markets”. “As Covid-19 relief packages expire and to help mitigate the impact of a pending fiscal cliff, the Fed may also have to buy longer duration bonds, increase the pace of asset purchases and strengthen forward guidance. More easing is also likely in Europe given weaker growth and inflation expectations,” says Salman Ahmed, global head of Macro and Strategic Allocation at Fidelity.

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The Drive to Digitalisation: How to Increase Cybersecurity

Brief: While security has always been at the forefront for funds, this year has tested defence practices and security frameworks utilised by the sector globally. The Covid-19 pandemic has pushed firms to identify and quickly mitigate any new security gaps. This new landscape has accelerated the adoption of advanced security and control measures to survive.“Covid-19 and the impact of social distancing have become the ultimate tech disrupter, driving investment and digitalisation innovations,” says George Ralph, managing director, RFA, ”This growth has been reflected in an increase in the need to manage distributed workforce transformations and a need for new solutions for business productivity, collaboration, and mobility via the cloud and data management.” He notes how these growth areas are not unique to the RFA client, rather, they mirror the broader trends in the global hedge fund industry. Specifically, hedge fund managers are growing more comfortable with moving data to the cloud in an effort to enhance operational value. However, they do still find data management to be one of their most significant challenges and its cited as one of their top spending priorities for the year ahead.  Ralph identifies a shift in acceptance and adoption of cloud-based technology: “This marks an inflection point for the hedge fund industry. Firms of all sizes must adapt to the digital working world. Those hedge fund managers that are fully or partially using the cloud will continue to see improvements in operational efficiency.

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Fed Keeps Corporate Bond Market Purring After COVID-19 Drove Record Issuance

Brief: Just because an end is in sight for the coronavirus pandemic, it does not mean U.S. companies will stop tapping the bond market. One of the consequences of COVID-19 was a sharp ramping up of corporate debt issuance as companies raced to bolster liquidity in the face of plunging revenues. But even as the economic recovery from lockdowns gathered pace and liquidity became less of a concern, companies have continued issuing bonds, taking advantage of lower borrowing costs to refinance debt and extend maturities.  "Refinancing was chapter 1 of the COVID story, which gave way to chapter 2, which is now the favorable conditions and getting ahead of the debt," said Nick Kraemer, head of ratings performance analytics at S&P Global Ratings. The dash for cash started in March. Having first drawn down on credit lines as financial markets began to seize, businesses then flooded into the bond market to pay back their obligations with longer-dated debt. The guarantee of support by the Fed smoothed out credit markets and yields fell back, encouraging companies to refinance at lower rates. By mid-August, investment-grade bond issuance had already surpassed the previous annual record of $1.221 trillion in 2017, according to data from LCD. As of the end of November, the 2020 total stood at $1.652 trillion.

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Fees Were Already Under Pressure. Then the Pandemic Hit.

Brief: The coronavirus pandemic has added kindling to the cost and fee pressures that have been smoldering in the asset management industry for years, according to Brown Brothers Harriman. The bank reported Tuesday that fifty-two percent of asset management firms plan to reduce expense ratios, or fees, over the next 12 months, according its new survey of asset management executives. The survey questioned C-suite executives on subjects including new products, costs, operations, outsourcing, and remote work arrangements. BBH interviewed CEOs, CFOs, COOs, and senior executives at global asset managers that included large multinational asset managers and smaller boutique firms. “Fee compression, compliance and regulatory changes, low organic asset growth, and rising technology costs fueled by rapid innovation have all weighed on asset managers,” wrote BBH partner Chris Remondi in a report on the findings. “Enter the COVID- 19 crisis, which accelerated the pace of many of these challenges.” According to the report, fee pressure is coming from big managers that benefit from economies of scale in certain products, as well as from the increased transparency around fees in recent years. One respondent said that “continuing fee pressures are a concern when it comes to revenue retention – it is no longer acceptable to simply pass along operational fees.” 

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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 December 8, 2020:

  • In the United Kingdom, a soon-to-be 91-year-old retired shop clerk and grandmother of four received the first shot of the approved Pfizer vaccine in what public health officials have called V-Day. Margaret Keenan was the first one in line at the University Hospital Coventry, one of several hospitals around the country that are handling the initial phase of the UK’s inoculation program. The UK is the first country in the western world to start mass inoculations and will likely provide lessons to other countries as they prepare for the unprecedented task of vaccinating billions of people.

  • Ahead of an advisory meeting Thursday to review the Pfizer COVID-19 vaccine, the United States Food and Drug Administration (FDA) has given its opinion. The FDA said Tuesday data from the drugmaker’s vaccine trials is consistent with recommendations put forth by the agency for an emergency use authorization. Data submitted appeared to show the vaccine was at least 52% effective before the second dose and 82% effective for the combined group of people who took one or two doses. In comparison, the annual flu vaccine generally reduces people’s risk of getting the flu by 40% to 60% compared with people who aren’t inoculated, according to the Centers for Disease Control and Prevention (CDC).

  • In Canada, Ontario’s Toronto and Peel regions have passed the midway point of their 28- day lockdown, but it has seemed to do little in flattening the curve. Since measures such as the closure of in-person restaurant service, gyms and a ban on indoor social gatherings - case counts, and hospitalizations have continued a steady climb. Health officials attribute the situation to trying to slow down a massive truck, whose momentum is difficult, but not impossible to counteract. However, an Angus Reid poll on Canadians plan for the Christmas holidays may throw a wrench into slowing down the coronavirus truck. The new survey taken in late November, said 30% of the nearly 5,000 respondents said they will be visiting loved ones locally and 10% says they planned to leave their community or province to do so.

  • Germany’s center for disease control confirmed on Tuesday the proportion of coronavirus cases per 100,000 people has reached a record high. The data from the Robert Koch Institute shows Germany has been averaging 147.2 infections per 100,000 people in the past seven days, which is far above the government’s stated goal of bringing new infections below 50 per 100,000. Chancellor Angela Merkel has said the country could only consider its anti-pandemic measures if that stated goal is met. Germany’s health minister was on public television Monday evening stating that stronger measures might be needed if the current trajectory is not broken.

  • In an attempt to kickstart Japan’s economy, Prime Minister Yoshihide Suga has launched the third fiscal stimulus of the year. The $294 billion USD package includes money to fight the coronavirus pandemic, but also trillions of yen aimed at investment in new digital and green technologies. “This economic package will protect the lives and livelihood of the people”, said Prime Minister Suga in a meeting with his ruling coalition. “It will maintain employment, support businesses, drive the economic recovery and open the way to breakthroughs in growth areas of green and digital technology.” This round of stimulus follows earlier rounds in April and May.

  • As the United Kingdom might be a window to what vaccine rollouts will look like for others, Australia has shown the rest of the world the effectiveness of lockdowns. When Australia started to witness a resurgence in cases in late July, the government put in place measures with the goal of just not flattening the curve but reaching zero new cases. The policy proposal was named “Go for zero” by a think tank that advises the government. While the strict lockdowns were hard to deal with for its residents – they are now reaping the benefits. Victoria state – home of the lockdown back in August can now allow up to 100 people to attend public gatherings and Melbourne welcomed its first international passenger flight in five months. Australia’s “Go for zero” approach has attracted media coverage from countries such as India and Canada.

Covid-19 – Due Diligence And Asset Management

US Election Results and Vaccine Optimism Drive Hedge Fund Surge

Brief: Hedge funds saw their second-strongest monthly gain on record in November, following a surge driven by US election results and developments made in the search for a Covid-19 vaccine. According to data from Hedge Fund Research, the HFRI Fund Weighted Composite Index soared 6.2% in November - the strongest monthly gain since December 1999 and the second-strongest month since index inception in 1990. The HFRI 500 Index also increased by 4.6% for the month, increasing the year-to-date return to 5.6%. These gains were largely led by equity hedge strategies, which soared on the back of “positive” developments. The HFRI Equity Hedge Index increased by nearly 9% for the month. Kenneth J. Heinz, president of HFR, said: “Through the powerful and volatile macroeconomic and geopolitical trends which have defined 2020, institutions have continued to increase allocations to hedge funds and other alternatives, building in strong performance momentum and positioning for acceleration of these gains into 2020.” Blockchain and cryptocurrency exposures were also said to drive industry gains, as hedge funds continue to increasingly incorporate related exposures into new and existing fund strategies. 

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Singapore, China Deepen Collaboration in Digital Finance, Among Other Areas: MAS

Brief : To support tourism, trade and e-commerce between Singapore and China, the Monetary Authority of Singapore (MAS) is working with the People's Bank of China in the area of digital finance, the central bank said on Tuesday (Dec 8). This is one in a slew of initiatives that will deepen financial cooperation between Singapore and China following an apex meeting between the two countries, the MAS said. It added that the measures will build on existing areas of collaboration, with the aim of supporting financing and investment activities to help Singapore and China recover from the Covid-19 pandemic. The initiatives were discussed at the 16th Joint Council for Bilateral Cooperation between Singapore and China, the highest-level bilateral platform between the two countries, on Tuesday (Dec 8), the MAS said. Another initiative is a 25 billion yuan ($5.11 billion) facility launched last month to help banks in Singapore meet their customers' growing business needs in Singapore and the region. Yuan funding of up to three months will be channelled to primary dealers - banks in Singapore approved by the MAS - through the authority's money market operations.

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GMO Has a Plan to Profit From a Growth Stock Bubble

Brief: GMO, the investment firm co-founded by Jeremy Grantham, has started running a long-short strategy that is designed to profit from the bursting of the growth bubble the firm sees in the stock market. The GMO Equity Dislocation Strategy was first put to work in late October across the firm’s liquid alternatives and multi-asset portfolios, Ben Inker, GMO’s head of asset allocation, told Institutional Investor in a phone interview. The firm raced to create the strategy after observing excessive speculation in stocks as the market came roaring back from its Covid-19-induced crash in March. “By the spring, we had started to see ‘the stupid,’” said Inker. “If you’re not prepared to short the stuff that’s gotten drastically overvalued, you can avoid a lot of the pain — but that’s not going to make you money.” GMO’s new strategy — which is long cheap stocks and short those that are expensive globally — has the potential to produce cumulative net returns of around 80 percent, according to Inker. That’s similar to the gains reaped from the GMO U.S. Aggressive Long/Short Strategy that the asset manager built to profit from the bursting of the 2000 bubble in technology, media, and telecom stocks. “We see a very similar spread to what we saw then,” Inker said of the valuation gap between growth and value stocks. “In 2000, buying value stocks was a perfectly decent idea,” he added, “but buying value stocks and shorting growth stocks did a lot better.” 

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Early Bet on Moderna Sees Top European Fund Gain 65% This Year

Brief: A Baillie Gifford & Co. health care fund run by an all-female team has surged past peers to a 65% gain this year, largely thanks to a far-sighted bet on medical stock Moderna Inc. The fund’s standout performer by far is Moderna, up about 700% this year, propelled by the recent success of its coronavirus vaccine trials. Other top holdings of the $80 million Worldwide Health Innovation fund also saw triple-digit rises, making it the best performing among European health care peers, according to Morningstar Inc. data. “The best way to think about Moderna is that they’re at the root of controlling biology -- anything that can be coded, Moderna can replicate,” said the fund’s manager Julia Angeles, who first invested in the company when it listed in December 2018. “I believed they could be one of those really unique companies that bridges the gap between biotech and technology.” The coronavirus sparked a rush by investors to bet on the winners in a race for a vaccine, with Pfizer Inc. and partner BioNTech SE soaring in the past month. Still, the nearest European peers to the Baillie Gifford fund trail it with gains of 13%-45% this year to November. The pandemic has had a mixed impact on the health care industry overall. Many patients with other conditions have shunned emergency rooms and doctors’ offices for fear of contagion.

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Over Half of LPs to Access Secondary Market Within Two Years, says Coller Capital

Brief: Over half of private equity investors (LPs) will access the secondary market within the next two years, either as a buyer or a seller – or both, according to Coller Capital’s latest Global Private Equity Barometer. Investors’ main motivations will be to re-focus their resources on their best private equity managers (GPs) and to re-balance their portfolios for a post-Covid world. One third of Limited Partners will face liquidity shortfalls, which they plan to remedy through asset disposals and new credit facilities. GP-led secondaries are likely to play an important role, too. Well-structured GP-led processes are overwhelmingly popular with LPs – 85 per cent of whom regard them as a useful tool. “The secondary market played a vital role in private equity during and after the GFC,” says Jeremy Coller, Chief Investment Officer of Coller Capital, “and secondary capabilities have certainly evolved since then. If General Partners structure liquidity processes that offer genuine alignment to all parties – whether they’re buyers or sellers – Limited Partners will welcome them, to the benefit of all participants in the asset class.” Despite the suddenness of the pandemic’s onset, nearly all LPs declare themselves fairly or highly satisfied with how their GPs have communicated – a stark contrast to the Global Financial Crisis, after which 60 per cent of investors told the Barometer that they were dissatisfied.

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Does Dan Loeb Secretly Love Short Selling?

Brief: Like a lot of hedge fund managers, Dan Loeb might be suspected of having a love-hate relationship with short selling. And who could blame him? But even though short bets have been painful for Third Point in recent months, Loeb is backing a new long-short equity firm, called Snowhook Capital Management, launched by the man who was formerly Third Point’s top short seller. When the Covid pandemic hit the markets in the early part of the year, Loeb’s Third Point portfolio was considerably shorter than it is now. But even so, Loeb has admitted he wasn’t prepared for what was to come.  “We did not ascribe adequate probability to a full-blown global pandemic in our scenario analysis around Covid-19 nor to its blunt but necessary cure: a total economic shutdown in much of the world,” he told investors in his first-quarter letter. Third Point’s short book provided much-needed ballast during the storm, even as the fund sank in to the red, losing 16 percent during the first quarter. But as markets recovered, Third Point’s short positions have become among the top five monthly losers in five of the past nine months, according to the firm’s reports to investors.  And in 2019, two of the year’s top five losers were short bets. By September, Third Point managing director Stoyan Hadjivaltchev, who oversaw the equity short book, had left the firm and launched a fund of his own.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Monday December 7, 2020:

  • In the United States, President Elect Joe Biden unveiled his healthcare team who will have the unenviable task of guiding the country through its worst pandemic in over 100 years. Xavier Becerra, the California attorney-general and former member of Congress, will be in charge of the US health department. Rochelle Walensky, the chief of infectious diseases at Massachusetts General Hospital, will become the head of the Centers for Disease Control and Prevention (CDC), the public health body coordinating the federal government’s response to COVID-19. As mentioned last week in Castle Hall’s COVID-19 Diligence Briefing, Dr. Anthony Fauci will remain as the Director for the National Institute of Allergy and Infectious Diseases, as well as serve as President Elect Biden’s chief medical adviser on COVID-19.

  • Canadian Prime Minister Justin Trudeau held a news conference on Monday, flanked by the military general who will lead the country’s vaccine logistics, to announce shots will start to be in Canadian’s arms by the end of the year. Prime Minister Trudeau announced up to 249,000 doses (so about 125,000 people will be inoculated due to the two-dose program) of the Pfizer COVID-19 vaccine will be on hand by year’s end. The vaccines will be distributed to jurisdictions on a per-capita basis, so each province will receive vaccine doses in a number proportionate to their share of the population. Ontario, Quebec and Alberta are Canada’s three hardest hit provinces right now – setting daily COVID-19 case records on a routine basis over the last several weeks.

  • The United Kingdom plans to give their first inoculations of the Pfizer/BioNTech vaccine on Tuesday. The country is gearing up to deploy the vaccine with more than 1,000 centers being set-up over the next several weeks. The Department of Health and Social Care said on Sunday the first batches have arrived at secure UK locations via Belgium. Following quality checks to ensure the vaccine has been kept at the correct temperature, the shots will be made available to 50 hospital hubs around the country, before being distributed to doctor-run vaccination centers, which will administer the shots. Some of Britain’s most famous figures have stepped forward to say they would receive the vaccine to encourage others to follow their lead. Queen Elizabeth II and Prince Philip, both in their 90’s, are two of those famous figures and will receive their shots within a few weeks, according to various media reports.

  • The Financial Times is reporting a World Health Organization’s (WHO) report on Italy’s handling of the pandemic’s first wave was taken down from health body’s website just hours after its publication in May. The assessment titled, “An unprecedented challenge, Italy’s first response to COVID-19” called the country’s response “improvised” and “chaotic”. The report was completed by a group of pan-European WHO scientists, led by Venice-based Francesco Zambon. Italy’s decentralized approach to public health policy, as well as delays in testing and tracing potential COVID-19 infections were other reasons for their harsh outcome during the first wave. In a written response to the Financial Times, the WHO said the document was removed from their website due to “factual errors in some of the data and statistics” but declined to provide specific details.

  • The United Arab Emirates (UAB) are facing a spin-off effect from the coronavirus pandemic: cyber-attacks. The UAB’s top cyber security chief said the Middle East region is facing a “cyber pandemic” as citizens moved into a full online life creating a huge increase in cyber-attacks. Mohamed al-Kuwaiti told a CNBC moderated panel at the Gulf Information Security Expo and Conference in Dubai over the weekend that the UAE has seen at least a 250% increase in cyberattacks in 2020 with the financial and health care sectors being the most targeted.

  • China has given its own pharmaceutical company its own kind of injection: a $515 boost to increase production and distribution efforts as it draws closer to its final stage of COVID-19 vaccine approval. Sinovac is the firm receiving the cash injection and is considered China’s frontrunner to be sold worldwide. The company’s vaccine is currently undergoing large-scale trials in Brazil, Pakistan, Indonesia and Chile. China has pledged to distribute their vaccines across the developing world as an attempt to gain future political favour, looking to replace the United States as that recognized superpower since they have taken a more domestic approach over the last several years via President Donald Trump’s foreign policy.

Covid-19 – Due Diligence And Asset Management

Goldman Plots Florida Base for Asset Management in a Blow to New York

Brief: Goldman Sachs Group Inc. is weighing plans for a new Florida hub to house one of its key divisions, in another potential blow to New York’s stature as the de facto home of the U.S. financial industry. Executives have been scouting office locations in South Florida, speaking with local officials and exploring tax advantages as they consider creating a base there for its asset management arm, according to people with knowledge of the matter. The bank’s success in operating remotely during the pandemic has persuaded members of the leadership team that they can move more roles out of the New York area to save money. Goldman may yet decide against centering asset management in Florida, where it would join a growing list of firms seeking tax and lifestyle advantages. It also may opt for another destination like Dallas, where it has been accelerating its expansion, the people said. The deliberations at the Wall Street icon, often a trendsetter for the industry, adds to the cloud over New York’s future. As restaurants and stores fight to survive, the city is trying to stem the flight of white collar jobs to states with lax tax regimes and lower costs of living.

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BlackRock Takes Equities to Overweight for 2021, Sees Powerful Restart to the Economy

Brief : BlackRock has raised equities to overweight for 2021, based on its view that the restart of the economy will accelerate with the distribution of vaccines.  The firm is raising equities from neutral on a tactical basis, meaning over a six-to-12-month basis. From a long-term strategic view, BlackRock remains neutral on stocks, due to valuations and a challenging environment for earnings and dividend payouts. The S&P 500 has traded to new highs and risen more than 14% this year, even after the big selloff in March. “The big change around the outlook itself is upgrading risk assets overall and seeing 2021 as a very constructive year for risk assets,” said Mike Pyle, BlackRock’s global chief investment strategist. BlackRock released its 2021 outlook Monday. Pyle said BlackRock has cut investment grade credit to underweight, on a tactical basis, and prefers high yield debt for income potential. The firm also upgraded emerging market debt to neutral and Asian fixed income to overweight. “We see 2021 as a really powerful year for the restart, in terms of economic activity, but also importantly a year where we’re going to see central banks hold interest rates within a pretty tight range,” Pyle said.

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‘Unstoppable Trends’ Powering Bullish Global Outlook, says Citi

Brief: After proving its resilience in the face of a once-in-a-century healthcare crisis, the global economy is set to rebound in spectacular fashion, according to a new report from Citi Private Bank. In its Outlook 2021 report, Citi Private Bank said 2020 was a chance for the world to “test drive the future” and set the stage for growth at the end of the pandemic. A strong financial system, the effectiveness of government actions to buoy businesses and individuals, and a successful rush to develop an effective vaccine have provided momentum for a bullish 2021 outlook. “Our optimism going into 2021 is buoyed by strong financial institutions, high household savings and growing confidence levels among businesses and consumers alike,” said David Bailin, chief investment officer of Citi Private Bank. “We’re also seeing increased investor optimism due to low global interest rates that will enable a full economic recovery.” The COVID-19 pandemic distorted valuations for many assets, which the report said will unwind going into 2021. The shakeup will ultimately prove beneficial for COVID cyclical sectors such as financials, industrials, real estate, it said, along with hotels, restaurants, and airlines.

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Amid Pandemic, Davos Event to be Held in Singapore Next Year

Brief: Organizers of the annual World Economic Forum event in Davos, Switzerland, have again changed their planned venue for next year’s edition, announcing it will now take place in Singapore in May — a sign that the COVID-19 crisis has played havoc with planning. Forum leaders in early October had said the elite gathering that usually takes place in the frigid climes of the Swiss Alps every January would be held in the Swiss city of Lucerne and nearby town of Buergenstock in May next year, delayed because of the pandemic. “The change in location reflects the Forum’s priority of safeguarding the health and safety of participants and the host community,” managing director Adrian Monck said. “After careful consideration, and in light of the current situation with regards to COVID-19 cases, it was decided that Singapore was best placed to hold the meeting.” The May 13-16 event is being billed as “the first global leadership event to address worldwide recovery from the pandemic,” and will — as usual — bring together heads of state and government, chief executive officers, civil society leaders, global media and youth leaders from around the world. The event is expected to return to Davos in 2022.

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JPMorgan Sends Policy Recommendations to Biden Team on Ways to Prevent More Covid-Related Misery

Brief: JPMorgan Chase has a set of policy recommendations for ways President-elect Joe Biden can prevent a coming wave of economic misery and reduce inequality in a post-Covid world, CNBC has learned. The first priority is for lawmakers to agree on another round of pandemic relief payments to lower-income households and extending benefits for the unemployed, according to the paper, which can be found here. Failing to do so will result in unnecessary suffering as the pandemic deepens in coming months, according to Heather Higginbottom, head of the bank’s policy group, whose findings are backed by data from hundreds of thousands of Chase customers. “We see how real households are weathering this, and can project that if they don’t have additional savings and income, they’re going to be in dire straits,” Higginbottom said in a phone interview. “We have a cliff of a bunch of programs that will expire at the end of the year. There are families relying on those payments, and many of them will be food insecure. We’ll see a lot of families feeling a lot of economic pain.”

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Coronavirus Recovery and US Dollar Weakness Put Asia in Bond Investment Spotlight

Brief: Asian financial markets could reap the benefits if US President-elect Joe Biden proves more conventional than his predecessor in the White House, potentially triggering a reallocation of global capital to the region. Consensus expectations point to less confrontational diplomacy for a Biden administration, creating less geopolitical headline risk, fewer market shocks and reduced volatility. Any warming of US-China ties would relieve pressure on global supply chains, which would be positive for foreign direct investment into Asia. A reduction in volatility would also be positive for Asian markets in general. It could encourage investors to refocus on the fundamental strengths of governments and companies in the region. Asian economies are more advanced in their pandemic recovery than their Western peers, having demonstrated greater state capacity to manage the crisis. China, Singapore, South Korea, Australia and New Zealand appear likely to suffer less long-term structural damage to their economies. In addition, Biden might roll back some US corporate tax cuts and deregulations implemented by sitting President Donald Trump. 

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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 December 4, 2020:

  • In a wide-ranging interview on CNN Thursday, United States President Elect Joe Biden said as soon as he is sworn in, he plans to make masks mandatory on all federal property and interstate transportation. “The first day I’m inaugurated, I’m going to ask the public for 100 days to mask. Just 100 days to mask. Not forever, 100 days,” said Biden. Elsewhere in America on the COVID-19 front, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases has accepted President Elect Biden’s offer to stay on at the White House as advisor on the coronavirus pandemic. “Absolutely, I said yes right on the spot,” said Fauci who has been serving in his role as director for more than 30 years.

  • Fresh off the United Kingdom approving Pfizer’s COVID-19 vaccine this week, Canadian Prime Minister Justin Trudeau said during a news conference on Friday Health Canada regulators are “working around the clock” to complete their reviews. On Thursday, Major-General Dany Fortin, the man responsible for leading vaccination logistics in the country held a news conference stating he figures COVID-19 vaccinations will start in January. However, the initial supply will be limited with just three million Canadians expected to get shots in the first three months of 2021. The federal Liberal government has been getting hammered over the last several weeks by the opposition Conservatives for its inability to provide a timeline on when Canadians will receive their first inoculation of a COVID-19 vaccine. Canada has signed a vaccine deal with Pfizer, along with six other vaccine manufacturers.

  • The United Kingdom has broadened their list of people who can be exempt from the usual 14-day coronavirus quarantine, starting on Saturday. Senior company executives and overseas executives will be among the “high-value business travellers” exempt from self-isolating. Other professionals in the performing arts, TV productions staff, journalists and recently signed elite athletes will also be exempt. Prior to this expansion, exemption was only limited to a handful of essential workers such as fruit pickers, the armed forces and technical staff working for utility companies. Business and tourism officials are praising the move, but details still need to be flushed out, such as how do people prove they are on a business trip and not just trying to skip out on self-isolating.

  • In Sweden, health officials are admitting they need to do more to convert vaccine doubters in their country if they are going to achieve herd immunity. According to a recent Novus poll, only 46% of Swedes want to be vaccinated while 26% don’t. Herd immunity comes when enough people in a community have developed immunity either through being infected or vaccinated. For COVID-19, the percentage is estimated to range from 55% to 82%. Sweden was one of the few countries that avoided a lockdown during the first wave with its health officials hoping enough people would develop antibodies to protect against new outbreaks. However, the second wave of the coronavirus has hit the country hard, which means more needs to be done to convince the population to get vaccinated once the time comes.

  • Following a visit by the Chinese Vice-Premier to two drug companies that produce COVID-19 vaccines and the national agency that oversees them in Beijing, mass production is expected to happen soon. The problem is this: the vaccines being produced by the China National Biotech Group (CNBG) and Sinovac Biotech are both still in their clinical trials and efficacy data has yet to be released. “We must be prepared for large-scale production and in strict accordance with quality supervision and biosafety requirements and regulations. Emergency use for high-risk groups such as port workers needs to be completed this year,” Vice-Primer Sun Chunlan was quoted as saying during her visits.

  • The Financial Times is reporting Australia and New Zealand companies are facing growing pressure from investors and politicians after handing out multimillion-dollar bonuses and dividends while receiving public money to help through the coronavirus pandemic. In a recent call by New Zealand Prime Minister Jacinda Ardern for companies “to do the right thing”, more than 17,000 businesses returned $524 million NZD since their performance was better than expected during the pandemic. In Australia, investors are using their voting power to pressure boards to withhold bonuses and dividends if they accepted government support.

Covid-19 – Due Diligence And Asset Management

Citi CEO Says Long-Term Productivity May Suffer With Remote Work

Brief: Citigroup Inc.’s Michael Corbat said he’s worried about potential long-term negative effects after many of his employees spent the vast majority of 2020 working from home. “People talk about the productivity that comes with working remotely,” Corbat said in a televised interview for a Bloomberg Invest Talks event that aired Friday. “Well, if I worked seven days a week, 15 to 16 hours a day and I don’t take any holidays, at least for a period of time I’m going to be more productive.” While more remote work will probably mean Citigroup can shrink its real estate footprint, Corbat said he’s hesitant to declare a widespread shift toward the practice. The CEO said in May that, unlike some of his competitors, he wasn’t considering the option of letting workers stay at home permanently after the pandemic ends. The New York-based bank, which has about 200,000 employees worldwide, wants to see how productivity changes over longer stretches of time and whether creativity suffers before deciding how much working from home to allow, Corbat said. Citigroup and many of its competitors have kept the vast majority of staff home for much of the year to help stem the spread of Covid-19. Now, as governments around the world rush to procure vaccines and promising new therapies for the virus, many companies are developing plans for eventually bringing workers back.

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Airlines Try COVID-19 Tested Transatlantic Flights to Build Confidence

Brief : KLM, the Dutch arm of Air France-KLM, on Friday said it would begin offering COVID-19 tested flights to Atlanta, the latest example of a European airline adopting a testing strategy to increase passenger confidence in flying amid the coronavirus pandemic. The plans centre around the concept of conducting multiple tests so that travellers can have more trust that the chances they or others are carrying the virus during their voyage are small. Under the KLM plan, passengers receive one test five days before their flight, another shortly before the flight, and a third after landing. “Only passengers with negative test results will be accepted on-board,” KLM said in a statement. After testing negative again upon arrival at Amsterdam’s Schiphol airport, U.S. and European Union passengers travelling from Atlanta will be able to skip a 5-day quarantine in the Netherlands. Alitalia announced a similar scheme for Rome to New York flights earlier on Friday, and Delta last week introduced one from Atlanta to Rome. Delta, Air France and Alitalia cooperate under the “SkyTeam” airline alliance.

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Sustainable Investing is in Vogue Among Wealthy Asians in the Covid-19 World Even if Questions Linger Over Potential Payback

Brief: Asia’s richest expect sustainable investing to accelerate after the Covid-19 pandemic, even if questions remain whether these will generate higher returns than putting money elsewhere, according to a study by Lombard Odier, one of Switzerland’s oldest private banks. Ultra high net worth individuals (UHNWI) in Asia, those with a net worth of at least US$30 million, showed strong interest in sustainability as an investment consideration going forward, a trend which has been accelerated by the Covid-19 situationsaid Vincent Magnenat, chief executive for Asia at Lombard Odier, in an interview. “Sustainability has been accelerated by the Covid situation, by what we are going through,” said Magnenat. “At the same time, investing in companies with an emphasis on sustainability will be a factor of higher return in the coming years.” Lombard Odier’s report focused on four areas – technology, investment, sustainability and family services – and surveyed more than 150 UHNWIs in Hong Kong, Indonesia, Japan, Singapore, the Philippines, Taiwan and Thailand.

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15 Days of 102 Fever, a Cracked Tooth From Chattering – ex NYSE Chief Shares his Covid Ordeal

Brief: Tom Farley, former president of the New York Stock Exchange, on Friday detailed his battle with Covid-19 early in the pandemic, telling CNBC “it was not a good period in my life.” “I had a 102 to 103.5 [degree] fever for 15 days straight, and then I couldn’t get out of bed for another week. I lost about 25 pounds,” Farley, who is in his mid-40s, said on “Squawk Box.” “I looked like Skeletor, cracked a tooth from chattering,” he said, referencing the Mattel supervillain from the Masters of the Universe franchise. “I felt like somebody was taking a sledgehammer to my back.” Farley, who oversaw the NYSE from 2014 to 2018, said he had his “nasty case” of Covid in March. At the time, he said his special purpose acquisition company was in the process of finalizing a deal with a merger target while the uncertainty caused by the fledging pandemic unsettled global financial markets. “It was at the exact time the S&P seemed to go down like 5% a day,” said Farley, whose first SPAC completed its merger in August with Global Blue, a Swiss fintech firm. He now serves as the company’s chairman. “My brain wasn’t firing. I was physically exhausted. It was not a good period in my life,” Farley said. “On that 23rd day, I woke up and yes, I was weak, but I felt better and I felt hopeful and optimistic, and I started getting into a workout routine.”

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European Banks Warned by ECB to Avoid Letting Bad Loans Pile Up

Brief: The European Central Bank urged the region’s big banks to do a better job scrutinizing companies’ ability to repay loans and weather the pandemic, warning them of the possibility that a mountain of loans eventually sours, weighs down the banking industry and slows the economic recovery. In a letter to banks’ chief executives, the ECB’s supervisory arm said it is increasingly important for banks to assess these risks now instead of waiting until it is too late when problematic loans build up on balance sheets. Lenders have been buoyed by unprecedented amounts of support from authorities over the pandemic. They’ve also benefited from regulatory flexibility on delaying provisions for doubtful loans. How some banks have been accounting for those loans has varied. “We have been observing differences in credit risk management approaches,” Elizabeth McCaul, ECB supervisory board member, said in an accompanying blog post. Areas of concern included overly optimistic assumptions and some “worrying cases” where banks have relaxed their risk-modeling standards. “If we delay – or worse, fail to act – we will have to pay the price of today’s inaction tomorrow,” she wrote. “We would be wise to start preparing now so that we may enjoy the strongest possible conditions when those healthier days arrive.”

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Haidar Hedge Fund That Surged on Virus Slumps on Vaccine

Brief: The raging global pandemic helped hedge fund manager Said Haidar make more than 25% during the market turmoil in March. Vaccines that could end the crisis have now erased those gains. His Haidar Jupiter macro hedge fund slumped 23.5% in November, its biggest monthly decline since starting more than two decades ago, as bets against stocks suffered in a global market rally, according to a letter to investors seen by Bloomberg. “We were caught off guard by a series of vaccine announcements in rapid succession, with much higher efficacy rates and highly expedited approval, manufacturing, and distribution timetables than earlier guidance suggested,” New York-based Haidar wrote to clients. The losses mark a dramatic reversal for one of the best-performing hedge funds in the world this year. The fund, which had gained as much as 68% through August this year, is now up 15.5%. That’s still better than the 0.4% seen through October by peers, according to data compiled by Bloomberg. A spokesman for Haidar Capital Management, which managed close to $900 million in assets earlier this year, declined to comment. The fund has now made adjustments to its portfolio to benefit from a potential early end to the pandemic and a strong global economic rebound, the letter 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 December 3, 2020:

  • In the United Kingdom, lots of words are being used to describe the country’s decision to approve the Pfizer vaccine for public use, but humility might not be one of them. Appearing on LBC Radio on Thursday, Education Secretary Gavin Williamson said the following: “We’ve got the very best people in this country and we’ve obviously got the best medical regulator, much better than the French have, much better than the Belgians have, much better than the Americans have. That doesn’t surprise me at all because we’re a much better country than every single one of them.” Prime Minister Boris Johnson’s office backed Williamson’s statement, saying the minister has a right to be “proud” of the UK. The comments come after Business Secretary Alok Sharma and Germany’s ambassador in London had a squabble since the Pfizer-BioNTech vaccine was produced in America and Germany, but Sharma said it was a sign that “the UK led humanity’s charge against this disease.” 

  • The United States suffered their deadliest day from the coronavirus pandemic on Wednesday with more than 2,800 succumbing to the disease. The number of COVID-19 patients in American hospitals sits at just over 100,000 people as of Wednesday – another record. Health officials are predicting by this time next week there will be 3,000 deaths due to COVID-19 a day in the United States. The mayor of Los Angeles, Eric Garcetti has said the city will run out of hospital beds by Christmas and a modified stay-at-home order for Los Angeles county will begin next week. Mayor Garcetti called on residents to “hunker down” and “cancel everything” to help stop the spread.

  • In Canada, the province of Quebec has reversed its decision on holiday gatherings in red zones – citing a worrisome trend in the number of COVID-19 cases. In a news conference on Thursday, flanked by his health minister, Premier Legault said “when we look at the situation, we are forced to realize that it is not realistic to think that we are going to succeed in reducing the progression of the virus in a satisfactory way by Christmas.”  The only exception will be for people who live alone – they will be allowed one visitor at a time. The province had previously given the green light to holiday gatherings in red zones with up to 10 people gathering between December 24th and December 27th, and then later clarifying that only two gatherings would be allowed within that time frame.

  • Germany will extend its partial lockdown into early 2021 as the country struggles to regain control of the coronavirus spread. After meeting with the premiers of Germany’s 16 states, Chancellor Angela Merkel said bars, gyms and cinemas will remain close until January 10th. The central government will reconvene with regional leaders on January 4th to reassess the restrictions. According to data from Johns Hopkins University, total infections have more than doubled in Germany since the restrictions started.

  • Speaking during a news conference on Thursday, French Prime Minister Jean Castex said the country will start COVID-19 vaccinations in early 2021. France’s inoculation strategy will have three phases. Starting in January, one million citizens will be vaccinated, beginning with elderly people in care homes and some staff in those establishments. The next phase will last from February until the spring - at risk citizens due to health, or age, along with certain healthcare professionals will receive their shot. The final stage will be to vaccinate the rest of the population. The prime minister said thanks to the contracts signed at the European Union level, France could potentially have access to enough doses to vaccinate 100 million people, which will be more than enough as the population of the country sits at approximately 66 million. 

  • Australia’s economy rebounded sharply in the third quarter from a coronavirus-induced recession. As the country largely were able to get COVID-19 under control in the September quarter, the outbreak in Victoria state notwithstanding, the economy expanded by 3.3%. That jump was larger than what experts expected and signifyingly better than the 7% contraction the Australian economy experienced in June. Economic growth is expected to be positive in December as well, but Australia still has the elephant in the room that is China. The two countries continue to have escalating tensions and China has been Australia’s top trading partner.

Covid-19 – Due Diligence And Asset Management

Paul Tudor Jones Sees ‘Massive Boom’ After COVID-19 Vaccine Gets Released

Brief: Legendary macro hedge fund manager Paul Tudor Jones expects "an explosion" of economic growth next year as a coronavirus vaccine becomes more widely available. As the federal government moves quickly to approve and distribute experimental inoculations from Pfizer (PFE)-BioNTech (BNTE) and Moderna (MRNA), Wall Street’s becoming increasingly bullish on 2021. Reflecting that mood, the CIO and founder of Tudor Investment Corp., expects risk appetite to rebound even further, especially with Congress and the Federal Reserve pumping more stimulus. "I think the stock market's on a combination of fiscal monetary pulse that we've never seen before in history, nothing like this,” Jones told Yahoo Finance in an exclusive interview on Wednesday. For that reason, stock multiples are frothier than in the year 2000, when the tech bubble sent the Nasdaq to its first historic high. And he anticipates a COVID-19 vaccine will jumpstart economic growth, which may have potential political implications. "The vaccine's going to bring us back. We're going to have an incredible growth rebound,” the investor predicted, as pent-up demand from the last year gets carried forward in a big way.

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Sustainable Allocations to Double in Next Five Years, Finds BlackRock

Brief : Investors plan to double their allocations to sustainable products over the next five years, according to BlackRock’s Global Client Sustainable Investing Survey, which finds that the pandemic has accelerated investor demand. One fifth of those surveyed said that the pandemic would actually accelerate their sustainable investing allocations. “The tectonic shift we identified earlier this year has really taken hold, as the convergence of political and regulatory pressures, technological advancements and client preferences have pushed sustainability into the mainstream of investing,” says Mark McCombe, chief client officer at BlackRock. “The results of our survey show this sustainable transition is occurring all around the world.” The survey gathered insights from 425 investors in 27 countries, including corporate and public pension plans, asset managers, endowments, foundations, and global wealth managers with nearly USD25 trillion in assets under management (AUM). The survey suggests this is the beginning of a sustained shift for at least the next five years, with survey respondents planning to double their Environmental, Social and Governance (ESG) assets under management (AUM) by 2025. While growth in sustainable assets is most pronounced in Europe, it is also growing in prominence in the Americas and Asia-Pacific as well.

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“Year of the Vaccine” Expected to Prompt Rotation into Value Stocks

Brief: Investors piled back into value stocks as November’s twin breakthroughs in the search for an effective vaccine against Covid-19, by Pfizer/BioNTech and Moderna, renewed optimism and prompted a huge rally in global markets. Value investing has been out of favour this year as the strategy typically favours companies that are more sensitive to economic cycles, such as energy companies and banks.  A turnaround in November saw the Russell 1000 Value Index rise by 13.2 per cent, outperforming the Russell 1000 Growth Index, which only registered a 10.1 per cent rise over the month. The year 2021 has already been named “the year of the vaccine” by Bank of America in its monthly survey in November, and the bank says it expects value stocks to outperform growth stocks, and for small-cap stocks to beat large-cap stocks over the year. Ian Lance, co-portfolio manager of Temple Bar Investment Trust, and portfolio manager at RWC Partners, believes that a vaccine could be “the catalyst” for a sustained move toward value investing. “As the Pfizer vaccine receives UK regulatory approval, and with it the promise of return to a somewhat normal life, now may be the signal many investors have been waiting for to re-allocate away from growth to value,” says Lance.

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AI Gets Left Behind as Asset Managers Focus on Remote Working Tech

Brief: Asset management firms are putting technology upgrades in artificial intelligence and automation aside to beef up tech related to remote working, according to a recent survey by consulting firm Deloitte. The survey, conducted in August as part of the firm’s annual investment management outlook, found that asset managers in North America, Europe, and Asia planned to increase spending in areas like data privacy and cybersecurity, which are seen as critical for allowing employees to work from different locations. “Not surprisingly, this indicates that investment management firms are spending in part to support remote and distributed working arrangements brought about by the pandemic,” Deloitte said in the report, expected to be released Thursday. On a net basis, 54 percent of North American firms planned to spend more on data privacy in the coming year, versus 23 percent of European respondents and 36 percent of Asia-Pacific firms. For the latter regions, cybersecurity was seen as the biggest priority, cited by a net 42 percent of European firms and 53 percent of Asia-Pacific respondents. A net 46 percent of North American firms also reported a higher budget for cybersecurity over the next 12 months.

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European CLOs Suffer in COVID-19 Era

Brief: The impact of COVID-19 on the European leveraged loan market fed through to collateralized loan obligations, with defaults up and loan supply down. A report by S&P Global Ratings said the CLO market was "hit hard by the pandemic." Defaults and CCC-rated asset holdings were up, loan supply fell and CLO managers that chose to trade out of weaker corporate sectors in some cases have experienced par losses, the report said. "All combined, these factors have negatively affected European CLO ratings, largely in the form of CreditWatch negative placements and downgrades of junior tranches," it said. The ratings agency uses CreditWatch and rating outlooks to show its view on how likely a ratings change is and the probable direction of such a change. Since March, S&P has put 39 European CLO ratings on CreditWatch negative, with about two-thirds of those actions subsequently resoled with a downgrade. The average downgrade was one ratings notch. As of Dec. 1, no European CLO ratings were on CreditWatch negative. Pressure on European CLO ratings was predominantly seen in junior parts of the capital structure, at the BB and B-rating levels. S&P's report also noted that moves by managers away from affected names and potential losses — along with "structural mitigants embedded in CLOs — explain why our rating actions on junior CLO tranches have been limited so far. On average, the magnitude of rating changes has been one notch, and to date we have not lowered any investment-grade ratings to speculative-grade."

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U.S. Venture Capital Investments Exceed 2019 Despite Pandemic Gloom

Brief: Despite an initial freeze in investments early in the year due to the COVID-19 pandemic, U.S. venture capital funding this year has already overtaken 2019 levels as many tech companies got a boost from remote work and an e-commerce boom. U.S. venture capital investments as of Dec. 1 totaled $139.6 billion across 9,898 deals, compared with $137.3 billion across 12,189 deals last year, according to previously unreleased data from PitchBook. That makes 2020 the third straight year for U.S. venture capital investments to exceed the $100 billion mark. Several investors have said that they are betting the pandemic will have the lasting effect of pushing more economic activity online, making up for the businesses boarding up on Main Street. The investors added that they are investing in startups that aim to enable the further digitization of sectors like banking, retail and healthcare. Fintech was a big focus for U.S. venture capital investors in 2020 with trading app Robinhood Markets Inc raising more than $1.2 billion over two deals, alternative lending company Affirm raising $500 million and digital bank Chime raising $485 million.

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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 December 2, 2020:

  • The United Kingdom became the first country in the world to approve the Pfizer/BioNTech vaccine on Wednesday, with the government announcing the first inoculations will be rolled out across the country beginning next week. The UK has ordered around 40 million doses of the vaccine and with two doses needed for full immunization, that means 20 million people will get the shots to start off. Residents in nursing homes and their care givers will be offered the vaccine first, followed by those over 80, then front-line health and social care workers. From there, the priority plan will largely follow age groups.
  • “The reality is December and January, and February are gonna be tough times. I actually believe they’re gonna be the most difficult in the public health history of this nation.” These were the words of United States Centers for Disease Control and Prevention (CDC) Director Robert Redfield during a virtual conference on Wednesday. The CDC was also busy making news changing their official guidelines – shortening quarantine recommendations from 14 days to 7-10 days after coming in contact with someone infected with coronavirus. The CDC made the move in part because they simply believe the demand of staying at home for a full two weeks is something Americans couldn’t or wouldn’t do and were ignoring the guidelines. 
  • Canada’s vaccine committee will follow a similar model to the UK once they receive their COVID-19 vaccines recommending long-term care, assisted living, retirement homes and chronic care hospitals to be first in line. The National Advisory Committee on Immunization (NACI) first issued preliminary guidelines last month, including general categories for “key populations” on who should get the vaccine first, but no ranked system on who should be top of the list. With Canada expected to get fewer doses than originally expected (6 million, so 3 million people with two doses required), it had no choice but to recommend a ranked system.
  • Russian President Vladimir Putin has ordered a large scaled voluntary vaccination programme against COVID-19 to begin in the country next week. President Putin said teachers and doctors should be the first in line to receive the country’s domestically produced vaccine. Sputnik V was one of two Russian made vaccines to have received domestic approval so far despite clinical trials being incomplete. Similar to the Pfizer vaccine, Sputnik V requires two injections and the president said Russia will have produced two million doses within the next few days.
  • Japan’s lawmakers passed a bill on Wednesday that will provide coronavirus vaccinations free of charge to its citizens. The law makes local governments responsible for administering the immunizations, according to the Ministry of Health, Labor and Welfare. There is also a provision obliging citizens in principle to make efforts to get vaccinated against COVID-19 but the provision will not go into effect unless the effectiveness and safety of vaccines are fully confirmed. The moves comes as a new wave of the virus spreads through Japan with some of its hardest hit areas forced to close bars and restaurants early.
  • Brazil President Jair Bolsonaro said the government cannot keep giving emergency aid to informal workers indefinitely. “Some people want to perpetuate social benefits, but nobody lives like that, said Bolsonaro. We need to have the courage to make decisions; worse than a poorly made decision, is indecision.” The comments from the country’s president likely means policy makers won’t extend the benefit that expires at the end of the year. Brazil is Latin America’s largest nation and has spent billions of dollars on emergency stimulus with public debt nearing 100% of GDP this year.

Covid-19 – Due Diligence And Asset Management

How Covid-19 Shocks Revealed Machine-Based Hedge Funds’ “Achilles’ Heel”

Brief: This year’s Covid-19 stock market upheaval has revealed an “Achilles’ heel” in quantitative hedge fund models that use traditional factors such as momentum and value, as machine-based strategies have struggled against “unique new drivers of stock returns that don’t fit the academic models”, says Man FRM. 2020 proved to be a “blow to the head” for factor-based quantitative equity analysis, Man FRM observed in its ‘Early View’ commentary on Wednesday. Quant equity hedge funds which trade traditional factors have struggled amid the dominance of a new “Covid factor” this year, with “near-consistent disappointment” in the form of “losses at the start of the year, losses in the market sell-off, losses through the summer and, to compound matters, losses in November.” The note, written by Keith Haydon, CIO of Man Solutions and Adam Singleton, head of investment solutions at Man FRM, explored how shorter-term market upheaval – such as the dot-com crash of the early 2000s and the 2008 Global Financial Crisis – can often render factor labels like value and momentum redundant as they exhibit negative correlation during shocks. “Trying to force stock behaviour into one box or another can be a good idea in normal times, as it lets models identify distinct baskets of stocks out of a large universe that best explain each factor,” they wrote.

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KKR Nears $800 Million Warehouse Deal With E-Commerce Booming

Brief : KKR & Co. is nearing a deal for a portfolio of U.S. warehouses, a sector that has received a boost during the pandemic as consumers increasingly turn to e-commerce. The transaction, which may close as soon as next week, values the roughly 100 properties at more than $800 million, according to a person with knowledge of the matter. Barclays Plc is arranging about $700 million in commercial mortgage-backed securities to finance the deal, which includes assets in markets including Atlanta, Chicago, Dallas and Baltimore, said the person, who requested anonymity because the talks are private. Representatives for KKR and Barclays declined to comment. While hotels and retail properties have been battered by the pandemic, investors have flocked to warehouses to capitalize as an e-commerce boom that was flourishing before the pandemic accelerates with shoppers increasingly buying from their couches. The warehouse portfolio set to be acquired by KKR is part of a broader wager by the company, increasing its exposure to the sector to about 30 million square feet. In recent months, through various funds, it has snapped up properties in metropolitan areas including Atlanta and Phoenix.

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Pandemic Increases Need for Country-Specific Focus in Popular EM Debt Sector

Brief: Investor appetite for emerging markets has been on the rise, boosted by hopes of a vaccine-led recovery from the coronavirus pandemic, and by Joe Biden’s victory in the US presidential election. According to a recent survey from Bank of America, half of fund managers favour emerging markets more than any other asset class for 2021. The MSCI Emerging Markets Index has risen by nearly 13 per cent in November. Emerging market debt is also growing in popularity, with EPFR data showing flows of USD3.5 billion into EM bonds during one week in November, the fourth largest weekly inflows ever. “EMD remains a relatively popular asset class for institutional investors globally,” writes the emerging markets debt team of US asset manager Eaton Vance.  “The irony, however, is that fund flows in the sector are still driven by index-based strategies that ignore fundamentals, even as many investors have come to recognise just how crucial individual EM country fundamentals will be in surmounting Covid-19 challenges.” Benchmark-based approaches “may be sub-optimal”, warns Eaton Vance, adding that indexes are often highly concentrated, with ten countries accounting for 80 per cent of JP Morgan’s Government Bond Index-Emerging Markets’ index weighting.  The asset manager, which is due to be acquired by Morgan Stanley, says: “This kind of concentration of a relative handful of larger EM issuers has been a major source of the index’s historical volatility… In contrast, outside of the GBI-EM there are 70 investable markets, with approximately USD1.1 trillion worth of local-currency market capitalisation.”

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Arena Investors Closes Special Opportunities Partners Fund I at $519M

Brief: Arena Investors, LP ("Arena"), an institutional asset manager, today announced the final close of Arena Special Opportunities Partners I, LP and Arena Special Opportunities Partners (Cayman) I, LP with total committed capital of $519 million. The close exceeds the $300 million target that was set for the fund, which was launched in March.  Arena's latest Fund invests in asset-backed, credit-oriented investments presented by the economic disruption and market dislocations from the COVID-19 pandemic. The fund has a flexible, global mandate with a majority of investors based in North America and Australia.  "With an investment strategy grounded in our 20 plus years of experience investing globally across divergent economic downturns, Arena is well-positioned to find value in all economic environments, especially today's," said Dan Zwirn, Arena Investors Chief Executive Officer and Chief Investment Officer. "The COVID-19 pandemic has caused newfound disruption to both society and the global economy and moved trends we were already seeing forward by five to ten years, especially in the industries that have been most heavily impacted. While much has changed, our flexible approach has allowed us to adjust quickly and continually identify attractive opportunities to deliver value to our investors."

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Ackman’s Pershing Square Holdings Fund Up 62.8% for the Year

Brief: Billionaire hedge fund manager William Ackman, who cautiously hedged his portfolio before the historic market sell-off in March, has extended his gains to 62.8% for the year so far. Last month, Ackman’s publicly traded Pershing Square Holdings portfolio gained 13.4%, lifting the $11.4 billion portfolio to a net gain of 62.8% in the first 11 months of 2020, according to a performance review. Ackman recently told investors that the firm is having its best ever year and that he is “bullish” for 2021. But he warned of possible volatility ahead as the coronavirus continues to take its toll. To guard against swings, Ackman said he put on a new hedge -- roughly one third the size of the one he put on earlier this year -- as corporate credit spreads are very tight. He earned $2.6 billion in profits from the first hedge and plowed that money back into the market, buying more of the stocks he already owns at cheaper prices. This summer Ackman raised the biggest blank-check fund ever helping swell his firm’s total assets under management -- including all hedge funds and Pershing Square Tontine Holdings -- to $17 billion. The average hedge fund gained 1.2% through the end of October, according to Hedge Fund Research. November data is still being compiled.

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Axon Capital’s Singh Sees Vaccine Boosting Travel, Entertainment Stocks

Brief: Services company stocks, especially those linked to travel and leisure, have room to rocket higher next year as consumers venture out again after spending on goods but cutting back on services during the pandemic, hedge fund manager Dinakar Singh said. With vaccines against Covid on the horizon, Singh, who runs Axon Capital, expects a flood of pent-up demand for travel to see far-flung business clients and employees, visit grandparents and take vacations. “Things are going to be explosive,” Singh, who headed Goldman Sachs’ proprietary trading unit before forming his own fund in 2005, said at the Reuters Global Investment Outlook Summit. “There well could be a huge surge of pent up demand for activities that have been restricted because of the virus.” After personal savings rates climbed early in the pandemic, stocks broadly recovered. The Standard & Poor’s 500 index has gained 12% since January and has rebounded 60% from its March lows. Real estate values also have increased, so many consumers should be ready to splurge if they manage to get through the crisis with their jobs intact. While business travel may ultimately be reshaped by video conferencing, markets still may underestimate the near-term demand for travel and entertainment, Singh said.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Tuesday December 1, 2020:

  • In the United States, a report from the Centers for Disease Prevention and Control (CDC) is lending fuel to the fire that the coronavirus could have been circulating unknown before what was originally thought. The study revealed 106 infections collected from donors in nine U.S. states between December 13th, 2019 and January 17th, 2020. “The findings of this report suggest that SARS-CoV-2 infections may have been present in the U.S. in December 2019, earlier than previously recognized,” said the report. Reports of a mysterious pneumonia spreading in Wuhan, China first emerged in December 2019 and was later recognized as ground zero for the coronavirus pandemic. The first case in America was recorded on January 19th, 2020. As mentioned in Castle Hall’s COVID-19 Diligence Briefing on Monday, China has been pushing hard through their state media that the coronavirus didn’t originate in Wuhan.
     
  • In a mini budget (in name only), Canada’s federal government unveiled close to $40 billion USD of new spending over the next two years in order to deal with the coronavirus pandemic. From the outset of the pandemic, the Canadian government has preached a “whatever it takes” mantra when dealing with the economic fallout and according to Bloomberg - delivering the biggest COVID-19 fiscal response in the industrialized world. Finance Minister Chrystia Freeland also announced $70-100 billion CAD in additional stimulus over three years to spur the recovery but failed to give much detail in what that money would go towards. The Conservative opposition government dismissed the fall economic statement from the government saying a three-year plan is pointless without first revealing how Canadians will be vaccinated against COVID-19. 

  • Trying to avoid a revolt within his own party, United Kingdom Prime Minister Boris Johnson made a few moves on Tuesday. The prime minister and his government will offer a £1,000 one-off payment to pubs affected by the toughest curbs of the new tiered system to be re-introduced this week as England emerges from a national lockdown. The prime minister also noted there will be a review of the coronavirus restrictions on December 16th, which suggests that districts with low infection rates might be able to move to a less restrictive tier. The government’s new tier of regulations is likely to pass even with some unhappy Conservative MPs as the Labour party has decided to abstain.

  • The European Medicines Agency (EMA) have pushed back the formal assessments of the Pfizer/BioNTech and Moderna vaccines, delaying inoculations in European Union countries to early 2021. Both vaccines were originally supposed to be assessed by the EMA on December 22nd, according to documents obtained by the Financial Times. However, the date for the EMA to give their opinion on the Pfizer/BioNTech vaccine will be December 29th while Moderna’s will be on January 12th. EU member state approval would likely come three-four days after those meetings. Some EU countries, such as Germany, hinted that their citizens could start receiving vaccinations as early as this month, but have changed their tune now – shifting the focus to 2021. 

  • In a bid to boost their pandemic-stricken tourism industry, the Philippines are looking at subsidizing coronavirus tests for tourists. The government is considering covering as much as 50% of the cost for COVID-19 swab tests but failed to elaborate who would qualify. The Philippines will also move to a set of uniform requirements for entry to tourist destinations, as the current protocol is deemed to be too confusing due to local governments setting mandates. The tourism sector accounted for 12.7% of the Philippines’ economic output last year.

  • Singapore and Hong Kong have delayed their travel bubble for the second time in a matter of weeks due to local cases in Hong Kong still being too high. The bubble was originally planned to begin operating in November, but now won’t start until at least 2021. The travel bubble was to allow travellers to move between the two regions without having to quarantine but subjected to coronavirus testing before and after flying. The two governments plan to review the start date in late December.

Covid-19 – Due Diligence And Asset Management

Lloyd Blankfein Touts New York City Recovery at UJA Wall Street

Brief: There were no cocktail franks or elbows to bump into at Monday night’s Wall Street Dinner. “That was so 2019,” Lloyd Blankfein said as he kicked off a virtual version of the annual benefit for the UJA-Federation of New York, a Jewish philanthropy. For decades, the event has been a power gathering of major figures on Wall Street, their colleagues and juniors. It has long been one of the biggest fundraisers in the country, with this year’s tally at $31 million so far. That’s a lot of cocktail franks, and while they’re the most popular item at any party, Blankfein made fun of the guests who might be missing them, or the platters of sushi, egg rolls and carved meats that are menu staples of the event at its usual midtown hotel venue… Addressing about 1,500 guests, Blankfein talked about what Covid has wrought, how we’ll recover and the important role UJA has to play. “The pandemic and ensuing economic crisis have made so many ordinarily vulnerable people even more so and for those on the edge, pushed them over,” Blankfein said. “Hundreds of thousands of people in our city can’t put food on the table, they’ve lost their jobs, they’re struggling to survive.” During the pandemic, UJA has distributed $52 million in emergency aid. It’s opening hubs for social services in Queens, Brooklyn, the Lower East Side, Long Island and Westchester County.

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Demand for Second Passports and Citizenship Soars

Brief : National lockdowns, closed borders and travel restrictions have helped drive up enquiries for second passports, citizenships and overseas residencies by more than 50% year-on-year. International finance advisory firm deVere Group, which has more than 100,000 clients globally, reports that this highly unusual year has seen demand for its residency and citizen service "skyrocket." The majority of enquiries are from high-net-worth individuals from the US, India, South Africa, Russia, the Middle East and East Asia who are seeking alternative options in Europe and the Commonwealth. Nigel Green, the founder and CEO of deVere Group, said: "Previously, a second passport, citizenship or residency were regarded by many as the ultimate luxury item; a status symbol like yachts, supercars and original artwork. "While this still remains the case, there's also been a shift due to the pandemic. "Now, second citizenship or overseas residency are increasingly becoming not just a ‘nice to have accessory' but a ‘must have.' "Whether it be for personal reasons, such as to remain with loved ones overseas or be able to visit them, or for business reasons, a growing number of people are seeking ways to secure their freedom of movement as they have faced travel restrictions which are, typically, based on citizenship." He continues: "The pandemic has served as a major catalyst for demand which skyrocketed this year. It has focused minds to secure that second passport or elite residency.

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Rhenman to Shutter Global Opportunities Equity Long/Short Hedge Fund

Brief: Rhenman & Partners Asset Management says it is closing its Rhenman Global Opportunities L/S strategy and intends to return capital back to investors. The fund – a global equity-based strategy which trades long and short across all industries and sectors, with a focus on value-oriented companies – has struggled with performance throughout 2020. The strategy, which has an annual return target of 7-8 per cent - is down more than 23 per cent over the 10-month period since the start of this year. In a statement, the Stockholm-based firm – known for its healthcare-focused investments – thanked all those investors who had been invested in the Global Opportunities vehicle. “The decision to liquidate the sub-fund Rhenman Global Opportunities L/S is primarily because the value of the sub-fund’s total net assets is deemed to be the minimum level for the sub-fund to be operated in an economically efficient manner,” the firm said. “In addition, the preconditions for raising capital to the sub-fund are not deemed to be in place.” While the Stockholm-based hedge fund manager - led by founding partner and chief investment officer Henrik Rhenman - is best known for its Rhenman Healthcare Equity Long/Short flagship fund, which trades a range of pharmaceutical, biotech, and med-tech stocks, the Global Opportunities strategy has a much broader market focus.

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European Money Market Funds Push Back Against Calls For Post-Covid Reform

Brief: Calls for tighter regulation on the EUR1.4 trillion European money market funds sector have been called “misguided” by the industry, which disputes the claims that central bank intervention prevented a fund liquidity crisis in March. The coronavirus pandemic caused a “dash for cash” among investors in March, with many companies and funds that were holding illiquid assets, such as real estate and corporate debt, drawing on money market funds for short-term funding. Euro area money market funds suffered outflows of nearly 8 per cent of assets under management in one week from 13 to 20 March, according to data from the ECB. Central banks’ injection of billions of euros in bond-buying schemes and market support has been credited with allowing money markets to continue providing liquidity throughout the crisis. In November, the European Securities and Markets Authority (ESMA) said that “further reforms of money market funds are needed” in order to address shortcomings in the fund management sector’s ability to cope with shocks. “We have identified a number of priority areas that funds and supervisors should focus on to address potential liquidity risks in the fund sector,” said ESMA’s chairman Steven Maijoor. Policymakers in the US have also recently urged a review of the regulations on money market funds, while the International Monetary Fund (IMF) has said the non-bank financial sector needs a stronger regulatory framework after the pandemic.

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85% of Pension Schemes Predict W-Shaped Recovery of Financial Markets

Brief: Eighty-five per cent of pension schemes believe that the financial markets will have a W-shaped recovery, according to research by Amundi and Create-Research. The survey of 158 respondents from 17 pension markets across the public and private sectors, collectively managing €1.96trn of assets, found that pension funds value portfolio resilience above everything else. The report highlighted the “toxic” side effects that central banks’ and governments’ policy, in response to the pandemic, has had on pension schemes. This includes increased liabilities and dwindling incomes from low-interest rates. Alongside the market meltdown in March 2020, these have ravaged funding ratios worldwide, the report noted. The W-shaped, or accordion-shaped recovery, predicted by pension schemes are both 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). Commenting, Create-Research professor Amin Rajan, 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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UK Hedge Fund Argonaut Takes Aim at AstraZeneca-Oxford Vaccine and Warns Against “Silver Bullet” Recovery

Brief: The recent stock market “exuberance” sparked off by breakthroughs in Covid-19 vaccine trials may give way to disappointment next year, says Argonaut Capital CEO and CIO Barry Norris, who continues to build short positions in a number of drug companies, including AstraZeneca, amid continued uncertainty over efficacy and dosage in its trial process. Norris, who runs the UK firm’s Argonaut Absolute Return equity long/short hedge fund, has taken a negative stance on several pharmaceutical stocks this year as the hunt for an effective Covid-19 treatment heated up. He is maintaining his bearish stance on the recent Covid-19 vaccine announcements, and believes a market recovery may not be as smooth or as quick as hoped by investors. “At the risk of being obviously non-consensual, I think that the market reaction to the vaccines was a group-think reaction. It’s just totally illogical to see this as a silver bullet,” Norris told Hedgeweek on Monday. “To price in a back-to-normal for the global economy next year, which is essentially what the market did in November, to my mind is incredibly risky because most of the recovery potential is already priced in,” he continued.

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Contact Castle Hall to discuss due diligence

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

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