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Coronavirus Diligence Briefing

Our briefing for Friday October 2, 2020:

Oct 2, 2020 3:55:34 PM

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

Covid-19 – Due Diligence And Asset Management

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

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

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

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

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Pandemic Pushes Investors Toward Biggest Alts Managers

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

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COVID-era Interview Questions at Banks and Hedge Funds

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

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Private Debt Fundraising Squeezed by Pandemic Jitters, Election

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

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

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

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Contact Castle Hall to discuss due diligence

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

Topics:Coronaviruscovid-19