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Covid-19 Diligence Briefing

Our briefing for Wednesday February 24, 2021:

 
  • In the United States, more than 150 New York chief executives urged Congress to pass President Joe Biden’s $1.9 trillion COVID-19 stimulus package in a letter on Wednesday. Notable signatures on that letter from the asset management world included BlackRock’s Larry Fink, Goldman Sachs’ David Solomon and Blackstone’s Steve Schwartzman – who previously backed former President Donald Trump. The letter stated: “Previous federal relief measures have been essential, but more must be done to put the country on a trajectory for a strong, durable recovery. The country’s business community is prepared to work with you to achieve these critical objectives.”
  • With United Kingdom’s Prime Minster Boris Johnson outlining the country’s potential track to freedom from lockdowns earlier in the week, Canada’s chief public health officer says the timing of their reopening isn’t solely dependent on achieving mass vaccination. Dr. Theresa Tam said while vaccinations play a “key role” other factors such as Canada’s epidemic curve’s movement, the rate of serious outcomes and the ability of local authorities to have testing and contact tracing to all be in place. “You can’t put an absolute date on one of these things but having everybody get the vaccine is a massive step towards returning to a more normal life,” said Dr. Tam.
  • A few days after the United Kingdom government released their four-phase strategy out of the current lockdown, a new advertising blitz has been launched with the Health Secretary and Chief Medical Officer urging Britons to ‘stay local’. “I know it’s been a long year, but we can’t let up now. Everything we’re doing is bringing us one step closer to beating the virus,” said Health Minister Matt Hancock. Chief Medical Health Officer Professor Chris Whitty added: “Vaccines give clear hope for the future, but for now we must continue to play our part in protecting the NHS and saving lives.” The UK’s stay-at-home order remains in place until at least March 29th.
  • Bloomberg is reporting France is resurrecting a financial instrument first used in the 1970s to try and find ways to bring back the economy to some sense of normality. The idea is participative loans – first used by the country in 1978. The loans have never been used on such a large scale but would offer investors a blend of equity and debt. They are similar to equity in that they are subordinated to all other debts and often come with a share of the profits. However, like loans, they have a fixed interest rate and afford the creditor no voting rights. French Finance Minister Bruno Le Maire wants the loans to have a duration of at least eight years and as long as a decade for some projects, with repayments beginning after four years. Final details of the plan are expected in the last week of March. 
  • India announced an expansion of their COVID-19 vaccination programme Wednesday and a warning that breaches of coronavirus protocols could worsen infection. Nearly a month ago, India’s health minister declared that COVID-19 had been contained – that was likely a mistake – as now some states such as Maharashtra in the west and Kerala in the south have reported a spike in cases and a reluctance to wear masks or maintain social distancing. In the past week, a third of India’s 36 states and union territories have reported an average of more than 100 new COVID-19 cases each day. Maharashtra and Kerala are reporting more than 4,000 new cases daily. Maharashtra state is home to Mumbai – India’s financial capital. 
  • The World Health Organization’s (WHO) COVAX programme – their attempt at a global vaccine-sharing scheme – delivered their first COVID-19 vaccines on Wednesday to the African nation of Ghana. The delivery was in the form of 600,000 doses of the AstraZeneca COVID-19 vaccine produced by the Serum Institute of India. The arrival of vaccines comes almost a year after the WHO first described the coronavirus as a pandemic and eight months after the launch of the COVAX initiative. The delivery was made to Ghana’s capital city of Accra with a vaccination drive expected to begin on March 2nd, which will prioritize front-line health workers and others at high risk.

Covid-19 – Due Diligence And Asset Management

Goldman CEO Warns Remote Work is Aberration, Not the New Normal

Brief : David Solomon wants to make sure you don’t get too attached to your Rona Rigs. The Goldman Sachs Group Inc. chief executive officer on Wednesday repeated his desire to see the firm’s offices fill up again. “This is not ideal for us and it’s not a new normal,” Solomon said at a Credit Suisse Group AG conference. “It’s an aberration that we are going to correct as quickly as possible.” The 59-year-old CEO has been one of the more vocal business leaders pushing government officials to move faster in making changes needed to bring employees back to work. He’s urged them to use private-sector support to speed up the process. Wall Street firms were preparing to welcome a larger cohort into their emptied-out skyscrapers last year, only to see that effort fizzle with a new surge of coronavirus cases. Some have been further frustrated by what they perceive as a botched vaccine rollout that delayed a return to pre-Covid normalcy. “The vaccine distribution and the process of recovery has been a little bit slower in the first quarter than some of us had hoped,” Solomon said. But additional government stimulus and the potential for an infrastructure bill after that will provide a “very, very strong tailwind” for economic recovery, he said.

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Institutional Investors Call for Fair and Equitable Global Fight Against Coronavirus

Brief: A group of institutional investors worth USD13 trillion, including Aviva Investors, AXA Investment Managers, and Fidelity International, has pledged to support fair and equal global access to vaccines and healthcare in the fight against coronavirus. Last week, the United Nations secretary general António Guterres labelled the global vaccination effort “wildly uneven and unfair” in a security council meeting. Three quarters of all vaccinations have so far been administered by just 10 countries, while 130 countries have not yet received a single dose. Led by the Access to Medicine Foundation, the investor partnership aims to improve financing and co-operation on worldwide vaccination efforts. The investors say they are concerned about limited funding for the World Health Organisation’s ACT Accelerator global healthcare access scheme, which includes vaccination wing Covax, and the effect this will have on the “trajectory of the pandemic and global economic activity in the coming years”.

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Global Airline Body IATA Plans COVID Travel Pass for end of March

Brief: Global airline industry body IATA said it would launch a COVID-19 travel pass at the end of March, bringing into use a digital system for test results and vaccine certificates which will help facilitate international travel. IATA said on Wednesday that it was essential that governments start issuing their citizens with digital vaccination certificates which can then feed into its travel pass.

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Barclays Investor Poll Predicts Rush of New Capital in “Breakout Year” for Hedge Funds

Brief: Hedge funds could be set for a rush of new capital pouring into the industry this year – potentially reaching up to USD30 billion – as investor appetite grows following strong 2020 performances, Barclays said on Wednesday. The bank’s ‘2021 Global Hedge Fund Industry Outlook and Trends’ report found that allocator sentiment towards hedge funds is the strongest it’s been since 2014, with 41 per cent of all investors planning to increase their hedge fund exposure this year. The annual hedge fund investor survey quizzed 240 firms representing USD5 trillion in assets, including USD725 billion of hedge fund investments - roughly 22 per cent of total industry capital. The bank’s Strategic Consulting team, which ran the poll, said hedge funds could draw between USD10 billion and USD30 billion of projected net inflows from investors, and around USD450 billion in gross allocations, in what could prove “a breakout year” for managers.

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Treasury ‘Tantrum’ Erases $14 Billion ETF’s Pandemic Rally

Brief: A breakneck selloff in the bond market left one of the biggest Treasury exchange-traded funds bleeding. The $14 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) has plunged 11% this year as long-dated Treasury yields climbed, fueled by building wagers on a rebound in inflation. Investors have yanked over $3.2 billion from the fund so far in 2021, whittling TLT’s total assets to the lowest level since mid-2019, according to data compiled by Bloomberg. Covid-19 vaccine rollouts combined with the prospect of further fiscal aid from the Biden administration has forced a reckoning of sorts for the Treasury market, where long-dated yields were hovering near historic lows entering 2021. Breakeven inflation rates have soared to multi-year highs, dragging benchmark 10-year yields to the highest in over a year, as the economic outlook brightens. That point was reinforced by Federal Reserve Chairman Jerome Powell this week as he said the recent run-up in bond yields is “a statement of confidence” in the economy, while downplaying the risk of a sustained pickup in price pressures.

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These Covid Billionaire Fortunes are Fading with the Vaccine Rollout

Brief: In the health-care industry, the coronavirus pandemic led to big fortunes, fast. Now some of them are evaporating just as quickly. Take Seegene Inc., a maker of Covid-19 test kits, and Alteogen Inc., a biotech with subcutaneous-injection technology. Their founders became billionaires as the shares surged last year. Fast forward a few months to the vaccine rollout, and they’ve lost their title after both stocks sank more than 40%, according to the Bloomberg Billionaires Index. It’s a similar story for glovemakers in Malaysia, which counted at least five industry billionaires by August as the worsening health crisis increased demand for the protective gear. Despite a brief rebound amid last month’s frenzy in retail trading, their shares are down by more than a third since hitting highs, wiping more than $9 billion from their founders’ net worths. While the billionaires created by the Pfizer Inc.-BioNTech SE and Moderna Inc. vaccines have maintained much of their wealth, many others have seen a falling off. The moves show how fleeting fortunes can be with a market so wild that some stocks have had days with fluctuations of more than 20%. Some of the founders took advantage of the volatility to book profits, just as others increased their control by buying more shares as prices fell.

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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 February 23, 2021:

  • In the United States, drug maker Johnson & Johnson told a Congressional hearing on Tuesday that they could provide 20 million doses of its single-shot vaccine to America by the end of March, assuming it gets the green light from federal regulators. U.S. health regulators are still reviewing the safety and effectiveness of the shot with a decision to allow its emergency use expected later this week. Once approved, it would be the first in America to require only a single dose. White House officials cautioned last week that initial supplies of the Johnson & Johnson vaccine would be limited upon its initial rollout, so it is interesting what changed in the matter of a week.
  • In Canada, Prime Minister Justin Trudeau and United States President Joe Biden are holding their first face-to-face virtual meeting on Tuesday. The two leaders were expected to discuss and unveil their “partnership roadmap” for the future of the Canadian-U.S. relationship, which will be how the two intend to fight COVID-19 together while rebuilding their economies. Prime Minister Trudeau and President Biden are also expected to discuss joint strategies on climate change, advance diversity, improve national security measures and build international alliances. The land border between the two countries has been closed to non-essential travel due to the pandemic since last March with those regulations still in place until at least March 21st.
  • Business leaders from the hospitality and tourism industries in the United Kingdom are accusing Prime Minster Boris Johnson of ignoring the “clear and present danger” to struggling city centers such as London, Manchester and Birmingham. Prime Minister Johnson in the past has predicted the major cities would “bounce back” once the pandemic is over, but Kate Nicholls, chief executive of UK Hospitality, has called for a plan to repair UK’s great cities: “Without this there is a real and present danger that London’s Central Activity Zone will be hollowed out and our economic and social capital diminished. London and our major cities will not simply bounce back.”
  • Reuters is reporting COVID-19 drug maker AstraZeneca is expected to deliver less than half the vaccines it was contracted to supply the European Union in the second quarter. An EU official directly involved in talks with AstraZeneca told them during internal meetings it would deliver less than 90 million doses in the second quarter when the contract committed to 180 million doses. The expected shortfall, which was not previously reported, could affect the EU’s ability to meet its target of vaccinating 70% of adults by the summer.
  • The United Arab Emirates (UAE) is looking to use the Dubai International Airport as a center of its growing vaccine supply network. The Associated Press is reporting the key transit hub was used previously for the global shipment of pharmaceuticals but has now already delivered millions of coronavirus vaccine doses to Latin America, South Africa and Egypt from major manufacturing hubs in India and elsewhere. The UAE’s push comes as vaccine diplomacy gains popularity around the world with China performing similar work on the vaccine front to developing nations. For instance, UAE, seeking to deepen ties with Egypt, a key Arab allay, has delivered free Sinopharm COVID-19 vaccine shipments. 
  • Brazil has fully approved the Pfizer/BioNTech coronavirus vaccine on Tuesday. The only problem is through a dispute over a supply deal, the country has no doses to start an immunization program. President Jair Bolsonaro has criticized the terms of the deal proposed by Pfizer, saying it was overly onerous as it exempts the drug maker from potential liability for unforeseen problems. Pfizer’s defence is that numerous other countries, including Brazil’s Latin American neighbours have already agreed to their terms. The Pfizer inoculation was the first coronavirus vaccine to receive full approval in Brazil, regulator Anivsa said. Vaccines developed by AstraZeneca and China’s Sinovac have only been approved for emergency use.

Covid-19 – Due Diligence And Asset Management

Blackstone Seeks About $15 Billion for New Secondaries Funds

Brief : Blackstone Group Inc. is seeking to raise about $15 billion for two new investment funds in the fast-growing private equity secondaries market. Blackstone Strategic Partners, a $38 billion unit focused on investing in existing private equity portfolios, aims to raise $12 billion to $13 billion for a ninth flagship fund, which would be its biggest ever, and a smaller vehicle of at least $2 billion to focus on so-called general partner-led secondary deals, according to people familiar with the plans. The firm’s secondaries business grew roughly eightfold over the past six years and should continue to expand at a “very rapid rate,” Blackstone President Jonathan Gray said on an earnings call last month, when he discussed plans for further secondaries funds without elaborating on fundraising targets. The value of secondaries transactions more than tripled over six years to $88 billion in 2019 and totaled $60 billion last year, data from Greenhill & Co. show, driven by private equity investors seeking to offload their stakes early in otherwise illiquid funds. The structure has evolved in recent decades as a solution for institutional investors to rebalance their portfolios and draw on cash when needed.

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Financial Services Firms That Invested in Emerging Technologies Profited in 2020, says new Broadridge Study

Brief: Over half of financial services firms worldwide plan to increase their spending over the next two years on next-generation technologies such as AI, blockchain, the cloud and digital, according to a new study surveying 1,000 global C-suite executives and their direct reports, by Broadridge Financial Solutions. Broadridge’s Next-Gen Technology Adoption Survey indicates that firms also reported a range of strategic benefits from prior investments in emerging technologies, including accelerated time to market, better decision-making and improved risk management. Broadridge developed The ABCDs of Innovation Maturity Framework for the study to categorise firms as either a Beginner, Implementer, Advancer or Leader in next-gen technology adoption. Next-gen technology maturity was based on progress made in implementing these technologies and reported effectiveness in driving business performance. Over the next two years, firms worldwide plan to increase the share of their overall IT budgets spent on next-gen technologies from 11.8 per cent to 15.7 per cent on average, an increase of 33 per cent.

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Powell Tempers Wall Street Yield Jitters, Stocks Cut Losses

Brief: The U.S. economic recovery remains “uneven and far from complete” and it will be “some time” before the Federal Reserve considers changing policies it adopted to help the country back to full employment, Fed Chair Jerome Powell said on Tuesday. Powell began is testimony before the Senate Banking Committee as Wall Street looked set for its sixth straight day of declines from last week’s record highs, although losses were pared after the release of his comments. Fears about rising U.S. Treasury yields hit the technology sector particularly hard. The U.S. central bank’s interest rate cuts and purchases of $120 billion in monthly government bonds “have materially eased financial conditions and are providing substantial support to the economy,” Powell said in prepared remarks.

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Dividend Outlook Remains “Extremely Uncertain” After Year of Slashed Pay-Outs

Brief: Global dividends fell by 12 per cent in 2020 to USD1.3 trillion in the full year of 2020, after cuts and cancellations reached USD220 billion between April and December. Companies in the UK and Europe made up more than half the value of cuts and cancellations combined, according to a new report from UK-based asset manager Janus Henderson. The UK saw the largest total fall in dividends, with total pay-outs falling by 41 per cent to an annual sum of USD62.5 billion. This compared to falls of 32 per cent in the rest of Europe, 18 per cent in Asia Pacific ex-Japan, and 10 per cent in emerging markets.  In 2020, London-listed Royal Dutch Shell cut its dividend for the first time since 1945 due to a collapse in oil prices, and major banks Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered all halted payments.

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Pandemic Revealed Benefits of Stock-Picking

Brief: Despite the pandemic, 2020 turned out to be a good year for equities. When markets are volatile, there are lots of opportunities to pick up bargains that can enhance returns. Manulife Investment Management’s mutual fund family led in investment performance for the year ended Dec. 31, 2020, with 87.9% of long-term assets under management (AUM) held in funds ranked in the first or second quartile by Morningstar Canada. (All companies are Toronto-based unless otherwise noted.) “Our [portfolio] managers deployed some cash in March to buy really good names at discounted prices,” said Sanjiv Juthani, head of product management at Manulife. The firm focuses on bottom-up stock-picking and “even with the potential for short-term market pain, our managers don’t make macroeconomic bets,” Juthani said. When Covid-19 hit, no one knew what the markets would do. “Equities could have gone down by 50%, up by 50% or anywhere in between,” said Paul Moroz, chief investment officer at Calgary-based Mawer Investment Management Ltd., which had 80.4% of its AUM in funds with above-average returns.

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World Bank’s Pandemic Fight to Bring New ESG Issuance Record

Brief: International Finance Corp. is on track to sell a record amount of environmental and social bonds as part of its global response to the pandemic. The World Bank Group’s arm for the private sector expects its sustainable bond sales this year will likely surpass the previous high of $2.3 billion it set in 2017, according to John Gandolfo, vice president and treasurer at IFC. Issuance will come in different currencies, and proceeds will go to clients globally, including small businesses, low-income households and poor and fragile nations, he said. “IFC is certainly focused on, first and foremost, its response to the pandemic and saving jobs, lives, livelihoods and also building a path to a resilient recovery,” said Gandolfo in an interview. It raised about $2.2 billion in debt tied to environment, social and governance last year, including a record $1.9 billion in social bonds. One key area of focus this year is vaccine campaigns, especially in emerging markets where distribution has been slow compared to developed nations, he said. IFC said it has already raised $440 million in social bonds across five different currencies in its current fiscal year, which runs July 1 to June 30. That included its first bond swapped from fixed-rate to the new Secured Overnight Financing Rate benchmark interest rate. The organization is also looking to issue social bonds in additional currencies to reach more investors.

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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 February 22, 2021:

  • In the United States, President Joe Biden will make the solemn move and order all flags flying over federal buildings to fly at half-staff to mark 500,000 American deaths due to the coronavirus pandemic. White House Press Secretary Jen Psaki said the flags will remain at half-staff for the next five days and “will highlight the magnitude of loss that this milestone marks for the American people and so many families across the country.” Elsewhere in America, Democrats begin their final push this week for President Biden’s $1.9 trillion stimulus plan, ditching any pretense of bipartisan involvement, so it can quickly pass the package before an earlier round of benefits runs out. The House of Representatives plan to vote as soon as Friday, which will then push the bill into the Senate for next week.
  • In Canada, the country’s chief medical adviser said on Monday that the department is poised to make a decision on the AstraZeneca COVID-19 vaccine in the coming days. Dr. Supriya Sharma told the House of Commons health committee that Health Canada has received all the necessary scientific information from the company. The remaining hurdle is how the health regulator will disseminate information to medical professionals about how and when a vaccine should be administered and in what groups. Other countries such as the United Kingdom, Australia and the European Union bloc of nations have already authorized the vaccine in their jurisdictions, but under different conditions. “It’s complicated. We know that we’ve got different regulators looking at the same data for AstraZeneca and are making different decisions based on science. That’s why this is taking a little bit longer than the ones we’ve done before,” Sharma said.
  • United Kingdom Prime Minister Boris Johnson announced the government’s roadmap for gradually easing COVID-19 restrictions on Monday. According to Prime Minister Johnson, the plan will be rolled out in four phases beginning March 8th with schools reopening across England and limited outdoor social interaction. If all goes according to plan, the last stage will be implemented no sooner than June 21st, which will see most social contacting rules removed and establishments such as nightclubs being allowed to reopen. Personal life events like weddings will also have no limitations if all things go well. Prime Minister Johnson, speaking during a press conference, said Britons have a glimmer of hope, thanks to an “unparalleled” vaccination program, meaning the country was “now travelling on a one-way road to freedom.” 
  • Bloomberg is reporting German Chancellor Angela Merkel aims to develop a plan that will pave the way for a cautious reopening, but the next steps must be done “smartly” and with more testing. The person familiar with the discussion Merkel had with leadership of her Christian Democratic Party said the Chancellor has identified three key areas for easing: private gatherings, restaurants and leisure activities. Reopening stores weren’t mentioned. Even without a national strategy on schools, some students in 10 of Germany’s 16 states returned to classes on Monday.
  • The Philippines have approved China’s Sinovac Biotech coronavirus vaccine for emergency use on Monday. The Philippines’ Food and Drug Administration head Eric Domingo said the Sinovac inoculation can be used for healthy people aged 18 to 59 but isn’t recommended for health workers frequently exposed to the virus due to its 50.4% efficacy for this group. Once the first batches of the vaccine arrive in the next 3 to 5 days, it is expected those shots will be administered to soldiers and other non-health front-line workers like supermarket employees, said presidential spokesperson Harry Roque in a separate meeting.
  • The World Health Organization (WHO) has a message for the rest of the world’s higher-income countries: we don’t want your money; we want your vaccines. With higher income countries approaching vaccine makers to secure more inoculations, it is reducing the amount of vaccine supplies for the WHO’s Covax initiative. “If you cannot use money to buy vaccines, having the money doesn’t mean anything, said Director-General Tedros Adhanom Ghebreyesus during a briefing on Monday. Germany had pledged to donate $1.8 billion USD to global efforts to combat the pandemic on Friday, following similar moves made by France and the United Kingdom last week.  Many developing countries are still waiting to give their first shots after wealthier countries have inoculated millions of their residents so far.

Covid-19 – Due Diligence And Asset Management

World’s Top 10 Hedge Fund Managers Earn $20.1 Billion in 2020

Brief : Millennium Management’s Israel Englander earned $3.8 billion last year, landing him the biggest payday of any hedge fund manager in 2020, showed data from Institutional Investor. Englander more than doubled his $1.5 billion payday in 2019 and made $2 billion more than the previous year’s rich list leaders Chris Hohn and Jim Simons, while making gains of 26% for his investors. The top 10 hedge fund managers globally earned $20.1 billion in 2020, a 50.2% rise from $13.4 billion in 2019, against the backdrop of volatile markets amid the coronavirus pandemic. Hedge funds made gains of 11.7% on average in 2020 amid a huge sell-off in March and large economic shutdowns following the emergence of the novel coronavirus, according to data from Hedge Fund Research. But top 10 averaged returns of 43% in 2020, with Coatue Management making 65%, Renaissance Technologies racking up 76% and Tiger Global Management 48%, the data from Institutional Investor showed. All of the top 10 hedge fund managers made over $1 billion in 2020, compared with eight in 2019.

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Don’t Ignore “Lockdown Fatigue”, UK Watchdog Tells Finance Bosses

Brief: Staff at financial firms in Britain are suffering from “lockdown fatigue” and their bosses are not always making sure all employees can speak up freely about their problems, the Financial Conduct Authority said on Monday. Many staff at financial companies have been working from home since Britain went into its first lockdown in March last year to fight the COVID-19 pandemic. One year on, the challenges have evolved from adapting to working remotely to dealing with mental health issues, said David Blunt, the FCA’s head of conduct specialists. “During this third lockdown, there has been a greater impact on mental well-being, with many people struggling with job security, caring responsibilities, home schooling, bereavements and lockdown fatigue.” Bosses should continually revisit how they lead remote teams, he said. “The impact of COVID-19 is creating a huge workload for those considered to be high performers, while the remote environment potentially makes it much more challenging for those who were previously considered low performers to change that perception,” Blunt told a City & Financial online event.

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BlackRock Turns Bear on Credit, Treasuries, Bull on Stocks

Brief: BlackRock Inc. said it’s turned bearish on credit and government bonds, downgrading the two asset classes to underweight over the long-term because of high valuations and inflation expectations. A stronger economy on the back of the Covid-19 vaccine rollout, combined with the potential for as much as $2.8 trillion of additional fiscal stimulus and higher inflation will drive up nominal yields this year, the world’s biggest money manager said in a note Monday. The surge in public debt, and increased appetite for it, could also pose a risk over the longer-term, the firm said. “We turn underweight credit due to rich valuations and are now modestly overweight equities,” Jean Boivin, head of the BlackRock Investment Institute, and others said in the note. “Equities valuations are also closer to long-term averages after factoring in historically low interest rates and an improving earnings outlook.” The call is in line with a broader concern that’s sent the 10-year Treasury yield soaring in recent weeks: that price pressures are poised to re-emerge amid an economic boom powered by vaccines, pent-up consumer demand and another round of government stimulus. The New York-based firm said it prefers inflation-linked bonds.

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Man GLG’s Flamed Urges Market Neutral Tilt as Inflation Risk Looms Amid Equities “Euphoria”

Brief: Inflation is the next big risk facing the nascent economic recovery, and equity investors should be “exceptionally selective” in their exposures, tilting portfolios towards market neutral strategies that will help avoid excessive beta risk, says Man Group’s Pierre-Henri Flamand. Flamand – CIO emeritus and senior investment adviser at Man GLG, the discretionary hedge fund unit of London-listed investment giant Man Group – believes UK, European and Asian markets now offer attractive relative value stockpicking opportunities away from the “equity euphoria” seen Stateside. In a recent market commentary, he said the surge in government borrowing globally during the coronavirus pandemic to keep economies afloat and stave off a downturn may ultimately prove “a significant drag on growth and earnings for years to come”. As a result, investors should “look beyond the good news”, and instead construct their portfolios “with one eye on a potential inflationary future”. Specifically, this means pivoting towards certain UK, European and Asian stocks, and away from “frothy” US equities whose prices are being driven up by “all the frustrated ambitions of last year”.

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Pandemic Caused $220 Billion of Global Dividend Cuts in 2020, Research Says

Brief: Global dividends fell sharply in 2020 due to the coronavirus pandemic, with the amount of investor payouts declining 12.2% to $1.26 trillion, according to new research. As the international public health crisis spread throughout the world, prompting lockdowns and curtailing business activity, dividend cuts and cancellations totaled $220 billion between the second and fourth quarters of 2020, according to the latest Global Dividend Index from asset manager Janus Henderson. Still, the total amount of dividends paid out between April and December 2020 was $965.2 billion, noted Janus Henderson, which analyzes dividends paid by the 1,200 largest firms by market capitalization before the start of each year. Dividend cuts were most severe in the U.K. and Europe, the index found, with both together accounting for more than half the total reduction in payouts globally, “mainly owing to the forced curtailment on banking dividends by regulators,” Janus Henderson found.

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A Year After Covid Crash, Pandemic Losers are the New Winners

Brief: A year after Covid-19 reordered world markets, sparking a brutal selloff for many stocks and creating new lockdown darlings, the prospect of vaccine-led reflation is turning the tide for the pandemic’s main laggards. Rebounds in shares that were the hardest hit during the early days of the crisis have helped equity benchmarks around the world climb to near record highs. The likes of European tour operator TUI AG and U.S. mall owner Simon Property Group Inc. are among those that have rallied most strongly. “There’s broad opportunity in those laggards,” said Hani Redha, a portfolio manager at PineBridge Investments, referring to airline stocks, cruise operators and hotels. “We are on the more bullish side that there’ll be a lot more normality coming back sooner than you may think.” The increasing optimism among investors about an end to months of lockdowns and travel restrictions can also be seen in the recent underperformance of those stocks that were among the pandemic’s biggest winners. The likes of Zoom Video Communications Inc. and Germany’s Delivery Hero SE, which soared as the coronavirus took hold and changed the way we all live, are now some way off their peak valuations.

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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 February 19, 2021:

  • In the United States, President Joe Biden made his debut on the world stage – albeit virtually as a G-7 meeting was held on Friday. The leaders of America, Canada, United Kingdom, Germany, France, Italy and Japan agreed to pledge $4 billion to global COVID-19 vaccine initiatives, as well as sustaining government spending to help economies recover from the coronavirus pandemic. “We will continue to support our economies to protect jobs and support a strong, sustainable, balanced and inclusive recovery,” the G-7 leaders said in a statement. “Recovery from COVID-19 must build back better for all.”
  • In Canada, the federal government announced on Friday it will extend the Canada Recovery Benefit (CRB) and Canada Recovery Caregiving Benefit (CRCB) by another 12 weeks, as some recipients faced a cut-off by March 31st. The leading Liberal government also extended the Recovery Sickness Benefit from two weeks to four and broadened the claimant period for employment insurance from 26 weeks to 50 weeks. Extending these programs will cost the government approximately $12.1 billion - $6.7 billion to stretch the recovery benefits and $5.4 billion for the changes to employment insurance. All of these changes as noted by Canada’s employment minister are contingent on passing new legislation and with that, support from the opposition parties as the Liberals are a minority government.
  • In a ruling on a lawsuit Friday filed by three members of parliament, the United Kingdom government failed to properly disclose the details of coronavirus-related contracts. Judge Martin Chamberlain said in his ruling that Health Minister Matt Hancock failed to comply with government transparency policies, and added Hancock, “spent vast quantities of money on pandemic related procurements during 2020. The public were entitled to see who this money was going to, what it was being spent on, and how the relevant contracts were awarded.” Prime Minister Boris Johnson and his government have faced multiple lawsuits since the onset of the pandemic ranging from the availability of medical equipment to student exam results.
  • In the Netherlands, the courts are expected to decide next week whether ministers lawfully used emergency powers to introduce a curfew law due to the coronavirus. The Court of Appeal in The Hague heard a government appeal on Friday after a lower court earlier in the week said the government’s curfew should be stopped. The appeals court verdict is unlikely to reverse the curfew because it was approved by MPs in parliament on Thursday. What this has done is left people in a state of confusion with police stopping to hand out fines over the past few days because the situation is so unclear.
  • France’s President Emmanuel Macron is urging the rest of Europe and the United States to send enough COVID-19 vaccines to inoculate healthcare workers in Africa, or risk losing influence to Russia and China. Macron made the appeal earlier in the week, urging the rest of Europe and America to allocate up to 5% of their current vaccine supplies to developing countries in an effort to avoid acceleration of global inequality. The World Health Organization said on Thursday that nations producing COVID-19 vaccines should not distribute them unilaterally and instead donate them to the global COVAX scheme to ensure fairness. 
  • The Wall Street Journal (WSJ) is reporting China’s Sinopharm COVID-19 vaccine was secretly given to VIPs – months ahead of health workers and other vulnerable groups. The WSJ lists Peru, the Philippines and Uganda as countries where powerful politicians and well-connected officials jumped the line. For instance, in Peru, it was revealed that government consultants, lobbyists, cabinet ministers, the former president and his family were inoculated in September before the vaccine was even approved by Peruvian authorities. China, for their part said earlier in the week at a United Nations conference that the country never seeks economic benefits or political conditions from its vaccines.

Covid-19 – Due Diligence And Asset Management

Fed Says Policy Providing ‘Powerful Support’ to U.S. Economy

Brief : Federal Reserve actions will continue to bolster the U.S. economy as it battles the Covid-19 pandemic, the central bank said Friday in its twice-yearly update to Congress. “Monetary policy will continue to deliver powerful support to the economy until the recovery is complete,” the Fed said. The report was published on its website ahead of Chair Jerome Powell’s testimony before the Senate Banking Committee on Tuesday and the House Financial Services panel a day later. Fed officials have signaled they will hold interest rates near zero at least through 2023 and last month repeated they would keep buying bonds at a monthly pace of $120 billion until “significant further progress” had been made on employment and inflation.  On an optimistic note, the Fed said data show a pickup in employment through early February in the hard-hit leisure and hospitality sector -- which includes restaurants, entertainment venues, and hotels. The Fed said data on new-business applications started to pick up in the summer.  Nevertheless, other data show that services spending remains restrained, the report said. The Fed noted that job losses in the pandemic have fallen disproportionately on low-income workers, those without a college degree, Americans of color and mothers. These groups also still have the most ground left to make up as economic activity remains suppressed.

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UK Equities Set to Revive as Vaccine Roll-Out Boosts Economic Recovery

Brief: Asset managers are preparing for a rebound in UK equities, as an easing of coronavirus restrictions is expected to follow a swift roll-out of vaccinations. Last week, the chief economist of the Bank of England Andy Haldane said that the UK economy is “like a coiled spring” with “enormous amounts of pent-up financial energy waiting to be released” once the effects of the mass vaccination programme kick in. The UK economy shrank by almost 10 per cent last year, resulting in a contraction more than twice as large as any on record, said the Office for National Statistics. The IMF expects the UK economy to expand by 4.5 per cent this year, and another 5 per cent in 2022. At the end of January, London-headquartered asset manager Schroders, upgraded its outlook on UK equities to ‘positive’.   “We upgraded UK equities as we expect it to benefit as the global recovery broadens into multinational and commodity-sensitive markets,” wrote Schroders, noting strong recent gains from oil and gas and basic materials companies. The FTSE All-Share index posted negative returns in January as companies in the financials, industrials, and consumer goods sectors all weakened.

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Sovereign, Pension Funds Double Down on Private Debt Amid Pandemic

Brief: Sovereign wealth and public. pension funds are bolstering their funding of private debt, with close to $9 billion committed since the COVID-19 crisis as they hunt for yield and their ample liquidity allows them to take on more risk than banks.  Most recently, Saudi Arabia's Public Investment Fund said last week it had become an anchor investor in a new $300 million shariah credit fund. Queensland Investment Corp (QIC), an investment arm of the Australian state, last month became the latest state-owned investor to launch a private debt team. Last year marked a tricky time for the asset class. Private-debt fundraising declined substantially and commitments to direct lending, the largest chunk of it, fell by more than half. But as the uncertainty surrounding the pandemic lifts, activity is expected to pick up in 2021. State-owned investors with their deep pockets and long-term investment horizons are at the forefront. "Now we are seeing real interest from sovereign and pension funds that wasn't there a couple of years ago," said Antoine Josserand, head of business development at pan-European private credit manager Pemberton Asset Management, which counts both types of investors as clients. "It's a reflection of the fact that they recognise the merit in terms of diversification of their alternative asset bucket. Others, as part of their fixed-income portfolio, are trying to find the best relative value they can in the current negative rate environment."

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Hamilton Lane’s CEO Sees ‘No Chance’ of a Recession This Year

Brief: Hamilton Lane Inc. is putting the probability of an economic downturn this year at zero, according to Chief Executive Officer Mario Giannini. “There is virtually no chance that there is a recession in 2021,” Giannini said Thursday during the firm’s annual market overview. “We’re not going into a downturn, and in fact we may have an even stronger environment than people expect.” The Bala Cynwyd, Pennsylvania-based alternative-asset manager, which oversees about $657 billion, believes that central banks will continue to plow more money into the system to hold up markets. “When you look at what governments are doing in the U.S., in Europe, everywhere -- they are saying this pandemic was no one’s fault and we are not going to allow economies to turn down and not do something about it,” said Giannini. “So we think they are going to continue to provide enormous fiscal stimulus through this year.” Giannini said interest rates will remain low for a longer period of time than expected. He did predict one wild card: the possibility of an inflation scare from pent-up demand for a return to pre-pandemic life with outings such as eating at restaurants and taking trips driving “an enormous amount of activity.”

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Ackman Details 2020 Performance, Names Female Investment Team Member

Brief: Activist hedge fund manager William Ackman, whose bets on companies are closely watched, updated investors on how his flagship fund earned a record 70.2% return in 2020 on Thursday in a socially distanced way by sending out a 57-page presentation. Normally this would be one of the rare occasions where investors could pepper the billionaire investor and his partners in person with questions about markets and individual companies over dinner in New York. Ackman has plenty to celebrate after his Pershing Square Capital Management put up a second straight year of record returns in 2020. In 2019 the fund returned 58.1%. And 2021 is off to a strong start with an 8.1% return. Because of the COVID-19 pandemic however, Ackman and his team continue to work remotely, something they started over a year ago, and there will be no public champagne cork popping or dinner tonight. It was only in 2018, over dinner, that Ackman told investors that he would stop jetting around the world to meet with investors throughout the year. He was going to focus more on researching new ideas instead of acting as his firm’s chief marketer. For investors, the shift has paid off, and Ackman called 2020 and “outstanding year” in the presentation.

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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 February 18, 2021:

  • In the United States, according to government data released on Thursday, life expectancy in the country fell by a full year during the first half of 2020, a decline reflecting the toll the coronavirus pandemic took on America. The last time life expectancy at birth dropped more dramatically was during World War II. Racial disparities also were reflected in the data. Black and Latino Americans lost 2.7 and 1.9 years of life expectancy while White life expectancy fell 0.8 years. According to the report, the only good news is that life expectancy typically bounces back quickly because of the way it is calculated. Once the United States controls the pandemic, experts predict this will occur.
  • Canada’s federal government released an updated COVID-19 vaccination timeline, showing at least 14.5 million Canadians will be immunized with the Pfizer or Moderna vaccines by June 30th.  The number could increase to 24.5 million Canadians inoculated in that same time period if other vaccine companies such as AstraZeneca, Johnson & Johnson and Novavax receive Health Canada approval. This means under the new updated timeline, between 38 and 64 percent of Canada’s population could be immunized as it heads into the summer season.
  • In the United Kingdom, Care Minister Helen Whately says the lockdown will be lifted step-by-step over a period of several months. Whately said the UK was in a “better place” now after a significant fall in COVID-19 cases and around 16 million Britons having obtained a first dose of a COVID-19 vaccine. The UK government is waiting for the delivery of key data, expected on Friday, on how much vaccines can reduce transmission rates before making decisions for instance, on when restaurants and pubs can reopen.
  • Italy’s new Prime Minister Mario Draghi presented his government’s priorities with a pledge to speed up the country’s coronavirus vaccination programme near the top of the list. “The virus is everyone’s enemy. It is in the memory of those who are no longer here that our commitment grows,” said Draghi. As of Wednesday, Italy had administered three million inoculations, but progress has been hampered by delayed vaccine deliveries. Prime Minister Draghi, the former European Central Bank chief’s other dilemma is lifting Italy out of its worst recession since World War II.
  • Brazil’s Butantan Institute kicked off a campaign earlier this week to vaccinate all of the adult population of a city to see if it’s possible to reduce the number of cases. The city chosen was Serrana in the southeastern state of Sao Paulo. The entire adult population of Serrana is estimated to be 30,000 and are expected to be immunized over a three-month span, said the Butantan Institute via social media. Brazil has been hit hard by the coronavirus pandemic – ranking third in the world in total cases nearing 10 million and has over 242,000 deaths – trailing only the United States.
  • Australia will begin its first coronavirus vaccinations on Monday, starting with 240 nursing homes across more than 190 locations around the country. Australia’s federal health minister Greg Hunt said Phase 1a of the vaccine rollout would include three priority groups – included aged care and disability residents and staff, quarantine and border workers, and frontline health workers. The rollout will begin with the Pfizer/BioNTech vaccine with the AstraZeneca vaccine joining the rollout in early March. “This is a really, really exciting time. We are about to start the single biggest, and most complex, vaccination task in the history of this nation,” said Australia’s Chief Medical Officer, Professor Brendan Murphy. “We know there will be bumps in the road as we commence this task, unanticipated problems which we will solve together with our partners.”

Covid-19 – Due Diligence And Asset Management

Hedge Funds, Robinhood Face Grilling by Congress Over GameStop Reddit Rally

Brief : Wall Street hedge fund managers, the chief executives of Robinhood and Reddit, and a YouTube streamer known as Roaring Kitty were grilled on Thursday by U.S. lawmakers about the Reddit rally in shares of GameStop Corp. Some of Wall Street’s most powerful players, including billionaire Republican mega-donor and Citadel CEO Ken Griffin, made rare public defenses of their business practices as lawmakers probed how Reddit users trading on retail platforms squeezed hedge funds that had bet against shares of the video game retailer and other companies. Griffin appeared before the Democratic-led House finance panel alongside Robinhood CEO Vlad Tenev, Melvin Capital CEO Gabriel Plotkin, Reddit CEO Steve Huffman, and Keith Gill, a Reddit user and YouTube streamer known as Roaring Kitty who promoted his investment in GameStop. The five men have been at the center of the saga, which roiled Wall Street in January prompting probes by several federal and state agencies.

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‘New Normal’ Here to Stay, Fund Selectors Say

Brief: Despite a boost in optimism following the approval of Covid-19 vaccines towards the end of 2020, six out of ten fund selectors believe that the ‘new normal’ is here to stay, a survey by Natixis Investment Managers has found. With heightened risk expected for the year ahead, two thirds of the 400 global fund selectors surveyed also predict that the global economy will not recover from Covid in 2021. However, regardless of concerns over Covid-19 and political issues, 80% believe central banks will support the market in the event of a downturn, according to the report.  According to respondents, volatility and negative rates were considered the first and second top portfolio risks for global fund buyers in 2021, at 49% and 39% respectively, while a credit crunch was also cause for concern. Against this backdrop, 66% of the fund selectors believe that aggressive portfolios will outperform their defensive counterparts. Matt Shafer, EVP, head of wholesale and retail distribution at Natixis IM, said: “2020 marked a year of extreme challenges for markets that went beyond the health pandemic, including climate events and natural disasters, political tensions and the fastest market correction in history.

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Pandemic Stokes Interest in Gates-Backed Public Health Fund

Brief: The coronavirus pandemic has shone a spotlight on underfunded public health issues and infectious diseases. Investors once reluctant to put capital toward niche vaccine candidates, diagnostic tools and other public health solutions are taking notice. A venture capital firm launched by veterans of the Bill & Melinda Gates Foundation-sponsored Global Health Investment Fund has attracted $300 million in an oversubscribed fund to spur development of affordable technologies to address global health issues. Adjuvant Capital drew a $75 million anchor investment from the Gates Foundation’s Strategic Investment Fund, as well as significant investment from large drugmakers Merck & Co. and Novartis AG, and such others as the International Finance Corporation and Dalio Philanthropies. The capital will be deployed across a portfolio of 14 companies, which are focused on a range of health issues including yellow fever, non-hormonal contraception and Covid-19.

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WisdomTree Unveils Covid Recovery ETF

Brief: WisdomTree has launched a bond ETF dedicated to EU coronavirus recovery efforts in what has been called a world first. The ETF will invest in bonds issued by the EU to finance initiatives designed to mitigate unemployment risks as well as repair economic and social damage caused by the coronavirus pandemic. The ETF provider highlighted that the bloc is expected to issue €850 billion of bonds focusing on the recovery through the initiatives SURE and NextGeneration EU. SURE is a temporary tool aimed at mitigating unemployment risks, while NextGeneration EU focuses on repairing the immediate socio-economic damage brought on by the virus. The WisdomTree European Union Bond Ucits ETF (EUBO) fund tracks the iBoxx EUR European Union Select Index, which contains bonds issued by the EU to fund these programmes. Together, NextGeneration EU and the EU’s long-term budget form the largest ever stimulus package financed through by the EU totalling €1.8 trillion, WisdomTree said.

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Europe’s Most Active Corporate VCs Target Pandemic-Proof Startups

Brief: Corporate venture investors took part in a record-setting year for betting on European startups in 2020 as companies sought to increase their exposure to pandemic-proof sectors, and the trend looks set to continue into 2021. Last year, European startups raised a record $21.4 billion through rounds with CVC participation, a nearly 35% increase over the year before, according to PitchBook data. About 34% of 2020's investment was directed to IT and software startups, with healthcare companies accounting for 23% of the capital raised. "The pandemic has shown that there's never been a better time to be investing in software early-stage tech," said Matthew Goldstein, a London-based partner at Microsoft's venture arm, M12. "It has become very clear that sitting on the sidelines is a losing strategy for corporate investors whether they are strategic or financially driven." In many cases, CVCs back technologies that are relevant to their sector or could even be integrated. Notable examples include ABN AMRO Ventures, which joined an €85 million (around $102.4 million) round for Swedish open banking platform startup Tink in December. 

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More than Half of PE-Backed Traditional Healthcare Providers Have Yet to Reap Digital Transformation Rewards

Brief: Over 50 per cent of healthcare businesses in the UK have yet to reap the rewards of digital transformation, according to a new report from Equator.The Healthcare industry digital wellness report 20/21 surveyed 20 private equity-backed healthcare businesses to uncover the digital maturity of the sector, with digitisation critical in the post-pandemic landscape. Private equity firms invested over GBP140 billion across 1,227 healthcare deals in 2019, with the sector now accounting for 14 per cent of total deal value. Covid-19 had an impact on deal activity in 2020, but over the last three quarters, healthcare has been the highest demand sector for digital due diligence, advisory and transformation services for Equator. The report includes detailed reviews of twenty healthcare businesses which have seen a PE-backed buyout, or significant growth funding over the last three years. Over a third (40 per cent) of websites reviewed in the report can benefit from using human-centred design principles to accommodate evolving preferences and expectations. Smart tools, such as chatbots and AI, can help businesses operate more efficiently and adapt faster. Out of the 20 businesses surveyed, none currently power their interactions or enhance their overall customer experience in this way.

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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 February 17, 2021:

  • United States President Joe Biden’s administration announced on Wednesday they will invest more than $1.6 billion to increase COVID-19 testing programs in schools and elsewhere. The Department of Health and Human Services and Department of Defense will spend $650 million to expand testing opportunities for K-8 schools and other facilities, including homeless shelters. The Biden administration will also spend $815 million to increase production of testing supplies and $200 million to identify and track new emerging variants of the virus. According to Bloomberg, the United States has found 1,277 total cases of the United Kingdom variant in 42 states so far.
  • In Canada, the province of Alberta is adding $120 million in pandemic supports for struggling businesses. The funding will come in the form of additional $10,000 in grants to small and medium-sized businesses that have seen severe drops because of the coronavirus pandemic. The support will be available to companies with fewer than 500 employees and does not need to be repaid. Elsewhere in the country, Quebec Health Minister Christian Dube announced Wednesday that the government will make rapid COVID-19 tests available to private companies to reduce workplace outbreaks. In a statement, the health minister said companies will have to prove their workplaces are vulnerable to coronavirus outbreaks and that they follow proper infection protocols.
  • The United Kingdom will become the first country in the world to give the green light for which human volunteers will be deliberately exposed to COVID-19. The trial is expected to start within a month and will see up to 90 healthy volunteers aged between 18 and 30 exposed to the smallest amount of the virus needed to cause infection. “The absolute priority, of course, is the safety of volunteers,” said Peter Openshaw, a professor of experimental medicine and the man co-leading the project. “None of us wants to do this if there is any appreciable risk.” Scientists have used human challenge trials for decades to learn more about diseases such as the flu, malaria and typhoid to develop treatments and vaccines against them. 
  • Germany’s Health Minister Jens Spahn said the UK variant of the coronavirus is spreading rapidly through the country and now accounts for more than one in five cases. Speaking at a news conference on Wednesday, Spahn said the UK variant will become the dominant strain in the country and is “doubling every week”. Despite this, Spahn stressed the COVID-19 restrictions are working as infection rates were falling in Germany even with the spread of the variant. Germany has also partially closed its land borders in an attempt to stem the spread of new variants entering.
  • Australia’s Victoria state reported no local coronavirus cases on Wednesday, which means their snap five-day lockdown is due to end. The country’s second most populous state was sent into lockdown last Friday after an outbreak was linked to a quarantine hotel in Melbourne. Schools and businesses will reopen, but some restrictions on public and private gatherings will remain. Fans will also be allowed to return to the Australian Open tennis tournament with approximately 50% capacity and nearly 7,500 people allowed into Melbourne Park per session going forward. 
  • The United Nations Secretary General has called on the international community to help ensure the world gets vaccinated as soon as possible. Speaking at a virtual UN Security Council meeting Wednesday, Secretary General Antonio Guterres said the “progress on vaccinations has been widely uneven and unfair”. Guterres pointed to the following statistics: just ten countries have administered 75% of all COVID-19 vaccines with more than 130 countries not yet receiving a single dose. Guterres went on to add, “the world urgently needs a Global Vaccination Plan to bring together all those with the required power, scientific expertise and production, and financial capacities.”

Covid-19 – Due Diligence And Asset Management

COVID Response Drives $24 Trillion Surge in Global Debt

Brief : The COVID pandemic has added $24 trillion to the global debt mountain over the last year a new study has shown, leaving it at a record $281 trillion and the worldwide debt-to-GDP ratio at over 355%. The Institute of International Finance’s global debt monitor estimated government support programmes had accounted for half of the rise, while global firms, banks and households added $5.4 trillion, 3.9 trillion and $2.6 trillion respectively. It has meant that debt as a ratio of world economic output known as gross domestic product surged by 35 percentage points to over 355% of GDP. That upswing is well beyond the rise seen during the global financial crisis, when 2008 and 2009 saw 10 percentage points and 15 percentage points respective debt-to-GDP jumps. There is also little sign of a near-term stabilisation. Borrowing levels are expected to run well above pre-COVID levels in many countries and sectors again this year, supported by still low interest rates, although a reopening of economies should help on the GDP side of the equation.

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Global Pension Funds Weather the Storm of 2020

Brief: Global institutional pension fund assets in the 22 largest major markets (the P22) continued to climb in 2020 despite the impact of the pandemic, rising 11 per cent to USD52.5 trillion at year end, according to the latest figures in the Thinking Ahead Institute’s Global Pension Assets Study. The seven largest markets for pension assets (the P7) – Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US – account for 92 per cent of the P22, unchanged from the previous year. The US remains the largest pensions market, representing 62 per cent of worldwide pension assets, followed by Japan and the UK with 6.9 per cent and 6.8 per cent respectively. According to the study, there was a significant rise in the ratio of pension assets to average GDP, up 11.2 per cent to 80.0 per cent at the end of 2020. This is the largest year-on-year rise since the study began in 1998, equalling the increase recorded in 2009 as pension assets bounced back after the global financial crisis. Whilst the measure usually indicates a stronger pension system, the sharp rise also underlines the economic impact of the pandemic on many countries’ GDP. Among the seven largest pensions markets, the trend was even more pronounced with a 20 per cent rise in the pension assets to GDP ratio to 147 per cent in 2020, from 127 per cent the year before.

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Europe Braces for Pandemic Reality to hit Banks

Brief: Unpaid debt from pandemic-stricken borrowers has ravaged profits at Europe’s big banks and kick-started a debate among politicians about whether they may ultimately need state help. Reflecting on the pandemic impact, many bank executives say the worst is behind them, with Societe Generale CEO Frederic Oudea and BNP Paribas CEO Jean-Laurent Bonnafe predicting an imminent rebound. “Optimism is ... a weapon of war,” Philippe Brassac, chief executive of Credit Agricole said in January, decrying “doom-mongers”. “And this war, we can win.” All three French lenders saw profits shrink last year and profits at Spain’s Santander and Dutch bank ING also dipped. While executives voice confidence, European officials worry the banks’ problems have barely begun. They fear more borrowers will default when government support, including billions of euros of loan guarantees in France, Spain and elsewhere, is unwound.

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Short Interest in Biggest Credit ETF Jumps to COVID-Panic Level

Brief: Investors are building bets against the largest corporate debt exchange-traded funds as spreads shrink and interest rates rise. Short interest as a percentage of shares outstanding on the US$48 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD) jumped to more than 15 per cent, up from 5.9 per cent at the start of the year, according to data from IHS Markit Ltd. That’s the highest level since last March, when high-quality bonds sold off as investors raced to raise cash in the face of a quickly spreading pandemic. Now, with the vaccine rollout underway and an economic reopening in sight, investment-grade credit spreads to Treasuries have tightened sharply. Meanwhile, building reflation bets have boosted long-dated Treasury yields to the highest levels in a year, renewing concerns about relatively high LQD’s duration -- a measure of sensitivity to interest-rate changes. Against that backdrop, the risk-reward for high-grade corporate bonds looks less compelling, according to Wells Fargo Investment Institute.

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The Scientific Study of the Extremely Obvious: Evidence Shows Retail Investors Paid More Attention to Stocks During Lockdown!

Brief: For the last year, market commentators and investment professionals have blamed volatile markets on bored retail investors trading on Robinhood while stuck at home during the pandemic. Turns out they were right, according to a new study from a top Australian university.Researchers from the University of Western Australia used Google mobility data and internet traffic to analyze how much individual investors in the U.S. paid attention to stock markets and publicly traded companies while under lockdown. The academics found that the extended periods at home led to higher market engagement by retail investors, especially among younger populations and in states where fewer people worked from home prior to the pandemic. “The stay-at-home duration increases retail attention and contributes to heightened trading activity in the financial market,” authors Daniel Cahill, Chloe Ho, and Joey Yang wrote in their paper. To measure how much attention individual investors paid to public companies, the trio looked at pageviews for those companies’ Wikipedia profiles. They found that the daily average views for company Wikipedia pages increased from March to April, as people spent more time at home due to Covid-19.

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Hintze’s CQS Hedge Fund Firm Unveils New Total Return Credit Strategy After Bruising 2020

Brief: CQS, Sir Michael Hintze’s long-running multi-strategy credit-focused hedge fund firm, has launched a new actively-managed strategy which aims to generate higher returns across corporate sub-investment grade opportunities against a backdrop of increased volatility and unpredictable markets. The CQS Total Return Credit Fund targets a range of geographies, asset classes and sectors, across various ratings classes, using a bottom-up, fundamental research process. The UCITS compliant strategy - managed by Craig Scordellis, head of multi-asset credit, and Darren Toner, head of high yield investment grade and financial portfolios - will use an unconstrained investment approach to scope out the strongest opportunities and maximise risk-adjusted returns while aiming to curb volatility and potential defaults. The fund will also use ESG (environmental, social and governance) processes as part of the portfolio-building process, including engaging directly with debt issuers to influence long-term corporate behaviours, promote responsible practices, and mitigate ESG risks.

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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 February 16, 2021:

  • In the United States, Dr. Anthony Fauci, the top adviser to President Joe Biden on the coronavirus pandemic, said the timeline for when vaccines will be available to the general public has been pushed back. In an interview with CNN on Tuesday, Dr. Fauci said vaccines won’t be available to the general public before mid-to-late May or early June. Dr. Fauci admitted previous estimates had vaccine availability for nonessential workers under the age of 65 with no health conditions closer to the end of April. The change in timeline is due to Johnson & Johnson COVID-19 vaccine still not being cleared for emergency use and once it does, having fewer doses available than originally suspected. 
  • In Canada, the leading federal Liberal Party and lead opposition Conservative Party are bickering on who is to blame for the slowdown in the latest COVID-19 relief bill. In a letter provided to The Canadian Press, Deputy Prime Minster Chrystia Freeland accuses the Conservative government of dragging their feet for no good reason and to the detriment of Canadians. Conservative leader Erin O’Toole fired back during a news conference on Tuesday stating part of the delay was the Liberal’s own doing. “Minister Freeland knows that this legislation is intended to fix problems for their last rush exercise,” said O’Toole. Members of Parliament are back in session on Tuesday after a weeklong break. 
  • United Kingdom Prime Minister Boris Johnson is fighting back against demands from his Conversative MPs to speed up the end of the country’s lockdown – saying the way out will be “cautious but irreversible”. The Evening Standard quoted one UK scientist saying it appears the ministers “have been really listening to advice” from Sage experts after the prime minister said he wanted to see “really low” case numbers before lockdown curbs were lifted. Prime Minister Johnson will publish his road map out of lockdown next week after analysing the latest data on case numbers, hospital admissions, deaths and the impact of the vaccine rollout. The Evening Standard reported 303 of the 315 local areas in England (96%) have seen a fall in COVID-19 cases.
  • The Netherlands court ordered the government on Tuesday to end its curfew it imposed last month to help stop the spread of the coronavirus. The court determined the ruling coalition was not entitled to use emergency powers to enforce the restrictive measure. The government of Netherlands immediately appealed and asked the court to suspend the order prohibiting the curfew. The full appeal won’t be heard until Friday after a member of the group that sought to overturn the curfew accused the presiding judge of bias. In the meantime, Prime Minister Mark Rutte has urged the public to remain at home during the hours of 9 PM to 4:30 AM, pending the result of the appeal.
  • The European Union’s Systemic Risk Board (ESRB) released a report on Tuesday noting that EU bloc governments must find the right moment to wean the economy off its unprecedented crisis support, so they don’t harm growth in the long run. According to the report from the ESRB, as of September 2020, governments had put 2.4 trillion euros on the table for loan guarantees, public lending, grants and tax relief. “If fiscal support is withdrawn prematurely, economic recovery and financial stability might be at risk, but if it is maintained for too long beyond the emergency, fiscal sustainability and longer-term growth may be jeopardized,” the ESRB said.
  • Japan will begin its inoculation plan on Wednesday when a group of health workers will be provided the Pfizer COVID-19 vaccine. Taro Kono, the Cabinet administrative minister who is tasked with the vaccine rollout, said the progress will depend on the availability of vaccine supplies from Europe. Kono is also looking at procuring special syringes that can get six doses from a Pfizer vial instead of the standard five. Over the weekend, Japan approved the Pfizer vaccine, which has already been used in other countries since December. The country fell behind after it asked Pfizer to conduct clinical tests with Japanese people, in addition to the company’s earlier tests in six other nations as Japanese citizens are known for having low vaccine confidence.

Covid-19 – Due Diligence And Asset Management

Democrats Target Private Equity, Hedge Fund Tax Break in Bill

Brief : Three House Democrats are pushing legislation that would repeal the carried-interest tax break used by fund managers to reduce the levies they owe to the Internal Revenue Service. The bill would close the carried-interest tax break and require many hedge fund and private-equity managers to pay higher ordinary income-tax rates, rather than the lower rates on capital gains. Representatives Bill Pascrell of New Jersey, Andy Levin of Michigan and Katie Porter of California are sponsoring the legislation, which could become part of broader talks on taxes in Congress in the coming months. “The ability of private-equity and hedge fund financiers to use the loophole impacts income inequality, as this tiny subset of executives make up some of the wealthiest citizens in the world,” the lawmakers said in a statement on Tuesday. The legislation would mean that investment fund managers could pay significantly higher tax rates, because they wouldn’t be able to classify some of their income, called carried interest, as capital-gains earnings. Ordinary tax rates max out at 37% and long-term capital gains rates are 20%, plus an additional 3.8% surcharge to fund the Affordable Care Act. Carried interest is the portion of an investment fund’s returns that are paid to hedge fund and private equity managers, venture capitalists and certain real-estate investors eligible for lower tax rates. Money managers who put their own money at risk, such as private-equity partners who invest money in their funds, could still qualify for the break under the House bill. However, all the income earned from managing a firm’s assets would be taxed at ordinary rates, according to the lawmakers.

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Going All-In? Investors’ Cash Levels Dip to 2013 Pre-Taper-Tantrum Levels

Brief: Cash levels in investment portfolios have hit the lowest since just before the so-called taper tantrum of 2013, according to Bank of America’s February fund manager survey, which also showed investors to be overwhelmingly bullish on the economic outlook. World stocks have been notching successive record highs in 2021, with central banks remaining supportive and governments injecting money into the system to get economies up to speed after the damage caused by COVID-19. “The only reason to be bearish is ... there is no reason to be bearish,” Michael Hartnett, BofA’s chief investment strategist, told clients, who have the highest equity and commodity allocations in a decade. A net 91% of them expect a stronger economy, the best ever reading in BofA’s survey published on Tuesday, which covered 225 fund managers with $645 billion in assets under management. Investors showed they had the capacity to increase risk, taking their cash levels down to 3.8%, the lowest since March 2013, just before the U.S. Federal Reserve sparked a market tantrum by signalling its intent to wind down, or taper, the bond-buying programme it launched during the 2008 crisis. However, investors hear echoes of the 2013 situation, and see another taper tantrum as the second biggest “tail risk” after delays in the rollout of coronavirus vaccines.

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Emerging Markets Funds Likely to be at the Vanguard of ESG Investing over the Next Five Years, says RWC Partners

Brief: Emerging markets funds must use the next five years to ensure ESG is at the centre of investment philosophies, with the biggest environmental and social challenges located in the countries they invest in, RWC Partners’ John Malloy has said. Coming off the back of a strong end to 2020, which was boosted by factors including the US’ announcement of a further USD1.9 trillion of Covid-19 related stimulus, the challenge for emerging markets investors now is to focus on five years of real change across economies. Malloy, co-head of Emerging and Frontier Markets at RWC Partners, says a focus on ESG across emerging markets is paramount: there is significant scope in these markets to effect long-lasting change. “On a global scale, emerging and frontier markets account for the largest share of the world’s population, land and mineral resources. They are the drivers of global growth and consumption. Sustainability is a function of their development, and it is therefore essential to promote responsible business practices, enforce human rights and environmental protection,” Malloy says. “These are also high impact markets where a minor change can have major global consequences. Stopping deforestation in Brazil, reducing emissions in China, eliminating poverty in India, or finding a solution to water scarcity in Africa, for example, could change the entire planet. ESG considerations are vital when investing in developing countries, and if the next five years are to be the years of emerging and frontier markets, they will also be the years of ESG.”

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Swiss Wealth Tax Rakes in Cash as Covid Revives Global Debate

Brief: Switzerland’s wealth tax offers a rare real-world example of how a levy on assets can work, just as such ideas gain traction elsewhere in the wake of the coronavirus crisis. The measure forces residents in one of the world’s richest nations to tally the value of their investments, real estate, cars, fine art, Bitcoin, and even beehives and cows. A percentage is then skimmed off by cantonal governments. Switzerland, among only a handful of countries with the levy, can make a claim that it has the most effective one. With the Covid-19 fallout causing government debt to swell, and hurting poorer people most, wealth taxes are being debated from California to the U.K. as a tool both to pay down debt and address inequality. U.S. Senator Elizabeth Warren, Nobel laureate Joseph Stiglitz and economist Thomas Piketty are among proponents. Criticisms range from the view that it’s wrong to target assets accumulated through income that is already taxed, to more practical questions of how to fairly operate such a levy. The Swiss don’t seem to be very bothered by all of that. “It works for us,” said Stefan Kaufmann, a farmer from Wetzikon in the canton of Zurich, who describes the policy as a good Swiss compromise.

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The Pandemic has Dramatically Complicated Issues of Tax Residency

Brief: We all know that the residency status and the domicile of an individual can have a dramatic impact on their tax position, so it is important to understand what impacts both. As a result of the covid-19 pandemic many people have been caught the wrong side of borders and for some this could be expensive. Neil Jones explains the added complexities affecting residency status, and outlines how to stay on the right track. In the normal course of events the ability, or inability, to travel to and from the UK would have consequences, however fortunately HMRC issued guidance. This deals with the exceptional circumstances presented by covid designed to help advisers and individuals understand the impact on both residency and domicile. Before looking at the impact of the guidance, we need to understand how residency and domicile work. This test starts with conditions to establish if an individual is non-UK resident. If they were resident in the UK for at least one of the last three tax years and present for fewer than 16 days in the UK in the current tax year, or were not resident in the UK in the three previous tax years and present in the UK for fewer than 46 days in the current tax year, then they would be classed as non-resident. This would also be the case if they worked overseas full-time and are present in the UK for fewer than 91 days, and work fewer than 31 days in the UK.

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Free-Spending Private Equity Firms Set a Record Pace in Europe

Brief: A year of pandemic prudence is giving way to jumbo dealmaking in Europe for deep-pocketed private equity houses. Buyout firms have announced $29 billion of takeovers involving European companies this year, up 60% year-on-year and the most for this period on record, according to data compiled by Bloomberg. That’s after months in which many large buyers, including Blackstone Group Inc. and CVC Capital Partners, stayed on the sidelines or focused on funneling much-needed capital to their existing portfolio companies. Now, opportunities stemming from the coronavirus crisis, an abundance of cheap credit and willing sellers looking to clean up their balance sheets are creating ripe conditions for bigger deals. Soaring equity markets, meanwhile, are driving up prices. “It‘s hard to overstate it,” said Anthony Diamandakis, co-head of global asset managers at Citigroup Inc. “Chances are high that we will see jumbo deployment this year.” The industry has long had the luxury of holding a record amount of unspent capital, and with the time to pick its bets. Investors continued to pour money into buyout funds last year, even as private equity firms stayed penny wise.

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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 February 12, 2021:

  • In the United States, The New York Times and New York Post are reporting New York state Governor Andrew Cuomo’s top aide withheld nursing homes’ COVID-19 death toll for fear it would spark a federal investigation. “We were in a position where we weren’t sure if what we were going to give to the Department of Justice, or what we give to you guys, and what we start saying was going to be used against us and we weren’t sure if there was going to be an investigation,” said Melissa DeRosa, Secretary to the Governor, to Democratic lawmakers. The comments made by DeRosa come about two weeks after New York Attorney General Letitia James published a report saying the true death toll of nursing home residents between March and August of 2020 may be twice as high as the 6,400 officially reported.
  • In Canada, new measures forcing air travellers to be on the hook for a hotel quarantine bill will take effect as of February 22nd. Prime Minister Justin Trudeau made the official announcement on Friday.  Under the new rules, travellers returning to Canada will be required to take a COVID-19 test at the airport at their own expense. They will then be required to spend their first three days of their quarantine at a supervised hotel while awaiting their test results and pay for the stay, which is expected to cost upwards of $2,000. Travellers will be required to book their government-authorized hotel stay in advance starting February 18th.
  • The United Kingdom’s reproduction rate for the coronavirus epidemic has dropped to its lowest levels since July. According to official government estimates published on Friday, the latest “R” number is between 0.7 and 0.9. What this means is that on average, every ten people infected with the coronavirus are passing it on to between seven and nine others. The last time the upper end of the range was below 1 was on July 31st, 2020. The figures mean Prime Minister Boris Johnson is forging ahead with his government’s plan to create a road map out of the UK lockdown, which he plans to unveil on February 22nd.
  • Italy’s Mario Draghi has gathered enough support from Italian lawmakers to lead the country’s next government. Draghi was able to clear the last hurdle on Thursday when the majority of the leftist Five-Star movement opted to back the former chief of the European Central Bank. Draghi will now face confidence votes in Parliament next week and will present his Cabinet to the President on Friday. Gaining support might have been the easy part of Draghi’s job as once he becomes Prime Minister, he must lead Italy out of severe health and economic crises created by the coronavirus pandemic. 
  • Japan’s government is set to review next week an early lifting of the COVID-19 state of emergency covering Tokyo and several other regions. As of the right now, the state of emergency was scheduled to end on March 7th. About 1,300 cases were reported on Friday in Japan, the sixth consecutive day under 2,000 cases and significantly better than the single-day peak of 7,882 a little over a month ago. Elsewhere in the country, about 400,000 doses of the Pfizer vaccine arrived on Friday with a Japanese health panel recommending approval – the first COVID-19 vaccine to get that distinction. Inoculations, starting with health workers, is expected to begin next week.
  • Australia’s second largest city – Melbourne – is entering its second lockdown to contain an outbreak of the UK strain of the coronavirus. The snap five-day lockdown was enforced by Victoria state Premier Daniel Andrews, which means 6.5 million residents must stay home except for essential shopping, care, exercise and work. The outbreak has spread from a quarantine hotel with the case count sitting at 19. The one thing that will continue is the Australian Open Grand Slam tennis tournament taking place in Melbourne and about to enter its second week. The event will continue without spectators. The sporting event is being treated as a workplace, meaning it can continue without crowds.

Covid-19 – Due Diligence And Asset Management

U.S. Says it’s Back at the Table to Help Global Economic Recovery

Brief : New U.S. President Joe Biden’s administration told allies on Friday it was re-engaging with them to help steer the global economy out of its worst slump since the Great Depression, a contrast with go-it-alone approach of Donald Trump. U.S. Treasury Secretary Janet Yellen told her peers from the Group of Seven rich nations that Washington was committed to multilateralism and “places a high priority on deepening our international engagement and strengthening our alliances”. Yellen spoke to the G7 in an online meeting, chaired by Britain, at which she called for continued fiscal support to secure the recovery, saying “the time to go big is now”. Britain said officials discussed giving help to workers and businesses hit by the pandemic while ensuring sustainability of public finances “in the long term”. As well as the United States and Britain, the G7 includes Japan, France, Germany, Italy and Canada.

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Covid-Claim Investors Seek Windfall Over Denied Coverage

Brief: A growing market niche where investors profit from others’ legal troubles is getting a boost from Covid. Distressed-investing funds and litigation-finance boutiques are likely to be spoiled for choice after a landmark U.K. court ruling last month rejected pleas from insurers looking to dodge pandemic payouts. They’re looking to finance or buy denied Covid-19 insurance claims for policyholders without the means or stomach for taking their insurers to court. “This is going to be huge,” said Steve Cooklin, chief executive officer of London-based litigation funder Manolete Partners Plc, whose biggest shareholder is veteran distressed investor Jon Moulton. “It’s hard to say at this stage how big exactly this issue is, but it’s probably going to be in the hundreds of millions of pounds.” Insurers have warned that Covid-19 coverage claims could top as much as $100 billion –- potentially the industry’s largest loss in history. Business-interruption coverage -- which protects against losses when companies have to shut for a period of time -- has been one of the most costly and contentious policy lines in the pandemic. U.K. virus-related claims, including on business-interruption policies, could exceed $2 billion. For investors in a zero-yield world of spiraling stock prices, the insurance payout battles present opportunities that can be profitable regardless of how debt and equity markets perform -- they’re “uncorrelated,” in the jargon of the trade.

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Ninety One’s Evans: Covid Has Accelerated UK Companies’ Sustainability Outcomes

Brief: Positive outcomes on sustainability issues from UK companies have been brought forward by three years as many firms prioritised employee and customer welfare through the peak of the coronavirus pandemic, Ninety One's Matt Evans has said. Companies in various sectors across the world were hit hard in H1 2020, as global lockdowns caused planes to be grounded as well as sporting, theatrical and musical events to be cancelled, leaving large swathes of the economy with zero revenue for months. Governments reacted by instituting schemes such as furlough in the UK, allowing companies to reduce their workforce without needing to fire people as the Government would pay up to 80% of their wages. All companies were able to access the furlough scheme, but Evans, who manages the £38m Ninety One UK Sustainable Equity fund, told Investment Week some were more introspective than others. Evans highlighted Dechra, a provider of veterinary pharmaceutical products, as an example of a firm that decided against taking furlough cash, instead promising to pay its employees itself even when they were unable to work. Since, Dechra has benefitted from the work-from-home trend as consumers spend more time with, and therefore money on, their pets.

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White House Meets with Airline CEOs on COVID-19 Travel Issues

Brief: The chief executives of major U.S. airlines, including American Airlines, Southwest Airlines and United Airlines, met virtually with the White House’s COVID-19 response coordinator on Friday amid airline concerns that new restrictions could be imposed on domestic air travel. “We had a very positive, constructive conversation focused on our shared commitment to science-based policies as we work together to end the pandemic, restore air travel and lead our nation toward recovery,” Nick Calio, chief executive of the Airlines for America industry group, said in a statement. The White House, which declined to comment on the airline meeting, has a separate interagency meeting scheduled for later on Friday to discuss coronavirus issues and is not expected to endorse requiring negative COVID-19 tests before flights at this point, said people briefed on the matter, who spoke on condition of anonymity. The airline CEO meeting with coronavirus response coordinator Jeff Zients and other administration officials involved in COVID-19 issues came after airlines, aviation unions and other industry groups strongly objected to the possibility of requiring COVID-19 testing before boarding domestic flights.

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DWS Scraps City of London Office Sale as Lockdown Saps Demand

Brief: DWS Group has abandoned plans to sell a City of London office building after bids fell short of its 145 million-pound ($200 million) asking price, the latest evidence of the pandemic eroding demand for all but the best new properties. The German asset manager majority-owned by Deutsche Bank AG has taken 85 King William Street off the market, and will now carry out a partial renovation, according to a DWS spokesman. The recent departure of some tenants from the building known as Capital House contributed to the low bids, according to people familiar with the matter, who asked not to be identified because the process is private. Capital House is “one of many strong core London office assets that DWS will continue to add value to through our active management strategies,” the DWS spokesman said, without commenting on the vacancies. An easing of coronavirus restrictions helped boost activity in London’s office market late last year, with deal volumes in line with the long-term average. But the latest lockdown, which has further delayed the return of workers to offices, has once again put a damper on sales, especially for properties that need modernizing.

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Outsourced Lead Generation to Become the ‘New Norm’ for PE-Backed Businesses

Brief: Outsourcing the generation of leads and new business will become the ‘new norm’ as the pandemic eases, one leading digital marketing firm has predicted. Scottish headquartered 4icg Group, chaired by entrepreneur Brian Williamson, says it has experienced an increase in private equity backed businesses looking to retain its services because of the need to recover falling revenues and maintain equity value. Dr Williamson pointed towards American PE-backed software and tech companies who accelerate their growth by outsourcing lead generation from day one to build sales volume quickly – a business model which is moving across the Atlantic. Williamson says: “Business quickly had to deal with the immediate impact of the pandemic but now we’re seeing companies taking the steps to recalibrate in line with revisions to their medium and long-term strategies. “For PE backed businesses, generating leads quickly and in good volume from a limited sales budget is more important than ever. A total package per sales employee may be GBP75k per annum but delivering the volume from that is trickier than ever given the restrictions on movement. A remote sales force can be guilty of chasing rainbows right now in an effort to justify their existence.

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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 February 11, 2021:

  • With the United States Senate firmly entrenched in the impeachment trial of former President Donald Trump, current President Joe Biden is left fighting the coronavirus pandemic shorthanded. Currently, the White House administration is only operating with two senior health officials in place: CDC Director Rochelle Walensky and Dr. Anthony Fauci serving as the president’s top medical adviser. For instance, Xavier Becerra, President Biden’s pick for health secretary won’t have his Senate committee hearing until February 22nd and likely won’t be confirmed until March. While the logjam rests in large part with the Senate, a Bloomberg article notes the Biden administration should also shoulder some of the blame. The White House hasn’t said why President Biden has yet to name a permanent Food & Drug Administration (FDA) or a Center for Medicare and Medicaid Services (CMS) chief.
  • In Canada, Manitoba became the first province to skip the federal government and go on their own – signing a deal to buy two million doses of a made-in-Canada COVID-19 vaccine. The firm is Providence Therapeutics and their vaccine is currently under clinical trial with human testing only starting in late January. With positive results, Providence Therapeutics has said it expects commercialization of the vaccine to begin by the end of 2021 or early 2022. Elsewhere in the country, due to a recent outbreak in St. John’s Newfoundland and Labrador, the province has delayed its upcoming election voting in some areas. In a release on Thursday, Elections NL said in-person voting will be postponed until a later date in 18 districts, while mail-in voting options have been extended. The election was set to go on February 13th, but results will now not be released until all voting in the province has concluded.
  • In the United Kingdom, the head of the country’s genetic surveillance programme has said the coronavirus variant first found in the Kent region, and known as the UK variant, has the potential “to sweep the world in all probability”. Sharon Peacock, director of the COVID-19 Genomics UK consortium, was interviewed by the BBC and said the concern is the variant keeps mutating and by doing so, could potentially undermine the protection given by the current vaccines. Prime Minister Boris Johnson said on Wednesday that Britons should be prepared to receive repeated vaccinations against COVID-19 in the future to keep pace with mutations of the virus.
  • Germany’s Chancellor Angela Merkel was busy defending her coronavirus strategy after announcing on Wednesday that the country’s lockdown will be extended to March 7th at the earliest. Speaking to lawmakers in Germany’s lower house of parliament on Thursday, Merkel said, “as a democracy, it is up to us to keep these restrictions only as long as necessary – not one day longer – and to lift them when possible. This is exactly the objective of this government.” Chancellor Merkel said she is aware of how difficult the lockdown has been on citizens of the country, but Germany is dealing with three aggressive mutations of the coronavirus and curbs are needed to reduce the risk.
  • The Philippines is set to receive 600,000 doses of China’s Sinovac Biotech COVID-19 vaccine, a presidential spokesperson said on Thursday. The vaccine is expected to arrive on February 23rd with 100,000 already confirmed to be going to the military. Upon arrival, the shots will be stored until they are cleared for use by the Philippines’ Food and Drug Administration. The country plans to buy 148 million coronavirus doses this year and inoculate 70 million people to achieve herd immunity.
  • China has banned the UK’s BBC World News from airing in the country, according to a statement from the nation’s radio and television governing body. In the statement, China’s NTRA claimed that BBC World News reports on China “infringed the principles of truthfulness and impartiality in journalism”. Earlier in the month China’s Foreign Ministry criticized BBC for its coverage of the country’s response to the COVID-19 pandemic, calling it “fake news”. It is unclear how much of an impact this will have on Chinese citizens as the BBC has never been allowed to broadcast in mainland China and was only available via international hotels. The move is also seen as a tit-for-tat as British media regulator, Ofcom, said last week it had withdrawn a license for China Global Television Network, or CGTN.

Covid-19 – Due Diligence And Asset Management

Goldman, Other Financial Firms Add China Staff, Eyeing Growth

Brief : Global financial firms including Goldman Sachs, BlackRock and Fidelity International are poised to add hundreds of staff in China this year as they look to take advantage of the opening up of its $40 trillion financial sector. Beijing in the last one-and-a-half years stepped up the pace of liberalisation mainly as part of a trade deal with the United States, and allowed foreigners to fully own their local ventures in areas including investment banking and asset management. After having won regulatory approval to raise holdings and dealt with the disruptions caused by the COVID-19 pandemic, Western firms are now readying plans to boost their onshore presence, representatives and headhunters said. Foreign financial firms have long coveted a bigger presence in China, and their expansion comes against the backdrop of a revival in its economy, increased onshore deal activities, and a rapid pace of wealth creation.  Goldman is leading the charge of the Wall Street banks operating in China - the first to move towards taking full ownership of its securities business after it was fully opened up to foreigners last April.

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Famed Hedge Fund Firm CQS IS Surviving – But Not Because of its Hedge Funds

Brief: For a man whose flagship hedge fund was down more than 50 percent at one point last year, Michael Hintze sounds surprisingly upbeat. On a chilly winter afternoon, Hintze, 67, phones from London to talk about his firm’s reckoning this past spring, a time when the flagship fund’s structured credit instruments went terribly wrong and the firm’s positioning amid market turmoil sent that and one other fund plummeting to their worst-ever losses — wiping out billions of assets in mere weeks. It was an exceedingly rare stumble for CQS, a London-based hedge fund that had reliably minted money for investors more or less uninterrupted since its founding in 1999. Its flagship Directional Opportunities Fund had averaged gains of nearly 14 percent per year since its inception in 2005.  That changed drastically in 2020, as the coronavirus ravaged global economies worldwide and bond markets gyrated wildly amid fears over liquidity. The fallout hit the assets CQS primarily invests in — structured and complex credits — particularly hard, as Hintze noted in a letter to investors in November. CQS’s Directional Opportunities, which accounts for 10 percent of the firm’s assets, lost 33 percent in March and a further 17 percent in April. The wretched performance, paired with upheaval in the executive ranks, took a toll on the firm, which cut some 50 jobs, scrapped a planned expansion into equities, and saw assets shrink by $3 billion in the short term, according to a June 2020 Bloomberg report.

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BlackRock Sees ‘Powerful’ Drivers for Emerging Europe Stocks

Brief: BlackRock Inc., the world’s biggest asset manager, sees a “powerful mix” of drivers for stocks in Europe’s emerging markets, including Covid-19 shot roll outs, stimulus measures and easy financial conditions. Valuations and investor presence in emerging European stocks remain “extremely low” and it’s time investors pay more attention to this equity class, Chris Colunga, co-manager of BlackRock’s 617 million euro ($748 million) Emerging Europe fund said in emailed comments. The provision of vaccines and continuing stimulus are likely to fuel earnings growth in the region, he said. European Union spending on sustainable infrastructure is set to feed liquidity into eastern Europe, he added. “As we enter 2021, the combination of strong liquidity, easy financial conditions and high levels of disposable income are a very powerful mix for earnings growth at a time the vaccine is offering hope of some demand normalization,” said Colunga. The BlackRock fund manager said he favors exposure to Greek stocks on bets tourism will recover and financial conditions as well as investments will improve. The stock fund has also turned “more constructive” on Turkey after the market’s underperformance and as the new economic leadership team pledges more traditional policies, Colunga said. As of the end of December, the fund had a 9.6% exposure to Greece, its third-biggest, and a 5.5% exposure to Turkey, its fifth-highest.

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Pandemic Leads to Rise in Financial Vulnerability, says FCA

Brief: The Covid-19 pandemic has left over a quarter of UK adults financially vulnerable with too much debt or low levels of savings, a survey by watchdog the Financial Conduct Authority (FCA) has found. Nearly 28 million adults in the UK were showing characteristics of vulnerability such as poor health, low financial resilience or negative life events by October last year. Having any one of these characteristics means that these consumers are at greater risk of harm, the FCA said. This figure was up 15% from February 2020, before the first lockdown kicked in and businesses closed. The FCA also found that the number of consumers with low financial resilience, such as over-indebtedness or with low levels of savings or low or erratic earnings, has grown. Over the course of last year, the number of UK adults with low financial resilience increased from 10.7 million to 14.2 million, the report shows, while different demographics are being affected more than others. Highlighting the threat to people’s incomes from the pandemic, in October one in three adults said they expect their household income to fall during the next six months, while 25% expected to struggle to make ends meet.

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KPMG Chair Steps Aside After Telling Staff to ‘Stop Moaning’ about Pandemic

Brief: KPMG has confirmed that its chairman is stepping aside after the accounting giant launched an investigation into controversial comments he made to staff in a virtual meeting this week. Bill Michael, who took over as chairman in 2017, told staff on Monday to “stop moaning” about the pandemic and the impact of lockdown on people’s lives, adding that they should stop “playing the victim card”. The online meeting was attended by around a third of the financial services consulting team’s 1,500 staff. Michael, who was in hospital with Covid-19 in March last year, later rejoined the call and apologised to staff who had criticised his choice of words in the comment section of the app used to run the event, according to the Financial Times which first reported the story. He also apologised in a separate email to all members of the consulting team. The chairman also reportedly told staff he was still holding client meetings despite Covid lockdown restrictions, and claimed unconscious bias was “complete crap”.  The big four accounting firm has now launched an investigation into Michael’s comments, prompting him to step aside – at least temporarily – until KPMG completes its inquiry.

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Where VC Funding is Surging

Brief: Health and wellness technology has received a big boost from venture capital. “VC deal activity within this space has spiked significantly,” with $8.3 billion worth of venture capital deals in 2020, PitchBook analysts said in a newresearch report. That’s 70 percent more than enterprise-oriented companies within enterprise health and wellness received in 2019 — and the most venture funding they’ve obtained in at least a decade, according to the report.  The most active venture capital firms in enterprise health and wellness tech since 2018 include Oak HC/FT, F-Prime Capital, and Echo Health Ventures, while the top private equity firms in the area since 2008 include Warburg Pincus, Francisco Partners, and Blackstone Group, the report shows. PitchBook, which tracks private-market data, projects the valuation of the sector will double to $1.3 trillion by 2025, from $640 billion at the end of June. “In the wake of the Covid-19 pandemic, we expect governments and NGOs will prioritize technologies that can help mitigate the health impacts of future pandemics,” the firm’s analysts said. “This will likely accelerate investment into technologies in the realm of disease tracking, public health tools, and pharmaceutical technology.”

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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 February 10, 2021:

  • In the United States, the Centers for Disease Control and Prevention (CDC) issued a new report noting that double masking – using a cloth mask over a procedure mask – like a disposable blue surgical mask - can significantly improve protection against COVID-19. While that does seem like common sense, researchers found the combination of the two masks can block 92.5% of potentially infectious particles from escaping by creating a tighter fit around the face. Media reports are noting it is unclear how or if the CDC will incorporate these findings into its new mask recommendations. The White House at this time isn’t recommending that people wear two masks to prevent the coronavirus but is considering a “range of options” when it comes to getting masks to Americans.
  • A recent survey from polling firm Ipsos revealed that close to two-thirds of Canadians believe that governments should have acted sooner to reduce the number of coronavirus cases in the country. Around 63% of Canadians said that governments should have been more proactive with stricter measures that included travel bans, curfews and lockdowns, in a bid to slow down the virus. As in who is to blame overall for the situation Canadians are facing? Just over three in ten (31%) blame each other – believing that many people didn’t follow rules like physical distancing very well. Sixteen percent blamed federal government, while just five percent blamed leaders at the provincial level.
  • In an interview on United Kingdom radio on Wednesday, Transport Secretary Grant Shapps became the first cabinet minister to reveal the government is considering a “vaccine” or “digital health” passport. Shapps reveled on BBC radio that talks are under way with the United States, Singapore, and the United Nations aviation body about an international system to help people who have had COVID-19 inoculations to fly. However, Shapps was quick to point out that it is “too soon” to book summer holidays yet and even suggested staycations in the UK could be in doubt due to not knowing how the virus will respond to the vaccines. The transport secretary also said nobody would be forced to get a digital health passport and one will not be required to travel within Britain.
  • The European Union (EU) said that it has approved a further 23 requests to ship COVID-19 vaccines to other parts of the world, bringing the total to 27 since enforcing the bloc’s new export-licensing regime. Over the last week, the EU has authorized COVID-19 vaccine shipments to the United States, Canada, Japan, Australia and China just to name a few. Under the export authorization system, drug companies must notify EU national authorities in advance of the amounts and destination of any vaccine shipments to other parts of the world. So far, the EU haven’t rejected any export requests and the system is expected to last until the end of March. 
  • Reuters is reporting Israel’s swift vaccination rollout is making the country the world’s first real study of Pfizer’s COVID-19 vaccine and the early results are promising. More than 3.5 million eligible Israelis have been fully or partially vaccinated. The older and at-risk groups were the first to be vaccinated and according to statistics, there have seen a 53% reduction in new cases, a 39% decline in hospitalizations and 31% drop in severe illnesses from mid-January until February 6th. In the same time period, people under the age of 60 who became eligible for shots later, new cases dropped 20%, but hospitalizations and sever illnesses rose 15% and 29% respectively.
  • A group of independent experts advising the World Health Organization (WHO) recommended the use of AstraZeneca’s vaccine even in countries that have coronavirus variants in their populations. As noted in Castle Hall’s COVID-19 Diligence briefing earlier in the week, South Africa halted its use of the AstraZeneca vaccine after a study showed it was less effective against the South African virus variant. This move threw South Africa’s coronavirus vaccination program into disarray as the AstraZeneca vaccine was the only one authorized for general use in the country. However, SAGE chair Alejandro Cravioto, the independent group responsible for advising the WHO, said “we have made a recommendation that even if there is a reduction in the possibility of this vaccine having a full impact in its protection capacity, especially against severe disease, there is no reason not to recommend its use even in countries that have circulation of the variant.”

Covid-19 – Due Diligence And Asset Management

Varde Partners Bets on Housing Market Boom in Sun Belt Suburbs

Brief : Varde Partners is investing more than $250 million to fund development of single-family homes in Arizona, Florida and Texas in a bet on Sun Belt suburbs. With historically low mortgage rates driving a housing rally during the pandemic, Varde is putting money into the real estate market through a trio of transactions as Americans shift away from coastal cities in a search for larger properties. The fund, which manages more than $14 billion, is acquiring a master-planned community in Austin, according to a statement. It’s also purchasing an active-adult community in Scottsdale, Arizona, where it will partner with builder Shea Homes to complete hundreds of houses for residents 55 and older. In a third transaction, Varde is investing $100 million to develop land in Florida and Colorado. The firm is making the investments as “traditional lenders continue to retrench,” according to a statement. The transactions come at a time when the Covid-19 pandemic is accelerating demographic shifts to the suburbs. Wall Street firms have sought to invest behind those trends, placing bets on single-family rentals, suburban apartment buildings and land for developing new subdivisions.

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Southwest CEO, Unions Urge Biden not to Mandate Domestic Air COVID-19 Testing

Brief: Southwest Airlines Chief Executive Gary Kelly and the leaders of the airline’s unions urged President Joe Biden not to mandate COVID-19 testing before domestic flights, warning it would put “jobs at risk.” The letter dated Tuesday and released by the airline on Wednesday said “such a mandate would be counterproductive, costly, and have serious unintended consequences.” The Centers for Disease Control and Prevention (CDC) last month said the Biden administration was “actively looking” at expanding mandatory COVID-19 testing to travelers on U.S. domestic flights, which has sparked push back from the aviation, aerospace and travel industries.

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Jim Simons Makes Billions While Renaissance Investors Fume at Losses

Brief: Jim Simons added $2.6 billion to his vast wealth in 2020. His clients weren’t so fortunate. Investors in three hedge funds run by Simons’s Renaissance Technologies lost billions of dollars as the firm’s computer models were flummoxed by the market’s gyrations. Meanwhile, Simons ranked second on Bloomberg’s list of the highest-paid managers, and was the only one in the top 15 whose clients didn’t make money last year. The secret to his success: access to a Renaissance strategy that’s closed to outsiders. The legendary Medallion fund gained 76% last year, according to Institutional Investor, while the public offerings racked up double-digit losses. It’s a stark disparity that has led some observers to wonder if Simons’s 15-year experiment to bring his brand of quantitative investing to the masses no longer works. Investors, including some employees, have yanked at least $5 billion from the three public funds since Dec. 1. After a further 9.5% dip in the $26 billion Renaissance Institutional Equities Fund in January, investors said they expect more will follow. Investors said they were surprised by the firm’s reaction to the losses.

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Macquarie Taps Renewables Trend with $2 Billion Infrastructure Fund

Brief: Macquarie, the world’s largest infrastructure investor, has raised 1.6 billion euros ($1.93 billion) for its second global renewables fund, driven by strong demand from institutional investors in Britain and Germany. Countries and companies are seeking to increase their usage of renewable energy to lower carbon emissions and fight climate change. At the same time, record low interest rates have crimped fixed income returns and boosted the allure of alternative assets. Macquarie Infrastructure and Real Assets (MIRA), manager of the fund, said it had drawn investment from 32 institutions, including pension schemes, insurers and sovereign wealth funds, helping it exceed a minimum target of 1 billion euros. While Europe-based investors contributed most of the capital - German and British investors accounting for 30% each - the fund, Macquarie Green Investment Group Renewable Energy Fund 2, also attracted interest from Asia Pacific and North America. It will target wind and solar projects in Western Europe, the United States, Canada, Mexico, Japan, Taiwan, Australia and New Zealand.

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Global Investors Accelerate ESG Investments in Response to Pandemic, says MSCI Survey

Brief: The global pandemic has highlighted both the importance of ESG issues and is accelerating ESG integration by institutional investors, according to the respondents of MSCI’s 2021 Global Institutional Investor Survey, a survey of 200 asset owner institutions with assets totalling approximately USD18 trillion. The survey of sovereign wealth funds, insurers, endowments/foundations, and pension funds found that over three-quarters (77 per cent) of investors increased ESG investments “significantly” or “moderately” in response to Covid-19, with this figure rising to 90 per cent for the largest institutions (over USD200 billion of assets).  “The combination of climate-related events, such as devastating wildfires, floods and droughts, and a global pandemic have accelerated the paradigm shift on ESG and climate change. Once an issue for ‘green funds’ and side-pockets, ESG and Climate are now firmly established as high priority issues,” says Baer Pettit, President and Chief Operating Officer, MSCI. “2020 marked a profound shift in the way institutions invest as many investors have recognised that many companies with strong environmental, social and governance practices outperformed during the pandemic.” The survey reveals that while US investors in general have been lukewarm about ESG in the past, with some high-profile exceptions, 2020 dramatically shifted their views closer to those of their international counterparts. Of US respondents, 78 per cent said they said they would increase ESG investment either significantly or moderately as a response to Covid-19, while the figure was 79 per cent and 68 per cent in Asia-Pacific and EMEA, respectively.

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Pimco Sees Risk in Premature Calls on Pandemic and Inflation

Brief: One of the biggest risks in 2021 is betting that vaccines will bring a quick end to the coronavirus pandemic, according to Pacific Investment Management Co. With growth-linked assets at or near records, “the biggest risk is probably the market prematurely pricing the end of the pandemic,” said Robert Mead, Pimco’s co-head of Asia-Pacific portfolio management. “It’s easy for markets to get a little too optimistic.” Mead is also sanguine about the chances of a breakout in inflation and interest-rate risks, while remaining broadly upbeat about the prospects for growth across developed and emerging economies this year. The money manager expresses his view through bets on steeper yield curves in Australia and the U.S. -- though his positions are less aggressive than they were last year. Mead’s strategy is based on the premise that although economies are seeing some pick up in prices, inflation targets remain stubbornly out of reach and major central banks are unlikely to raise borrowing costs for at least three to four years. His views are in contrast to the vibe in markets this week, with bond traders seeing the strongest inflation outlook in years and warnings from BlackRock Inc. and JPMorgan Asset Management on resurgent price risks.

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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 February 9, 2021:

  • In the United States, a report from the Conference Board says close to half of employers expect their employees to be able to return to the office as early as this spring. In the report, roughly 40% of employers that shifted their staff to remote work are planning to have a return to the office as early as March. However, this may be easier said than done as the new normal has made remote work at least a future consideration. Many companies may make the return voluntary or adopt some sort of flexible work schedule. According to a separate survey by the Pew Research Center, more than half of employees said if given the option, they would want to keep working from home, even after the pandemic.
  • During his routine news briefing Tuesday, Canadian Prime Minister Justin Trudeau said non-essential travellers arriving at the country’s land border will have to provide proof of a negative COVID-19 test, similar to air travelers. "As of February 15th, when you return to Canada through a land border, you’ll need to show a 72-hour PCR test, just like air travel,” said Prime Minister Trudeau. Canada’s Chief Public Health Officer Dr. Theresa Tam said last week there is no exemption to Canadians who have already received a vaccination – for instance – snowbirds who stay in Florida or Arizona during the winter months. Prime Minister Trudeau went on to add while border officers can’t legally deny entry to Canadians returning, those who show up without proof of a test could face fines up to $3,000 CDN.
  • The United Kingdom, similar to Canada, are stepping up their restrictions and quarantine rules for returning travellers. Starting next week, the UK will require passengers where worrying coronavirus variants are spreading to pay for 10 days of quarantine in a hotel, while rule breakers will face heavy fines (up to $14,000 USD) or jail terms. The restrictions are added to those already in place, which ban travel abroad for holidays. UK Health Secretary Matt Hancock told parliament Tuesday, “anyone who lies on the passenger locator form and tries to conceal that they’ve been in a country on the “red list” in the 10 days before arrival here, will face a prison sentence of up to 10 years.” The 10-day hotel stay will also cost the traveler $2,400 USD and further COVID-19 tests will be conducted on day 2 and day 8 of their quarantines. Upon the news, airlines and travel companies called for more government aid, saying the new rules would deepen a crisis that has seen them lose nearly all of their revenue. 
  • Bloomberg is reporting German Chancellor Angela Merkel wants a gradual reopening of stores and hotels next month as long as the infection rates continue to fall. According to a chancellery briefing seen by Bloomberg, Chancellor Merkel will propose to Germany’s 16 state leaders on Wednesday the gradual reopening plan while asking the current restrictions – which include the closures of schools and non-essential stores to remain in place until early March. Stores would reopen in regions with a seven-day COVID-19 rate of less than 35 per 100,000 and hotels in areas where the rate is less than 20. For Germany, as a whole the number currently is just over 70 per 100,000.
  • In Russia, new data suggests the country’s coronavirus death toll in 2020 was likely close to three times higher than reported. Figures released from Russia’s federal statistics agency on Monday indicated there was as many as 162,429 deaths due to COVID-19. Russia officially reported 57,555 deaths from COVID-19 in 2020, according to data from the country’s coronavirus task force. Based on those new numbers, Russia would have ranked third in the world for COVID-19 related deaths. 
  • The World Health Organization (WHO) led team probing the origins of COVID-19 in China over the last several weeks have said the coronavirus may have taken a “convoluted” path to Wuhan, but bats remain the likely source of transmission. Peter Ben Embarek, who led the team of independent experts, said the work had uncovered new information, but not dramatically changed their picture of the outbreak. The WHO-led team said the transmission of the virus via frozen food is a possibility that warrants further investigation but ruled out the lab leak as suggested by the United States. According to an American State Department spokesperson, the “jury’s still out” on whether China has been fully transparent on the coronavirus pandemic and they are looking forward to seeing the complete report and would make an assessment based on science and data.

Covid-19 – Due Diligence And Asset Management

KKR Deployed Record $12.5 Billion as Firm Ramped Up Deals

Brief : KKR & Co. deployed a record $12.5 billion in the fourth quarter, finding buying opportunities in the market turbulence of the Covid-19 pandemic. New York-based KKR also had a record fundraising for the year, taking in about $44 billion, according to a statement Monday. KKR “had the most active fundraising and deployment year in our history,” co-Chief Executive Officers Henry Kravis and George Roberts said in the statement. Private equity firms have been bringing in cash at a rapid pace and KKR has been among the most active dealmakers. Notable acquisitions last year included a $3 billion-plus deal for lens retailer 1-800 Contacts and spending 4.2 billion pounds ($5.8 billion) for waste management business Viridor Ltd. It has also expanded its U.S. industrial real estate holdings. Its $2.8 billion Dislocation Opportunities Fund, raised at the height of pandemic anxiety, gained 52% last year as it seized on credit opportunities.

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Biden to Discuss Relief Package with CEOs at Walmart, JPMorgan, Others

Brief: U.S. President Joe Biden will meet with the chief executives of JPMorgan Chase, Walmart, Gap Inc, and Lowe’s Companies on Tuesday as part of his efforts to boost an economy still reeling from the coronavirus pandemic. Biden and the executives, who will be joined by Vice President Kamala Harris and Treasury Secretary Janet Yellen for the 1:45 p.m. EST gathering in the Oval Office, will discuss Biden’s $1.9 trillion coronavirus recovery package, known as the American Rescue Plan, the White House said. JPMorgan’s Jamie Dimon, Walmart’s Doug McMillon, Gap’s Sonia Syngal and Lowe’s Companies’ Marvin Ellison were all slated to attend along with Tom Donohue, the head of the U.S. Chamber of Commerce, a top business lobby. Speaking at a briefing with reporters ahead of the meeting on Tuesday, White House press secretary Jen Psaki said the goal was to hear thoughts on the plan from some of the nation’s top employers, though she expected it to be the first of many meetings with the business community. “It’s more of a discussion about the country and the economic downturn that we’ve gone through,” Psaki said. “The president wants to lay out all of the specifics of his plan, hear feedback from them as he has with many different groups over the past couple of weeks,” she added.

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Retail Investors Cut Spending and Increase Investment

Brief: Individual investors have reduced spending and increased their investments during the Covid-19 pandemic, research indicates. A survey of 2,000 investors in the UK showed that 4 in 10 – or 39% - had “dramatically” cut spending and were funding investments. ITI Capital, a broker that sponsored the research, said low interest rates were the cause and that 35% of investors would invest more if bank rates were cut further. Investors favoured traditional investment asset classes, although 24% were exploring cryptocurrency as an alternative investment as it had “not been negatively impacted by Covid-19”. Just over a quarter said they were more willing to try new investment products and take more risks over the next 12 months.  Meanwhile, 40% of investors said they anticipated a bull run in 2021 if the Covid-19 situation dramatically improved, but 35% expected a house price crash worse than the 2008 crash to occur this year. Despite the appearance of piles of cash created by reduced spending, 36% of investors said they had dipped into their savings to stay afloat during the Covid-19 crisis.

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Public Pension Plans Market USD154.6bn in Private Markets in 2020, but Appetite for Real Estate and Real Assets Plummets

Brief: Public pension plans tracked by investment data and analytics firm eVestment reported USD154.6 billion of commitments to private markets funds in 2020. This is a 2 per cent increase from 2019’s totals. In a pandemic-impacted year that turned fund due diligence and the normal course of business on its head, 2020’s results clearly show how the investment business was able to pivot to virtual due diligence to eke out an increase in commitments compared to 2019. There were clear winners and losers across the asset classes tracked however, with both private equity and private debt having strong years while real estate and real assets saw significant declines in reported commitment totals.  Across all private fund commitments eVestment tracks, pension giant CalPERS was the biggest allocator of capital to private markets, with USD19.94 billion of commitments reported. CVC Capital Partners’ funds were the top destination for public plan money, raising USD5.2 billion from the public pensions eVestment tracks. Private equity was a big winner in 2020, according to eVestment’s year-end data. Reported commitments to private equity funds grew 20 per cent year-over-year to USD83.1 billion. The 2020 total of 1,047 individual commitments represented a 9 per cent increase from 2019’s total number of commitments and the average commitment size in 2020 was USD79 million compared to USD72 million in 2019.

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Remote Working High on List of Traders’ Challenges, Boosts E-Trading: JPMorgan

Brief: Remote working is now one of the top daily challenges facing traders and a development that will likely boost the use of technology and electronic trading in the months ahead, a survey by JPMorgan released on Tuesday showed. According to the survey of 260 fixed income, currencies and commodities (FICC) traders conducted in December, almost a third cited the availability of liquidity -- how quickly and easy it is to buy and sell an asset in markets -- as their chief trading challenge. That was followed by workflow efficiency and remote working, a new addition that highlights the impact of the coronavirus pandemic on trading floors following widespread lockdowns that began almost a year ago. According to the survey, 77% of respondents said they worked from home between March and June for an average of four days a week, with 21% reporting a change in the their execution style. Many cited increased electronic trading. For 2021, 55% of respondents said they expected to work from home for an average of four days a week, with 18% saying their execution style could continue to change going forward -- again mostly through increased electronic trading.

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Activist Jeff Ubben to Seek Up to $8 Billion for Impact Fund

Brief: Activist investor Jeff Ubben is seeking to raise as much as $8 billion for a hedge fund at his investment firm Inclusive Capital Partners, according to a person familiar with the matter. The Spring Fund II would be a successor to the $1.5 billion Spring Fund that Ubben started at ValueAct Capital Management, the activist hedge fund he founded in 2000. The new offering would focus on so-called impact investing, which aims to make systemic changes at companies and sectors to the betterment of society, the person said. The fundraising goal was reported earlier Tuesday by Reuters. Ubben launched Inclusive Capital after leaving ValueAct in June. The new firm counts electric-truck company Nikola Corp., power generator AES Corp. and bioenergy firm Enviva Partners among its investments. While at ValueAct, Ubben agitated for changes at high-profile companies including Citigroup Inc., Rolls-Royce Holdings Plc and Microsoft Corp. The fundraising comes as Ubben is in the midst of negotiating for a board seat at Exxon Mobil Corp. He’s also discussing making a sizable investment in the oil giant if he were granted a seat.

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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 February 8, 2021:

  • In the United States, the new director of the Centers for Disease Control and Prevention (CDC) said that testing domestic airline travelers for COVID-19 would be “another mitigation measure” to combat virus spread. Director Dr. Rochelle Walensky didn’t expand on whether or not the CDC would test domestic travelers, however Transportation Secretary Pete Buttigieg said over the weekend that there was an “active conversation” with the CDC about requiring a negative COVID-19 test for passengers. On Monday, White House officials reiterated now is not the time to be travelling, if it at all possible. 
  • Canada’s most populous province has extended its stay-at-home order for most regions but will begin to transition back to the colour-coded shutdown system through a regional approach. Ontario Premier Doug Ford made the announcement on Monday that the stay-at-home order for Toronto, Peel and York regions will remain until at least February 22nd. In most other areas, Ontario will transition into the tiered colour system they were using before the entire province went into a lockdown on December 26th. Elsewhere in the country, Quebec is again allowing non-essential businesses, including personal care establishments like salons to reopen their doors. Restaurants and theatres will also be allowed to be open in the “orange zone” as of Monday, though those businesses will stay closed in harder-hit areas for now.   
  • The United Kingdom continues to state they are on track to have all those over the age of 50 vaccinated by May. They too, have another plan already in the works, which includes a top-up of immunizations to fight new variants of the coronavirus in the autumn, along with predicting an annual vaccination drive for COVID-19, similar to injections given for influenza each year. The UK is one month into their third national lockdown and Prime Minister Boris Johnson’s government is in a race against time to get as many people vaccinated as possible as the plan is to start lifting some of those restriction curbs next month.  

  • Italy has reintroduced localized “red zones” as areas across the country have identified new COVID-19 variant spread. According to the Italian Health Institute over the weekend, the UK and Brazilian COVID-19 variants were detected in a sample of 44 cases recently analyzed. Municipalities in the provinces of Perugia and Terni were sent into the red zone on Monday, which means people are prohibited from leaving their homes except for work or health reasons. The red zones will be imposed in those regions until February 21st. Elsewhere in the country, vaccinations of citizens over the age of 80 started on Monday. The vaccination of Italy’s elderly population was set to begin at the beginning of February but was delayed by the reduced number of doses of vaccines from Pfizer and Moderna.  

  • According to Bloomberg, the World Health Organization (WHO) wrapped up its weekslong investigation in Wuhan, China over the weekend and found some “important clues” about a Wuhan seafood market’s role in the outbreak. Bloomberg spoke with Peter Daszak, a New York-based zoologist assisting the WHO sponsored mission and said he anticipates the main findings will be released before the group departs on February 10th. “It’s the beginning of hopefully a really deep understanding of what happened so we can stop the next one,” said Daszak. “That’s what this is all about – trying to understand why these things emerge so we don’t continually have global economic crashes and horrific mortality while we wait for vaccines. It’s just not a tenable future.” 

  • South African health officials paused the country’s rollout of the AstraZeneca coronavirus vaccine over the weekend after a study showed it offered reduced protection against the COVID-19 variant circulating there. On Monday, South Africa said it would instead roll out the AstraZeneca vaccine in a “stepped manner”, giving out 100,000 doses and monitoring it to see if it prevents hospitalizations and deaths. The overall messaging though from the scientific world, including the WHO is don’t panic. Several global health officials noted that the South African study was small, and that the vaccine is known to work against the original COVID-19 variant, which is still very prevalent throughout the world. 

Covid-19 – Due Diligence And Asset Management

Renaissance Clients Exit After Firm's Anemic Run of Results

Brief : For years, Renaissance Technologies was among the most exalted names in high finance, as close to a sure-thing as Wall Street had. But recent months have battered its reputation, and investors are now streaming to the exits. Renaissance has seen at least $5 billion in redemptions since Dec. 1 -- a once-unthinkable rebuke from clients after unprecedented losses from the East Setauket, New York-based firm. The walkout comes after three funds open to the public fell by double digits last year, their computer models flummoxed by the rapid stock market crash and even faster rebound. Renaissance now finds itself in a position unlike any other in its near 40-year history: Trying to convince investors who once clamored to get into its funds that it’s still worth their money, and can be trusted to deliver market-beating returns. 

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ECB's Largarde Sees Significant Economic Risk From Resurgent Virus

Brief: European Central Bank President Christine Lagarde pledged monetary support for the economy amid extended coronavirus lockdowns and said governments must do the same. “The renewed surge in Covid-19 cases, the mutations in the virus and the strict containment measures are a significant downside risk to euro-area economic activity,” she told European Parliament lawmakers on Monday. “It remains crucial that monetary and fiscal policy continue to work hand in hand. Fiscal policy -– both at the national and at the European level -– remains crucial to bolster the recovery.” While the outlook is highly uncertain, the ECB chief noted that the start of vaccination campaigns across the euro area “provides the eagerly awaited light at the end of the tunnel.” 

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Six Hedge Funds, Nine Brokers, and Thirteen Stocks Added to Robinhood Class Action Law Suit

Brief: A class action lawsuit filed in California Southern District Court on 28 January, 2021 has been amended to include six hedge fund companies worth billions of dollars, a total of ten online brokers who manipulated the stock market, and the thirteen stocks involved. The various brokers and hedge funds allegedly conspired together to knowingly deprive retail investors of the ability to invest in the open market during an unprecedented stock rise, in order to benefit the hedge fund companies, such as Citadel, Melvin Capital, and Maple Lane Capital. The lawsuit alleges that the online brokers involved froze the everyday investors out to enable the hedge funds to stop losing money when the stocks rose in value.  The lawsuit continues to allege that Robinhood and nine other online brokers failed to provide duty of care to their customers and that they purposefully harmed their customers positions in GameStop Corp (NYSE: GME) and twelve other stocks, such as Blackberry, LTD (NYSE: BB), AMC Entertainment Holdings Inc. (NYSE: AMC), Nokia Oyj (NYSE: NOK), Koss Corporation (NYSE: KOSS), and Naked Brand Group Ltd (NYSE: NAKD). The lawsuit is also alleging that Robinhood was recently fined USD1.5 million by the SEC, and a monitor has been assigned to watch their activities closely. 

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Equity Funds' Year-End Inflows "Evaporate" as January Pandemic Surge Curbs Investor Risk Appetite

Brief: Investors pulled back from equity funds in January, with appetite for risk assets dampening as global coronavirus cases registered a post-holiday surge. Funds network Calastone found that December’s vaccine-fuelled inflows to equity funds “evaporated” in January, with net monthly inflows falling 97.5 per cent month-on-month to just GBP64.6 million. Total trading volumes in this period exceeded GBP21 billion. Heavy outflows of GBP965 million were dealt to active equity funds that lacked an ESG mandate, causing them to lose almost all of the GBP1 billion in new capital that they had gained in December. “The euphoria that characterised the huge inflows to equity funds in the last few weeks of 2020, including even unloved traditional active funds, dissipated with the cold light of the post-holiday hangover,” says Edward Glyn, head of global markets at Calastone. “The pandemic has increased in intensity in almost all parts of the globe, causing stock markets to falter and investors to curb their enthusiasm for equities.”

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Hedge Funds Bet On Oil's 'Big Comeback' After Pandemic Hobbles Producers

Brief: Hedge funds are turning bullish on oil once again, betting the pandemic and investors’ environmental focus has severely damaged companies’ ability to ramp up production. Such limitations on supply would push prices to multi-year highs and keep them there for two years or more, several hedge funds said. The view is a reversal for hedge funds, which shorted the oil sector in the lead-up to global shutdowns, landing energy focused hedge funds gains of 26.8% in 2020, according to data from eVestment. By virtue of their fast-moving strategies, hedge funds are quick to spot new trends. Global oil benchmark Brent has jumped 59% since early November when news of successful vaccines emerged, after COVID-19 travel curbs and lockdowns last year hammered fuel demand and collapsed oil prices. Last week it hit pre-pandemic levels close to $60 a barrel.

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How Face-to-Face Meetings Pay Off

Brief: It’s been almost a year since in-person meetings were wiped from the calendar and replaced with all-virtual interactions. While investors and other professionals have since adapted to the efficiency of Zoom and other video platforms, research shows that physical meetings were worth the extra time and money for fund managers. Meetings between portfolio managers and company leaders were found to predict higher investment returns in a recent paper by researchers at the Massachusetts Institute of Technology, China Investment Corp., and Remin University of China. The study, which examined investor meetings with firms listed on the Shenzhen Stock Exchange in China — where companies are required to disclose such meetings — found that a higher number of face-to-face meetings were tied to outperformance of about 70 to 100 basis points per month. According to authors Eric So of MIT, Rongfei Wang of CIC, and Remin University professor Ran Zhang, the results likely stem from investors allocating more time and resources to meetings with firms that they perceive to be undervalued.

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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 February 5, 2021:

  • In the United States, the White House announced on Friday 1,000 active-duty military will be deployed to COVID-19 vaccination centers to help with the process. President Joe Biden has called for setting up 100 mass vaccination centers over the next month – two of which will be opening in California – with military personnel arriving at those facilities in a little over a week. According to Bloomberg, about 6.9 million Americans have the full two dose regimen from the Pfizer and Moderna vaccines, which translates to approximately 2% of the population. To reach widespread or “herd” immunity – about 70% to 85% of Americans must be vaccinated.

  • In Canada, the latest employment numbers were released and the economy lost 213,000 jobs in January. Canada’s unemployment rate sits at 9.4%, the highest rate since August and wiping out the gains made during the fall. The country’s two most populous provinces – Ontario and Quebec accounted for almost all of the losses due to many retail sector jobs disappearing due to lockdowns. There does seem to be good news though coming out of both of those provinces. Ontario reported more than 1,600 cases on Friday, which is about 50% less than what they were reporting a month ago and Quebec has started to see COVID-19 hospitalizations drop, along with daily cases.

  • United Kingdom scientists confirmed that the Oxford/AstraZeneca COVID-19 vaccine works about as well against the new B.1.1.7 strain, as the original coronavirus strain. Andrew Pollard, Professor of Paediatric Infection and Immunity and Chief Investigator on the Oxford vaccine trial said the following: “Data from our trials of the ChAdOx1 vaccine in the United Kingdom indicate that the vaccine not only protects against the original pandemic virus, but also protects against the novel variant, B.1.17, which caused the surge in disease from the end of 2020 across the UK.” This news comes as the UK government announced that all Britons aged 50 and over will be vaccinated against the coronavirus by May.

  • Mexico’s President Andres Manuel Lopez Obrador posted a video on Thursday saying he tested negative on an antigen test, 12 days after testing positive for COVID-19. To prove the point on his good health, President Lopez Obrador walked down a flight of stairs at the National Palace. While Mexico’s leader might be doing better – the country is not – posting 1,682 deaths due to COVID-19, close to a daily record on Thursday. In the video, President Lopez Obrador didn’t say when he would end his isolation and return to public appearances.

  • Reuters is reporting Brazil’s Prosecutor-General Augusto Aras has opened a preliminary investigation into President Jair Bolsonaro and his health minister on possible negligence in response to a COVID-19 outbreak in Manaus City. The region, located deep in the Amazon rainforest, was hit hard by a second wave of the coronavirus, causing the city to run out of oxygen tanks in January. This prompted the government to fly in tanks, so people literally wouldn’t choke to death. The document stated If eventually wrongdoing was found, a request for the beginning of an “inquerito” will be submitted to the Supreme Court.

  • In Australia, the city of Perth and the surrounding region snap five-day coronavirus lockdown was lifted on Friday after no new cases of community transmission in that time period. The state of Western Australia recorded no new cases from almost 50,000 tests conducted during the lockdown, but some restrictions would remain in place until February 14th, such as mandatory mask wearing for residents while outside of their homes and a 20-person limit on all indoor private gatherings.

Covid-19 – Due Diligence And Asset Management

BNP Paribas Expects End to Trading Boom, COVID Loan Pain to Ease

Brief : BNP Paribas warned investors on Friday that a debt-trading bonanza that supported its earnings last year was unlikely to last, while signalling that the worst of the global coronavirus crisis was over for its loan book. Charges linked to the COVID-19 pandemic took their toll on fourth quarter net profit at BNP Paribas, which said it had set aside more provisions for loans that could turn sour. But the eurozone’s biggest listed bank struck a more upbeat note for 2021, saying it expected its cost of risk, which reflects provisions for bad loans, to drop compared to 2020 as the outlook improves in the second half. Another side-effect of the pandemic, a surge in fixed income trading business, provided a boost to earnings in the fourth quarter, but BNP Paribas warned that this level of market activity was unlikely to persist in 2021. The Paris-based bank said revenue at its corporate and institutional banking business rose 6.9% in the quarter as fixed-income, currencies and commodities (FICC) trading revenue jumped by 22%, mirroring gains among its global competitors. “FICC is unlikely to experience the same magnitude of revenues that it generated in 2020 on the back of exceptionally intense client activity”, BNP Paribas said in a statement.

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Health of UK DB Scheme Surpasses Pre-Covid Levels, but Pandemic Impact May Be Overlooked

Brief: The health of the UK’s Defined Benefit (DB) pension schemes has surpassed that of their pre-Covid levels as they continued to recover through Q4 2020, according to Legal & General Investment Management (LGIM). LGIM's Health Tracker, a monitor of the current health of UK DB pension schemes, found that the average1 DB scheme can expect to pay 97.1 per cent of accrued pension benefits as of 31 December 2020, up 1.6 per cent from 30 September 20202. This compares to the pre-COVID level of 96.5 per cent from 31 December 20193 as well as the lows of 31 March 20204 which saw the EPBM (Expected Proportion of Benefits Met) metric drop to 91.4 per cent. This latest improvement means LGIM’s measure was actually up on 2020 (from 96.5 per cent to 97.1 per cent) despite falling to 91.4 per cent at the end of March and marks a third successive quarter of growth across 2020. Nominal rates were around 0.6 per cent lower at the end of 2020 than at the start, but the impact from this was outweighed by the overall performance of growth assets over the year. However, it is important to note that these figures may yet still understate the negative impact of the pandemic, due to a weakening of covenants that many schemes will have endured. John Southall, Head of Solutions Research at LGIM, says: “The last quarter of 2020 was another positive period for our measure of UK DB scheme health, with the ratio continuing to rise, as it has consistently done so since the March lows of 91.4 per cent. This change was almost entirely driven by outperformance of growth assets with interest rates and expected inflation broadly flat over the quarter.

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Alpha-Generating Opportunities Surge in Japan, as Economic Recovery and Market Reforms Gather Pace

Brief: Japan’s macroeconomic backdrop is strengthening alpha-generating opportunities for hedge funds, with a growing number of newly-launched Japanese equity strategies looking to capitalise on a kaleidoscopic range of stockpicking ideas arising from market-friendly structural reforms, a pick-up in economic momentum, improving fundamentals, and a falling number of coronavirus cases. Strategists at Lyxor Asset Management said on Friday the prevailing market landscape appears supportive for risk assets and stronger economic growth heading into Q2, with a second Covid-19 wave now appearing past its peak and its impact so far appearing largely manageable. “With the pandemic gradually abating and as the Japanese economy regains some momentum, we see a wider set of investment themes, supporting stockpicking,” senior Lyxor strategists Jean-Baptiste Berthon and Philippe Ferreira, and EU head of hedge fund research Bernadette Busquere Arnal, said in a market commentary. “These themes include stocks sensitive to domestic consumption, exposure to Asia, reflation policies or capex. The alpha environment has already improved.”

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Prudential CEO Looks to Expand Abroad, in Asset Management

Brief: Prudential Financial Inc. Chief Executive Officer Charles Lowrey unveiled his three-year strategy to transform the company through deals, cost savings and share buybacks. The life insurer has allocated $5 billion to $10 billion to invest in and acquire growth businesses, which will contribute more than 30% to its earnings by 2023 from a current 18%, Lowrey said Thursday in an interview. The firm is looking to expand in China, India, Indonesia, Latin America and Africa, and is considering bolt-on purchases in asset management, he said. “Our strategy is designed to deliver higher growth, with greater efficiency and lower market sensitivity,” he said. “We’re always looking for strategic acquisitions.” Lowrey, who took the helm in December 2018, laid out the plan alongside Prudential’s fourth-quarter results. After-tax adjusted operating income was $2.93 a share, beating the $2.56 median estimate of 13 analysts surveyed by Bloomberg. The CEO also laid out plans to cut $750 million in costs and return about $10 billion to shareholders via dividends and share repurchases over the next three years. Prudential aims to halve the contribution of individual annuities to its earnings, and it’ll achieve this through sales, reinsurance transactions or the expiration of policies, Lowrey said.

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Assured Capital Partners Positive on Outlook for 2021

Brief: Assured Capital Partners' Balanced Growth Fund had another extraordinary year in 2020, despite the coronavirus pandemic, narrowly missing out on surpassing a 40 per cent return for the third time in the fund’s existence. According to hedge fund database service EurekaHedge, the fund has now returned over 376 per cent since inception as of the end of 2020 and the firm is positive on the outlook for the year ahead, despite the ongoing economic disruption caused by the Covid-19 crisis. Assured Capital writes: "In early 2021 there’s nearly USD5 trillion sitting on the sidelines at the moment. That’s about a qaurter of the total US Gross Domestic Product on an annual basis (2020: USD20.8 Trillion). Not to mention the government is considering further injection of cash into the economy via additional rounds of stimulus. And when all of this pent-up capital gets unleashed on the market, and the economy at-large, the upshot will likely be staggering.  "Additionally, the Federal Reserve Bank has indicated it intends to maintain a low interest rate policy for the foreseeable future. Presumably keeping bond yields suppressed in the near-term. Forcing more investors to seek positive returns in equities. Also, many companies will see favourable earnings comparisons during much of 2021 relative to last year leading to a large swath of positive earnings beats.

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2020 Was Terrible for Real Estate Investing. Will 2021 Be Better?

Brief: With office buildings emptied, hotels left vacant, and commercial tenants struggling to pay rent, it should come as no surprise that 2020 was a challenging year for real estate investing. In private equity real estate, deal making plummeted in both number and value, with the total deal value declining 50 percent from 2019 levels, according to Preqin data. Deal numbers, meanwhile, dropped from 9,848 in 2019 to 5,979 last year. This slowdown in deal making was accompanied by a decline in fundraising, with 283 funds closing in 2020, compared with 494 funds in 2019. As in other alternative classes, large funds run by established managers had the most success in fundraising, with the ten biggest funds accounting for 34 percent of the total capital raised. In total, private equity real estate funds secured $118 billion in investor commitments in 2020, a 34 percent decline from the previous year’s total, Preqin said. “Restrictions on travel, lockdowns, and reduced physical interaction among market participants hit fundraising and played a major part in deal declines,” David Lowery, head of research insights at Preqin, said in astatement

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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 February 4, 2021:

  • In the United States, Democrats in the Senate are poised to take their first step Thursday in passing President Joe Biden’s $1.9 trillion COVID-19 relief proposal. Senate Democrats need to pass a budget resolution to unlock a legislative tool called reconciliation, which would allow them to approve President Biden’s proposal with a simple majority. Most legislation requires at least 60 votes in the 100 seat Senate to pass. If everyone were to vote along party lines, there would be a 50-50 split with Vice President Kamala Harris providing the tie-breaking vote. Republican lawmakers have already said they could offer up to 20 amendments on the bill which would include a reverse to the cancellation of the Keystone pipeline, block a higher minimum wage, stimulus checks for illegal immigrants and tax hikes on businesses during the pandemic.
  • Canada received some troubling news on Thursday during a news briefing as the man in charge of leading vaccine logistics admitted he doesn’t know how many Moderna doses will arrive in the weeks ahead. Speaking to reporters, Major-General Dany Fortin said 180,000 Moderna COVID-19 vaccines arrived on Thursday, but the drugmaker hasn’t made clear to the government why it has reduced shipments to Canada. Despite the unknowns, Fortin is still in line with Prime Minister Justin Trudeau’s assessment that the country expects to have two million Moderna doses delivered by the end of March. According to data collected by the University of Oxford, Canada ranks 33rd in the number of shots administered per capita, trailing middle income nations such as Poland, Serbia, Romania and Slovenia, along with G7 counterparts the United States, United Kingdom and Germany.
  • The United Kingdom is conducting the first world trial of mixing vaccine doses to see if they can find faster ways to inoculate their population against new mutated variants. British researchers will mix the Pfizer and AstraZeneca vaccine shots with initial data expected to be generated around June. Infectious disease experts believe there are around 4,000 mutations of the coronavirus around the world right now and the hope is that mixing two different vaccine types will lead to a better understanding of whether inoculations can be rolled out with greater flexibility.
  • Denmark plans to introduce a digital “vaccine passport” in order to reopen their society. The plan would initially apply to business travellers, but authorities believe it could help reopen the rest of the country with citizens able to freely go to restaurants, conferences, musical festivals and sporting events. All these activities are currently restricted with current lockdowns in place until at least February 28th. According to Denmark’s finance minister, over the next three to four months, the “passport” could be become available on mobile phones with other information, such as whether or not someone tested positive for antibodies, to come in later iterations.
  • CNBC is reporting the United Arab Emirates (UAE) and Dubai in particular, are rejecting the “superspreader” label after the region’s recent surge in cases. The report notes record breaking infection rates in recent weeks have forced Dubai to ban its popular brunches and close pubs and bars. Statistics from the UK Civil Aviation Authority show almost 300,000 people traveled between the UAE and UK during November and December 2020, with thousands flocking to Dubai hotspots to escape lockdowns. Cases have tripled since November, but UAE authorities deny the community has been put at risk and reject the idea they have played a key role in spreading the virus throughout the world.
  • In Australia, professional tennis players have taken center stage again as more than 500 players and officials were ordered into isolation in Melbourne after a worker at a quarantine hotel tested positive for COVID-19. Melbourne officials have reinstated an order for masks indoors and a limit of gatherings to 15 people after Victoria’s state 28-day run of no local cases came to an end thanks to the infected worker. About 1,200 players, coaching staff and officials are in Australia for the Australian Open – professional tennis’ first major championship of the year, which is set to begin in just a few days. Australian government officials are set to meet on Friday to consider the quarantine hotel programme should use more remote, regional centers given the tendency for the virus to escape and spread into the community.

Covid-19 – Due Diligence And Asset Management

January Blues Cause Investors to Shun Equity Funds as Surging Coronavirus Pandemic Prompts Tighter Curbs Around the World

Brief : The vaccine-induced euphoria that saw equity funds enjoy their second-best month on record in December evaporated in January as contagious new Covid-19 variants prompted surging infection rates around the world. The latest Fund Flow Index from Calastone shows that net inflows fell by 97.5 per cent month-on-month to just GBP64.6 million, no more than a rounding error in the context of busy trading volumes well above average at GBP21.8 billion. As the UK descended into a full national lockdown with no prospect of release for months to come, outflows from funds focused on UK equities accelerated to GBP179 million, the eighth consecutive month in which investors have shed UK equities. Equity income funds, which are heavily weighed to UK shares, had their second-worst month on record, in effect a vote against UK equities too.  Meanwhile, Europe’s vaccine debacle prompted a U-turn in investor sentiment towards funds focused on European shares. After months of accelerating inflows culminating in a record month in December, January saw investors once again bail out of European funds, selling down GBP141m. All other regions saw modest inflows. Global funds, however, had another good month, in line with the average for the last year. Two thirds of global fund inflows are driven by ESG.  There was bad news for traditional active equity funds (ie those without an ESG mandate), as they gave up almost all the new capital they had garnered in December. Investors shed holdings to the tune of GBP965m in January, having added GBP1.0 billion the previous month. The return to outflows marks a return to trend.

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Early Backers of Vaccine Maker BioNTech In $719 Million Payday

Brief: German venture capital firm MIG AG, which was among the first backers of COVID-19 vaccine developer BioNTech, has paid 600 million euros ($719 million) to its investors, cashing out parts of an initial investment of 13.5 million euros. MIG said on Thursday that investors in its funds would now receive 340 million euros from the sale of an unspecified stake in BioNTech, following a payout of 260 million euros last year. MIG’s funds have provided funding to BioNTech, which developed the vaccine with U.S. drugmaker Pfizer, since the German biotech company’s inception in 2008. BioNTech now has a market capitalisation of around $28.4 billion, more than eight times its valuation of $3.4 billion when it made its stock market debut on the Nasdaq exchange in October 2019. MIG AG general partner Kristian Schmidt-Garve said the investment firm was proud of BioNTech’s role in fighting the pandemic. “We are also very pleased that we could realise considerable returns for the shareholders in the involved funds, which amount to a multiple of the initial deposits,” he added. MIG did not say how many BioNTech shares were sold and how many it still holds in the company.

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Carlyle Reports USD518.8 Million Fourth-Quarter Profit

Brief: Washington-based Carlyle Group reported a USD518.8 million fourth-quarter profit on the back of strong asset sales at the end of last year, including its divestment of a 50 percent stake in streetwear fashion brand Supreme to VF Corporation as part of a USD2.1 billion deal in November. VF Corporation already includes the brands Vans, The North Face, Timberland and Dickies, and the company said that it expects Supreme to contribute at least USD500 million of revenue and USD0.20 of adjusted EPS in the fiscal year 2022. Carlyle's December results swung upwards from a loss of USD8.3 million, or 8 cents per share, in the same period of 2019. The better-than-expected figures came largely on the back of the disposal of assets in the global PE-firm's private equity division and credit businesses. Carlyle’s private-equity portfolio increased in value by 11 per cent during the period, compared with an 11.7 percent gain by the S&P 500 stock market index. The private equity group recorded total assets under management at USD246 billion, an increase of 10 per cent year-over-year. Meanwhile, fee-earning assets under management stood at USD170 billion, up 6 per cent year-over-year. It also has a remaining USD76 billion of capital available for investment.

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Asia’s Family-Owned Business Founders Seek Private Equity Exit

Brief: Dealmakers across Asia are busy fielding calls from company founders who are mulling letting go of their life’s work as the Covid-19 pandemic has upended how global business is done. After riding the region’s rise over the past decades, family firms that dominate the economic landscape are now also looking for bigger partners, help to modernize management teams and in succession planning, according to consultants, bankers and private equity firms. “We’ve seen founders, particularly the older entrepreneurs, saying there are more challenges in the world now and that they’re thinking about succession issues and management issues,” said Ed Huang, co-head of Asia acquisitions in private equity at Blackstone Group Inc. “Private equity is better understood now as either a potential strategic partner or as an exit path.” The shifting sentiment could spell seismic moves in capital. Just publicly listed family firms in Asia have a market capitalization of more than $5.56 trillion, according to Credit Suisse Group AG. In Hong Kong and Singapore 70% and 60% of listed firms, respectively, are family-backed businesses, a report from the Family Firm Institute showed. Recent deals include a CVC Capital Partners-led privatization of Hong Kong fashion chain I.T Ltd. as well as a takeover by TPG and Northstar Group of a unit of Singapore-based food company Japfa Ltd. Pankaj Goel, Credit Suisse’s co-head of investment banking and capital markets for Southeast Asia and frontier markets, said the region could be in line for a “many-fold” increase in deals already this year. He singled out sectors such as consumer, health care and technology as key areas.

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Man FRM: Why These Hedge Fund Strategies Stand to Gain From a Miscellany of Market Opportunities

Brief: Man FRM is optimistic on what it describes as an “unusually large” spectrum of hedge fund strategies amid a growing medley of investment opportunities and themes arising from the fledgling economic recovery. In its Q1 strategy outlook published on Thursday, Man Group’s funds-of-funds unit spelled out how a spring economic recovery, coupled with dovish central bank stances and ongoing fiscal support, will help sustain and extend the market rally, particularly in equities. That, in turn, will likely strengthen the hand of a range of hedge fund strategies including credit, equity long/short, macro and relative value, during the first quarter. Stronger earnings and multiple expansions are underpinning an increasingly bullish investor sentiment for 2021, particularly in US equities, with low interest rates and abundant liquidity helping to support expensive valuations. At the same time, though, Jens Foehrenbach, Man FRM’s CIO, also acknowledged how certain “speculative excesses” in the market may potentially throw up risks further down the line this year - including sharp interest rate hikes, rotations, and policy mistakes such as a premature withdrawal of stimulus amid the Covid recovery. “Cognisant of this bullish expectation for equity markets, we believe investors should remain disciplined around the goal of portfolio positioning, which is to provide diversification if this expectation turns out to be wrong – not to beat the market if we experience a strong year for equities,” Foehrenbach wrote in the outlook.

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Vaccine Passports: Path Back to Normality or Problem in the Making?

Brief: Governments and developers around the world are exploring the potential use of “vaccine passports” as a way of reopening the economy by identifying those protected against the coronavirus. Those developing the technologies however, say such tools come with consequences such as potentially excluding whole groups from social participation, and are urging lawmakers to think seriously about how they are used. The travel and entertainment industries, which have struggled to operate at a profit while imposing social distancing regulations, are particularly interested in a way of swiftly checking who has protection. Among those developing passports are biometrics company iProov and cyber security firm Mvine which have built a vaccine pass now being tested within Britain’s National Health Service after receiving UK government funding. iProov founder and chief executive Andrew Bud believes such vaccine passports only really need to hold two pieces of information. “One is, has this person been vaccinated? And the other is, what does this person look like?” You need only match a face to a vaccination status, you don’t need to know a person’s identity, he added. Confirmation of patrons’ vaccination status could help the night-time economy, which employs some 420,000 people in the northern English city of Manchester, off its knees, experts say.

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Contact Castle Hall to discuss due diligence

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

Our briefing for Wednesday February 3, 2021:

  • In the United States a new survey has shown almost half of Americans have taken at least one trip since last March even though the Centers for Disease Control (CDC) has said to avoid travel during the pandemic. The survey classified a “trip” as travelling several hours by car, plane, train or other mode of transportation. Forty-five percent of those who responded had taken at least one trip with close to 20% taking more than three trips. One-third of survey respondents said they have a trip planned for 2021. According to the U.S. Travel Association, spending on trips dropped 42% in 2020 costing the industries associated with the travel economy $492 billion.

  • In Canada, CTV News is reporting the European Commission says it has authorized a COVID-19 vaccine delivery to Canada and doesn’t plan to block exportation of most doses produced on the continent. An EU spokesperson said the following on Wednesday: “Canada is aware that the EU has the duty to ensure that our citizens are vaccinated as soon as possible. At the same time, we do not want to deprive other countries from their own much needed vaccines, in particular these countries who do not have their own manufacturing capacity.” Earlier in the week, Canada’s Public Services and Procurement Minister Anita Anand told the House of Commons a shipment of the Pfizer/BioNTech vaccine was on its way from Europe, but only accounted for one-fifth the size of previously planned shipments.

  • Reuters is reporting the United Kingdom will chair a meeting of finance chiefs from the group of G7 nations on February 12th as they try to figure a way out of the global economic crisis created by the coronavirus pandemic. UK Chancellor Rishi Sunak, along with Bank of England Governor Andrew Bailey will co-host the online meeting with the United States, Japan, Germany, France, Italy, Canada, as well as the European Central Bank. “Recognizing that a global crisis needs global solutions, the Chancellor will work with his counterparts to address the shared economic challenges facing our domestic and global economies and seek to achieve a strong and sustainable economic recovery from coronavirus,” the ministry said.

  • Italy is turning to former European Central Bank chief Mario Draghi to try and form a non-political government through the coronavirus pandemic. Italian President Sergio Mattarella met with Draghi and gave him the mandate of trying to form a new government to replace Prime Minister Giuseppe Conte’s coalition of the 5-Star Movement and Democratic Party after last ditch negotiations fell through. Draghi’s work at the European Central Bank garnered him the nickname “Super Mario” and he will have to be just that to try and guide Italy through a health care crisis, a national vaccination campaign and an economic recession.

  • As part of China’s diplomatic effort, the country pledged 10 million coronavirus vaccine doses to developing nations through the global COVAX imitative. China has already pursued deals or donations with more than 30 nations, which has far exceeded the 10 million doses it is providing to COVAX, which is a coordinated effort between the World Health Organization (WHO) and GAVI, the Vaccine Alliance. The deal with COVAX on Wednesday didn’t offer details on which vaccine China was providing.

  • Olympic officials on Wednesday unveiled a few of the many COVID-19 rules for the Tokyo Games this summer in Japan. There will be no singing and chanting during events and participants will be mandated to wear masks at “all times” except when eating, sleeping or outdoors. Delegations and staff will be required to appoint a COVID-19 liaison officer, who will be responsible for ensuring that the participants follow the guidelines. Those nations that don’t comply could lead to expulsion from the Games. These rules though will likely do little in winning the favour of the Japanese public who are understandably worried about opening their borders to the world in the middle of a pandemic.

Covid-19 – Due Diligence And Asset Management

World Economic Forum Again Delays Annual Meeting in Singapore

Brief : The World Economic Forum has again pushed back its 2021 annual meeting in Singapore, rescheduling it for August from May given what it called “challenges in containing the pandemic”. The Geneva-based WEF, which last month delayed the event by 12 days in May, said on Wednesday it would now be held from Aug. 17-20. “Although the World Economic Forum and Government of Singapore remain confident of the measures in place to ensure a safe and effective meeting, and local transmission of COVID-19 in Singapore remains at negligible levels, the change to the meeting’s timing reflects the international challenges in containing the pandemic,” it said in a statement. Global travel restrictions have made planning difficult for an in-person meeting in the first half of the year, while differing quarantine and air transport regulations increased the lead time needed to ensure participants can join, it added.  Singapore’s ministry of trade and industry said the government understood the challenges the WEF faced and had agreed to reschedule.  The annual meeting typically takes place in January in the Swiss ski resort of Davos, but the pandemic made that impossible this year.

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Centerbridge Credit Fund Soars 90% on Pandemic Disruption Bets

Brief: A $3 billion credit fund Centerbridge Partners began investing in March returned an annualized 90% in 2020, making it a top performer among vehicles designed to take advantage of pandemic-related price dislocations. As the pandemic took hold in the U.S., Centerbridge deployed $1.8 billion in funds following its special credit strategy, according to people with knowledge of the matter. It continued to invest additional money in beaten-down debt through year-end, the people added. The firm’s Special Credit III Flex Fund, which targeted consumer-facing industries battered by market turmoil, including rental cars, airlines, auto parts and entertainment, returned 121% on a gross basis, said the people, who asked not to be identified discussing private results. A representative for Centerbridge declined to comment. Centerbridge’s $1.3 billion flagship vehicle, the Special Credit III fund, gained a net 8.7% last year, the people said. The $28 billion private investment firm specializes in lending to and buying troubled companies, many of which are going through Chapter 11 restructurings. It recently became the owner of SpeedCast International Ltd. following the satellite communications company’s bankruptcy last year.

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All Funds Will Be ESG Funds in Five Years, say Professional Investors

Brief: Three-quarters of UK fund buyers say all funds will soon incorporate ESG as sustainable investing gathers further momentum in the aftermath of Covid-19, new research shows. A CoreData Research study of 200 professional fund buyers around the world found nearly two-thirds (63 per cent) think all investment funds will incorporate ESG in five years. This proportion increases to almost three-quarters of respondents in the UK (73 per cent) and Europe (72 per cent). However, only half of fund selectors in North America (50 per cent) believe such a scenario will play out. The survey, conducted in November and December 2020, also shows that momentum towards ESG has accelerated since the pandemic. Six in 10 (60 per cent) global professional fund investors say they have increased their focus on ESG in the wake of Covid-19. The UK is leading the sustainability charge, with eight in 10 (81 per cent) raising their ESG commitment. But the picture is somewhat different in North America, where less than half (42 per cent) have upped their focus on ESG in light of the pandemic. A key factor driving the heightened ESG focus is a belief that sustainable investments can help deliver superior performance. Half (50 per cent) of global respondents say ESG funds tend to outperform their non-ESG counterparts — a sentiment most pronounced in the UK (65 per cent) and Europe (60 per cent). However, less than a third (31 per cent) of North American respondents share this conviction.

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One of World’s Richest Nations Taps Wealth Fund as Cash Dries Up

Brief: Kuwait’s government has transferred the last of its performing assets to the country’s sovereign wealth fund in exchange for cash to plug its budget deficit, after a political dispute over borrowing left one of the world’s richest nations short of cash and prompted Fitch to cut its outlook to negative.  Fitch affirmed Kuwait’s AA rating but said “the imminent depletion of liquid assets” and “absence of parliamentary authorization for the government to borrow” was creating uncertainty. Its report follows S&P Global Ratings’ recent warning that it would consider downgrading Kuwait in the next six to 12 months if politicians fail to overcome the impasse. Though it’s a high-income country, years of lower oil prices have forced Kuwait to burn through its reserves. Desperate to generate liquidity, the government began last year swapping its best assets for cash with the $600 billion Future Generations Fund, which is meant to safeguard the Gulf Arab nation’s wealth for a time after oil. With those now gone, it’s not clear how the government will cover its eighth consecutive budget deficit, projected at 12 billion dinars for the fiscal year beginning April. The assets include stakes in Kuwait Finance House and telecoms company Zain, a person familiar with the matter said, asking not to be named because the information is private. State-owned Kuwait Petroleum Corp., which has a nominal value of 2.5 billion dinars ($8.3 billion), was also transferred from the government’s treasury in January, the person said.

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Global Pandemic Brings Surge of New and Experienced Retail Investors Into the Stock Market

Brief: In a year when a pandemic gripped the world, beginning and experienced retail investors flocked to the stock market using taxable, non-retirement investment accounts, according to new research by the FINRA Investor Education Foundation (FINRA Foundation) and NORC at the University of Chicago. The study, Investing 2020: New Accounts and the People Who Opened Them, found that market dips that made stocks cheaper to buy and the ability to invest with small amounts were among the top reasons younger and inexperienced investors reported entering the stock market. For respondents who opened new accounts in 2020, investing for retirement was the most frequently cited reason for opening the account, despite the study’s focus on taxable investing. Researchers further found that the majority of new investors—meaning those who opened a non-retirement investment account for the first time during 2020—were under the age of 45 and had lower incomes than investors who already owned taxable investment accounts prior to 2020. New investors were also more likely to be racially or ethnically diverse.

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Gates and World’s Rich Win Big on Private-Jet Firm’s 196% Surge

Brief: The coronavirus crisis hasn’t stopped the world’s wealthy from flying -- they’re just increasingly doing it privately, and some are getting outsized returns from it. Bill Gates, Nassef Sawiris, James Packer and Kerry Stokes have accumulated more than $1.2 billion in the world’s largest operator of private-jet bases, according to data compiled by Bloomberg. The company, Signature Aviation Plc, has recently become the focus of a takeover fight involving Blackstone Group Inc., Carlyle Group Inc. and Global Infrastructure Partners, helping its shares almost triple since a low in mid-March. Private flying is one of the few travel categories to have held up during the Covid-19 pandemic, offering the well-heeled the opportunity to jet off while minimizing potentially risky contact with other passengers. As global airline passenger traffic has plunged, private-jet activity has fared better and was at about the same level in the first three weeks of January as at the start of 2020, despite a resurgence of the virus, according to research from aviation data and consultancy company WingX.  “Some clients only flew commercial before the pandemic, but Covid-19 has changed all of that,” said Michael S. Harris, director of family office at Verdence Capital Advisors, which oversees about $2.5 billion. “The way we travel may now have changed forever.”

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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 February 2, 2021:

  • In the United States, President Joe Biden’s administration announced during their daily coronavirus briefing on Tuesday that they will soon begin direct shipments of coronavirus vaccines to retail pharmacies, expanding access points for Americans to receive COVID-19 inoculations. White House COVID response coordinator Jeffrey Zients said next week that one million doses will be allocated to 6,500 pharmacies. These shipments are in addition to the more than 10 million doses that are already set to be shipped to states, tribes and territories around the US, said Zients.
  • Canadian Prime Minister Justin Trudeau announced Tuesday the country’s plan to start securing a domestic supply of vaccines as the global market has proved difficult recently. Prime Minister Trudeau said the National Research Council-owned Royalmount facility in Montreal will start to churn out doses of the COVID-19 vaccine produced by Maryland-based Novavax later in the year. Novavax submitted its vaccine for Health Canada regulatory approval last week. “This is a major step forward to get vaccines made in Canada, for Canadians… We need as much domestic capacity for vaccine production as possible. We won’t rest until every Canadian who wants a vaccine has received one,” said Trudeau.
  • In the United Kingdom, Captain Tom Moore has passed away at the age of 100 after he contracted COVID-19. Mr. Moore’s family released a statement on Tuesday announcing their father’s passing. His charitable endeavor struck a chord with the UK and the rest of the world last year during the initial lockdown when his walk around his garden raised $53 million USD for the National Health Service. Elsewhere in the country, a COVID-19 mutation similar to the South African variant has been discovered in the Kent strain of the virus, according to a leading UK scientist.
  • The Lancet International medical journal gave Russia’s Sputnik V vaccine the green light after peer-reviewed late-stage trial results said it was 92% effective in fighting COVID-19. Russia was criticized by the western world by their decision last August to roll out the vaccine before the final phase III trials results had been conducted. Scientific experts said the results meant the world had another effective vaccine against the pandemic. “Russia was right all along,” said Kirill Dmitriev, head of the Russian Direct Investment Fund.
  • In the United Arab Emirates (UAE), Dubai has authorized the UK’s AstraZeneca vaccine for its fight against COVID-19. The first shipment arrived via India on Tuesday and marks the third vaccine in use in Dubai joining the Pfizer/BioNTech and Sinopharm jabs. Government authorities say the AstraZeneca shot will only be available in this stage to Emiratis, those over the age of 60, frontline/vital workers and people with disabilities.
  • Japanese Prime Minister Yoshihide Suga has extended a state of emergency covering Tokyo and other regions until March 7th. Prime Minister Suga added another month as the latest state of emergency was set to expire February 7th and while the daily coronavirus cases are coming down, they were still high enough to be a concern. The current emergency measures have been in effect since January 11th and include Tokyo and Osaka, which account for 60% of the Japanese economy’s total output.

Covid-19 – Due Diligence And Asset Management

Brookfield Property Partners Loses $2 Billion in Pandemic Year

Brief : Brookfield Property Partners LP posted a $2 billion loss as the fallout from the Covid-19 pandemic caused it to reassess the value of its real estate. The loss last year compares with $3.2 billion in net income for 2019, a decline the company attributed primarily to “unrealized reductions of values of certain assets within the portfolio,” according to a statement on Tuesday. Funds from operations, a measure of cash flow for real estate companies, were down about 18% to $540 million for the company’s portfolio of office buildings, while FFO from retail properties fell 29% last year to $550 million, according to the statement. The pandemic kept many offices and malls around the world empty for large portions of last year, while also accelerating changes to how people work and shop. The success of remote working during the pandemic has many companies examining how much office space they need, while stay-at-home orders have pushed broader adoption of e-commerce at the expense of brick-and-mortar retail. Amid this pressure, Brookfield Property Partners’ corporate parent, Brookfield Asset Management Inc., has proposed taking the company private by acquiring the shares it doesn’t already own for $5.9 billion, or $16.50 a share. The company’s shares have gained 18% this year, closing Monday at $17.08.

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Steve Cohen’s Point72 Raises $1.5 Billion After Melvin Capital Infusion

Brief: Steve Cohen’s Point72 Asset Management has opened to new cash and raised more than $1.5 billion in commitments in a matter of days, according to people familiar with the matter. The move comes after the hedge fund provided $750 million in emergency cash to Gabe Plotkin’s Melvin Capital, which was struggling with GameStop Corp. and other short bets gone sour. Citadel’s hedge funds, along with founder Ken Griffin and his firm’s partners, put $2 billion into Melvin. By the end of last month, Melvin sunk 53% after retail investors banded together online to push up the prices of GameStop and other popular targets of short-sellers. Point72 is raising the fresh cash because it sees investment opportunities in the market, one of the people said, asking not to be identified because the information isn’t public. The firm had about $18.9 billion in assets as of October. The hedge fund fell about 9% in January, the people said. Before its recent cash injection, Point72 had about $1 billion invested in Melvin. A spokeswoman for the Stamford, Connecticut-based firm declined to comment.

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BTIG to Maintain Remote Working Until September 2021

Brief: BTIG employees will not be required to return to any of the firm’s US offices prior to Labor Day of 2021.In March 2020, BTIG was one of the first financial services firms to send all of its employees home to work remotely in response to the Covid-19 pandemic. BTIG will continue to evaluate the data on the global health crisis, and make all future reopening and other logistical decisions based upon the latest information available from the medical community and local government officials. BTIG believes that remote work will continue to offer the best protection to its employees, their families, clients and its business operations. The firm does not anticipate a return to its offices until vaccines are widely available, and when it is confirmed that the newly discovered Covid-19 mutations do not pose any additional risks to employees. Once the firm’s offices fully reopen, BTIG expects approximately 30-50 per cent of its employees will choose to incorporate remote work into their regular schedules. “As a firm, we are very fortunate to find ourselves in a position where we can choose when to safely reopen our offices for staff. The positive feedback we’ve received from our clients, as well as the high levels of employee engagement thus far, enabled us to extend the period of remote work longer than we anticipated in the summer,” says Jennifer Mermel, Chief Operating Officer of BTIG.

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GameStop Saga Expected to Revive Scrutiny of Hedge Fund Industry

Brief: With hedge funds at the center of market drama for the second time in less than 12 months, the GameStop saga is likely to expedite a regulatory review of the ever-larger role non-bank firms play in the financial markets, regulatory experts said. Scrutiny of the non-bank financial sector was already expected to be high on newly appointed Treasury Secretary Janet Yellen’s agenda after hedge fund de-leveraging contributed towards turmoil in the U.S. treasury market in March 2020. But the sector is likely to garner much closer attention after a retail buying frenzy in GameStop and other stocks burnt several hedge funds that had bet against the companies, and led retail brokerages to restrict trading in the affected stocks. The incident appeared to spark market-wide volatility, as hedge funds scrambled to meet their obligations and close out bad bets, trading the highest volume of shares since 2009, according to an analysis from Goldman Sachs Group Inc. It has shone a spotlight on the huge footprint of non-bank equity trading firms, particularly that of Citadel Securities, which accounts for over 20% of all U.S. equities volumes and roughly 39% of all U.S.-listed retail volume, according to its website. Its heft has raised questions over the company’s market power.

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Digital Health Funding Hit USD $21.6 bn in 2020

Brief: Investments into the online healthcare sector soared in 2020, supercharged by Covid-19. According to the research data analysed and published by Finaria, the total digital health funding in 2020 amounted to USD21.6 billion. VC funding led with a total of USD14.8 billion across 637 deals, a 66 per cent year-over-year (YoY) uptick. Based on a Silicon Valley Bank (SVB) report, investments in the healthcare sector as a whole amounted to USD51 billion during the year. Biopharma led in deal value, with investments worth USD24.5 billion across 570 deals. The total VC funding in the digital health sector set a new record. It also drove its total investment value since 2010 to USD59 billion across more than 5,000 deals. Around 77 per cent of all funding in 2020 went to US companies, USD11.5 billion across 429 deals. Comparatively, China received USD1.1 billion in eight deals. Consumer-centric companies received USD9.6 billion (+81 per cent YoY) while practice-centric ones got USD5.3 billion (+47 per cent YoY). Telemedicine was the highest ranked category, receiving USD4.3 billion, up by 139 per cent YoY. It was almost equivalent to the next three categories combined. Data Analytics raised USD1.8 billion, mHealth Apps got USD1.4 billion and Clinical Decision Support gained USD1.2 billion.

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Ares, KKR Veterans Leave for Upstart Healthcare Investment Firm

Brief: Executives from Ares Management and KKR have joined Patient Square Capital, a new healthcare investment firm, as founding partners. Patient Square announced on Monday that Alex Albert, who was most recently the co-head of healthcare private equity at Ares, and Neel Varshney, previously a managing director at KKR’s Americas healthcare private equity team, have joined the firm. Patient Square was launched in August by Jim Momtazee, who spent more than 20 years at KKR. Soon after its launch, the firm sponsored a special-purpose acquisition vehicle called Montes Archimedes Acquisition Corp. Albert spent six years at Ares before leaving for Patient Square, according to the announcement. Prior to joining Ares, he worked as a vice president at FFL Partners. He previously was an associate at KKR, where he was on the healthcare team with Momtazee. Before joining KKR, Albert was an analyst in the investment banking division at Goldman Sachs. Meanwhile, Varshney spent roughly four years at KKR, where he also worked with Momtazee on healthcare deals. Before joining the firm, he worked as a vice president at Linden Capital Partners, focusing on healthcare. He also worked as an engagement manager in healthcare, private equity and corporate finance at Mckinsey and Co., and worked in business development at Medtronic. Varshney is a doctor who trained in internal medicine at Massachusetts General Hospital, the announcement 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 Monday February 1, 2021:

  • United States President Joe Biden plans to meet with a group of Republican senators on Monday to see if there is any common ground on the administration’s $1.9 trillion COVID-19 relief proposal. While President Biden is known for his ability to work across the aisle, this might be a challenge – even for him. A group of 10 Republican senators rolled out a counter proposal of $600 billion. “There is obviously a big gap between $600 billion and $1.9 trillion. I don’t believe any of us are mathematicians, but clearly the amount needs to be closer to what he (Biden) proposed than smaller,” said White House spokeswoman Jen Psaki. The Biden administration is citing urgency, noting the need for Americans to access unemployment insurance, food insecurity, funding for vaccine distributions and public schools. 

  • Canada’s federal government has unveiled a new loan program aimed at businesses to survive COVID-19 and its subsequent lockdowns. The program will be called the Highly Affected Sectors Credit Availability Program, or HASCAP for short, and Monday was the first day businesses could apply. Businesses can qualify for between 25,000 and $1 million if they meet the  primary condition that their revenues have fallen by at least 50% at least three months out of the previous eight. The program is only for companies that have already qualified and/or are receiving a previous government wage-subsidy program or rent subsidy program.

  • United Kingdom Health Secretary Matt Hancock provided an update Monday during a news briefing and said the country will protect its COVID-19 vaccine supply, but also play a part ensuring the whole world can get access to vaccines. Hancock also touched on the recent fallout with the European Union, concerning AstraZeneca vaccine supplies stating, “my attitude has always been we protect every UK citizen as fast as we can and at the same time we are generous around the world.” Elsewhere in the country, some sad news as Captain Tom Moore has been hospitalized with COVID-19. You may remember Mr. Moore’s record-breaking fundraising effort of 41 million USD for health service workers by walking 100 lengths around his garden during last year’s initial lockdown. What made the feat so impressive was Mr. Moore was approaching his 100th birthday and was even knighted by the Queen for his fundraising efforts.

  • German Chancellor Angela Merkel met with the country’s 16 state leaders, along with representatives from both vaccine manufacturers and the European Commission via video conference to discuss possible improvements to Germany’s vaccination program. Chancellor Merkel said her pledge to vaccinate the population by the end of the summer remains, but her Health Minister Jens Spahn said Germany will “have to make a great effort” to do so. German firm BioNTech along with its US partner Pfizer promised to deliver up to 75 million more coronavirus doses to the European Union in the second quarter, which should help in the effort. 

  • In Australia, the city of Perth and surrounding area have begun a snap five-day lockdown after a security guard working at a quarantine hotel tested positive for the coronavirus. Western Australia, for which Perth is the capital of – had not reported a case of locally acquired coronavirus for 10 months. The lockdown will include the city Perth – a city of around two million – along with neighbouring regions and citizens must stay home, except for essential work, healthcare, food shopping or exercise. The lockdown will run until Friday night. 

  • Over the weekend, the World Health Organization (WHO) continued their research through the city of Wuhan, China with one of the stops being the wet market thought to be central to the disease’s spread. According to CNN, the WHO team members have been granted access to months of Chinese influenza data, which may contain vital clues as to the early spread of the coronavirus. The WHO’s team next visits will include the Centers for Disease Control in Hubei and the Wuhan Institute of Virology. The latter gained notoriety thanks to former United States President Donald Trump’s administration unproven claims that the laboratory was the source of the coronavirus and not the wet market that has now infected over 100 million people worldwide.

Covid-19 – Due Diligence And Asset Management

Why Hedge Funds are More Likely to Cause a Market Crisis than Robinhood’s GameStop Traders

Brief : Over the past week, many people have asked me the same question: “Will the GameStop situation lead to a market crash?” The direct answer is an emphatic NO! However, it will likely lead to increased volatility over the near-term, which is why I suggest traders use lighter than normal positions until the volatility calms down. The markets have always been dominated by the large institutions and, for the record, I absolutely love the recent surge in retail trading. Here is one side effect: When retail traders take long positions against the short positions of these big institutions, and then drive up the price of these stocks, it leads to what is called a “short squeeze.” When these institutions are forced to cover a stock, they are sometimes forced to sell their long positions (if the loss is big enough) to meet margin requirements, to reduce leverage, or to possibly raise cash for future redemptions. This forced liquidation of long positions can lead to a quick, short-term decline in stock prices, such as the one we saw on Monday, Jan. 25 between 10:45 am.-11:05 a.m. EST, (see chart) but I don’t see it leading to a market crash.

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Hedge Fund Body Alarmed by Retail Investor Frenzy ‘Distortions’

Brief: Wall Street’s retail trading frenzy has distorted markets, global hedge funds industry body AIMA said on Monday, adding it was concerned that lawmakers were encouraging such moves. Retail investors gathering in social media chatrooms like Reddit have been driving up the price of stocks like GameStop shorted by hedge funds, with the focus shifting to other parts of the market on Monday, such as silver. “What is dangerous, amid this trading frenzy, is that retail investors have been chasing prices so far above any sane valuation and that many will end up nursing losses,” AIMA CEO Jack Inglis said in a letter to members, who manage $2 trillion. “The role of some supposedly responsible lawmakers, who have been cheering these events from the side-lines, with a knee-jerk reaction against short selling, is concerning to say the least.” U.S. Democratic lawmaker Alexandria Ocasio-Cortez, said last week that people felt “everyday people” were finally able to “get back” at those who had all the marbles on Wall Street and forced once hedge fund into an existential crisis.

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UK PE Market Bounced Back After Covid-19 Hit

Brief: UK private equity deal activity bounced back in the second half of 2020, although a profound slump in transactions in Q2 as lockdown gripped the M&A market meant that total annual deal volumes hit their lowest levels in more than seven years. KPMG’s latest study of UK transactions involving private equity investors indicates that a total of 889 deals completed over the course of 2020, with a combined value of GBP87.2 billion. This was the fewest number of private equity transactions seen in the UK since before 2014, and a fall of 26 per cent on the previous year, which saw 1,199 deals worth GBP107.7 billion. Mid-market PE deals Transactions with an EV between GBP10m and GBP300m. were particularly impacted by the challenges brought about by the Covid-19 pandemic, with both volumes and values falling by a third on the previous year. In total, 452 mid-market transactions completed during the year, with a combined value of GBP28.45 billion. However, while total annual deal volumes were ultimately hampered by the cliff-fall seen in the second quarter, there was a clear bounce-back in activity in Q3 and Q4. Deals that had been put on hold sprung back to life, and PE investors, still sitting on substantial reserves of capital, mobilised once more, resulting in over two hundred transactions completing in each of the final two quarters. Jonathan Boyers, head of M&A for KPMG in the UK, says: “This is a tale of retreat and recovery.

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Greylock Files for Bankruptcy After Losses Spur Withdrawals

Brief: Greylock Capital Associates filed for bankruptcy protection in New York as investors pulled money from the hedge fund following three consecutive years of losses. The Chapter 11 proceedings will allow Greylock to restructure its debt and terminate its Madison Avenue office lease in Manhattan, according to a Jan. 31 filing signed by Chief Financial Officer David Steltzer. Assets under management at the emerging markets hedge fund -- which more than halved since 2017 to $450 million at the end of 2020 -- will drop by $100 million by the end of March in the absence of new investments, according to the filing. Greylock has cut its staff to nine people from 21 three years ago, and is in talks with its remaining major investors, confident that the business can “successfully reorganize and continue as a going concern” after the bankruptcy, Steltzer wrote. The firm hasn’t hired any financial or business consultants. The firm has no plans to shut down, according to a message from Greylock President Ajata “AJ” Mediratta. The hedge fund opened a small office in Stamford, Connecticut last year to make it easier for the firm’s commuters, reducing the need for a large office in midtown Manhattan.

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Entrepreneurs Re-Think Investment Priorities During Lockdowns

Brief: Research by regional mid-market private equity firm YFM Equity Partners (YFM) has revealed a growing focus on culture and working practices, rather than simply valuation, after almost a year of interrupted working and repeated lockdowns.  The survey polled over 120 entrepreneurs, advisers and dealmakers across the UK in December, and showed that the primary consideration for boards looking for VC and growth funding was the investors’ approach to working (48 per cent), closely followed by their cultural fit with investors (45 per cent), whilst the financial terms, once the dominant consideration, came in as the third most important criteria, only selected by 38 per cent of respondents. David Hall, investment partner at YFM and managing director, says: “It is clear that entrepreneurs have different priorities after the experience of the pandemic, and the impact it has had on their organisations, their people and their own quality of life. “Our survey suggests that management teams are now placing more value on their long-term organisational health and bringing on board a supportive partner. That doesn’t mean that VCs can get better value for money, but rather they have to demonstrate the right approach and ethical standards as a prerequisite before they get through the door of the best growth businesses,” he added.

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Wells Fargo CEO Scharf’s Pay Drops Nearly 12% in 2020

Brief: Wells Fargo & Co Chief Executive Officer Charles Scharf’s annual pay fell by about $3 million, or 12%, in 2020, a regulatory filing showed on Friday. Scharf will receive $20.3 million for his work during the year, compared with $23 million in 2019, the bank said. bit.ly/3ahptPv. Scharf, who served as a top lieutenant to JPMorgan Chase and Co Chief Executive Jamie Dimon during the financial crisis of 2008, took over the reins at Wells Fargo in 2019. The fall in Scharf’s pay compares with a 36% drop in Goldman Sachs Chief Executive David Solomon’s salary and a 20% jump in compensation for Morgan Stanley’s top boss James Gorman. JPMorgan held CEO Dimon’s annual pay at $31.5 million. Wells Fargo’s board cited the drop in the bank’s financial results for 2020 as one of the reasons for Scharf’s lower compensation, noting that the results were significantly impacted by the effects of the COVID-19 pandemic. The bank last year posted its first quarterly loss since 2008 and also saw its profit plunge to just 1 penny per share in the first quarter of 2020. However, Wells Fargo ended the year with a rare quarterly profit beat. The bank has operated under a dark cloud since 2016 when details emerged about millions of phony accounts employees had created in customers’ names without their permission to hit sales targets.

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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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