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Coronavirus Diligence Briefing

Our briefing for Monday July 27, 2020:

Jul 27, 2020 4:08:33 PM

  • In the last week, eighteen states in America have shattered records for new daily cases of the novel-coronavirus, COVID-19. The United States has now reached over 150,000 deaths due to complications surrounding the virus. Starting Monday, the country has begun the first Phase 3 clinical trials for a vaccine. According to biotechnology company Moderna and the National Institute of Allergy and Infectious Diseases, part of the National Institutes of Health, the trial will be administered to 30,000 adults at nearly 100 different research sites. Each participant will be given two 100-microgram injections of the vaccine or a placebo roughly 28 days apart. Results indicated the Phase 1 and Phase 2 vaccinations proved to induce immune responses in all of the participants and are viewed as safe for further study.

  • It’s been just over 6 months since the first case of COVID-19 was diagnosed in Canada. Since then more than 110,000 cases have been confirmed in the country and over 9000 deaths have been recorded to due complications associated with the virus. Leading health officials in the country unanimously agree that on average, Canada has fared better than most of the world in terms of dealing with the pandemic. Dr. Sumon Chakrabarti, an infectious disease specialist based in Mississauga, Ontario said that the majority of Canadian hospitals were not wholly overwhelmed, “we never were at a point where we felt appreciably out of control.”

  • In the United Kingdom, prohibitions have been put in place for travelers looking for a summer escape. The U.K. will no longer allow its residents to travel to Spain for vacations as the number of new Spanish cases rose to 12,166 last week. Nearly 10,000 flights were scheduled to fly from Britain to Spain in the coming weeks. The Spanish government is now urging the U.K. to reconsider its quarantine of the Balearic and Canary islands, where cases are low but are now once again on the rise.

  • Despite having the third highest number of cases globally, Indian Prime Minister Narendra Modi claims that the country has “proved the world wrong,” but conceded “we need to remain vigilant. We have to remember that coronavirus is still as dangerous as it was in the beginning.” The number of new cases in India rose to 48,661 on Sunday and is particularly prevalent in Delhi, the country worst hit city. The state government has increased testing in the area and has begun to adapt thousands of train coaches to house make-shift hospital beds.

  • The government of Hong Kong has imposed a ban on gatherings larger than two people as a reaction to surging cases in the region. It is now mandatory to wear a mask in both indoor and outdoor spaces with fines for failing to do so will range up to 5000 Hong Kong dollars or $645 dollars U.S. The city is now facing what residents are calling a third wave, with a new makeshift hospital being set up near the airport. Since the beginning of the pandemic only 20 people have died in the city, but officials are taking precautions as cases are climbing by more than 100 a day. The relatively low case load has been attributed to strict rules preventing non-residents from entering the city.

Covid-19 – Due Diligence And Asset Management

Hazeltree and Northern Trust Collaborate to Analyze the Impact of COVID-19 on Alternative Asset Managers

Brief: Hazeltree, a leading provider of cloud-based treasury management and portfolio finance solutions, and Northern Trust Alternative Fund Services (NTAFS) today published a report, “Weathering the 2020 Storm: Market Volatility, Location Disruption and Record Volumes.” The analysis examines the market impact of COVID-19, highlighting new operational challenges facing investment managers that require immediate attention. The analysis observes trends across both NTAFS and Hazeltree clients and: compares liquidity metrics experienced in March/April 2020 versus prior periods as tracked by NTAFS and Hazeltree.  Highlights the emphasis placed upon cash and liquidity management practices during these uncertain times. Details a new range of concerns from investors, introducing questions managers can expect during investor operational due diligence reviews. Stresses the importance of robust processes and technology to effectively manage cash, liquidity and collateral during this new “work from home” operating model.“Asset managers faced pressure beginning in March, not only from market volatility, but also from needing to execute on critical operational functions in a work-from-home environment,” said Peter Sanchez, Head of Alternative Fund and Omnium Business Services, Northern Trust. “The challenges highlight the importance for alternative fund managers to have the scalability, security and systems to operationally manage such a crisis – whether in-house or through a partnership with a Fund Administrator or another provider.”

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Koch online toolkit helping businesses reopen after Covid-19

Brief: A major Koch Industries Inc. subsidiary has created an online toolkit for businesses wanted to reopen safely after pandemic-related closures. The platform is called Hygiene Ready and was developed by GP PRO, the commercial division of Georgia-Pacific. It pulls from resources made available by the Centers for Disease Control and Prevention (CDC), Occupational Safety and Health Administration (OSHA) and the World Health Organization. The GP PRO team began putting Hygiene Ready together in March and its Wichita-based parent company, Koch, highlighted those efforts in a recent article on its website. The company says that the toolkit is geared toward any business looking to safely reopen, including restaurants, retail stores, event venues and industrial facilities. It also includes training materials and updated links to Covid-19 news and guidance.

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Wells Fargo Scales Back Business

Brief: Wells Fargo & Co. is slashing costs, cutting staff and tightening up on lending to ride out the coronavirus recession. Its rivals might not be too far behind. The fourth-largest U.S. lender entered the pandemic in worse shape than its peers. The bank is still clawing its way back from a 2016 fake-account scandal that put it on the wrong side of customers and regulators. Revenue has fallen for two years in a row, and the bank recently reported its first quarterly loss since 2008. "We have not done what is necessary to run an efficient company," Chief Executive Charles Scharf said in a memo to employees this month. Wells's mix of challenges is forcing it to cut costs first, but it might not be the last. The bank's approach to belt- tightening could offer some clues about what is to come for the rest of the industry. Other big banks cut billions of dollars in costs and laid off thousands of employees after the last financial crisis, putting them in a better position to withstand this one. Some have pledged not to lay off employees in 2020. Whether they are forced to make cuts later on will depend on the length and severity of the recession.

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Covid-19 could be trigger for widespread mandate losses

Brief: Investment managers with poorer performance through the Covid-19 crisis are set to see a high number of mandate losses, research suggests. Investors in hedge funds and smart beta were among the most dissatisfied with recent performance. In a survey of 368 institutional investors and family offices, 48% said they were disappointed with hedge fund returns and 64% said the same for ‘alternative risk premia’, which is usually known as smart beta. Emerging market debt also disappointed 53% of investors, the Bfinance research showed. As much as 54% of the asset owners are terminating or likely to terminate managers based primarily on their 2020 performance, including more than 80% of family offices. Apart from hedge funds, smart beta and emerging market bonds, active strategies received positive feedback, Bfinance said, and the vast majority of investors – or 82% - said they were satisfied with how their portfolios had performed.

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Hedge Fund Fees in Free Fall Is the New Reality For a Humbled Industry

Brief: Hedge-fund fees had already been shrinking before the pandemic ripped through global markets. Now, they’re in terminal decline. One of London’s fastest-growing hedge funds is enticing new investors by agreeing to forgo performance fees until returns hit a key threshold. In Hong Kong, a fund boss is offering to cover all losses, a concession that’s almost unheard of in this rarefied world. And famed investor Kyle Bass has told clients he’ll charge his usual 20% cut of profits only if he earns triple-digit returns in a new fund he has started. Long notorious for charging high fees, the $3 trillion industry runs portfolios that are generally open only to institutions and affluent individuals. It’s going to extraordinary lengths to attract new money as the coronavirus pandemic triggers losses and accelerates an investor exodus that has plagued the industry for years. Many of the world’s most prominent managers have come to the stark realization that they need to upend the “two and-twenty” fee model that’s been a fixture for decades if they want to expand. For some smaller firms, the goal isn’t growth. It’s survival.

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Economic slowdown hits the alternative lending business

Brief: The coronavirus pandemic is hitting alternative lenders hard, with business down substantially, a handful of mortgage investment corporations stopping investors from redeeming their funds and others trying to offload their portfolios of home loans. In Ontario, mortgage registrations by private lenders fell 26 per cent in June over the same month last year, according to Teranet, which operates the province’s electronic land registry system. That followed a 45-per-cent decline in May and a 29-per-cent drop in April, when real estate sales plunged, and private lenders halted loans to assess the economic rout. Industry experts say the downturn will reveal where the weaknesses are in the sector. “The tide is going out right now. We’ll see very quickly who was naked this whole time in the private mortgage world,” said Dustin Van Der Hout, investment adviser with Richardson GMP Ltd.

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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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