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Coronavirus Diligence Briefing

Our briefing for Thursday July 23, 2020:

Jul 23, 2020 3:12:25 PM

  • With the United States surpassing the four million mark for coronavirus cases today - a quarter of that amount has come in just the past two weeks. “We’ve rolled back essentially two months’ worth of progress with what we’re seeing in number of cases in the United States,” said one American doctor. On Wednesday the COVID-19 hospital count in the country was 59.600 – roughly 300 short of America’s peak seen in mid-April.

  • A study released in the Canadian Medical Association Journal showed for-profit long-term care homes in Ontario saw significantly worse outbreaks of COVID-19 compared to their non-profit/municipality run counterparts. While profit status had no impact on whether a facility had a coronavirus outbreak, it did play a significant role on what happened once one occurred. In Ontario 57% of nursing homes are set-up to be profit-making – the highest rate in Canada.

  • In the United Kingdom, mandatory facial coverings are set to be in place as of Friday, although where they are necessary seems confusing. Citizens visiting shops/shopping centers, supermarkets, banks and take out restaurants will have to wear facial coverings. However, the public will not have to wear facial coverings in pubs, restaurants, hairdressers, movie theatres, or gyms. Enforcement of the rules will also be lax – it will be essentially up to the individual to make sure they are conforming to the new rules as businesses won’t be required to enforce them and police will only issue fines of up to £100 as a last resort for those who don’t comply.

  • European Union states have agreed on common hygiene standards for air travel. Measures include mouth-and-nose protection for passengers six years of age and older, social distancing at airports during security checks and check-in, and a high fresh-air quota in airplanes must be guaranteed. However, the social distancing plan seems to stop once you are up in the air as the middle seat does not have to remain free.

  • India reported an all-time high of nearly 45,600 coronavirus infections over the last 24 hours. As the virus continues to increase at a record pace across the country, Prime Minister Narendra Modi has tried to focus India’s attention to their relatively low death rate. However, public health experts believe the death toll is much worse than reported. A Financial Times article noted in some states, hospitals and officials have been under intense pressure to attribute the deaths of coronavirus patients to other underlying health issues such as diabetes to help keep the official COVID-19 death toll down.

  • Tokyo, Japan recorded 300+ new cases in a single day for the first time on Thursday. This news prompted Tokyo Governor Yuriko Koike to say, “I think we can consider this to be a warning that strong public cooperation is needed.” There were 920 new daily infections on Thursday across Japan, which set a record for the second straight day. The rise in infections are likely to hurt the government’s state sponsored “Go To Travel” tourism initiative as the country heads into its first long weekend since the incentive program set to boost the economy was launched.

Covid-19 – Due Diligence And Asset Management

Hedge Funds Gain Favor in Latest Sign of Rebound

Brief: Big investors including pensions and family offices are taking another look at hedge funds, as they navigate the market turbulence sparked by the Covid-19 pandemic. While the industry was hit with yet another quarter of outflows -- its ninth in a row -- the results of a Bloomberg Mandates survey suggest better times are ahead. This comes weeks after a Credit Suisse Group AG poll found a similar trend: Net demand for hedge funds was the highest in at least five years, with interest in the industry outranking others. The findings are the latest signal of a turnaround for the beleaguered industry, which has faced a tough capital-raising environment for much of the last decade as investors revolted over high fees and mediocre returns. Prominent names including George Soros’s family office and the Texas pension fund are leading the charge, pumping cash into managers in the past few months to diversify assets. Bloomberg’s mandates group surveyed 50 institutional allocators from May 14 to June 10. About half of those polled managed more than $1 billion. Here’s a look at the findings: Almost half of institutional investors re-positioning their portfolios boosted allocations to hedge funds or plan to this year. The industry emerged as the top pick among six major alternative asset classes, followed by private debt.


U.S. SEC Chief ‘Worries’ About Retail Investors Trying to Get Rich Quick

Brief: The head of the U.S. Securities and Exchange Commission (SEC) on Thursday said he is worried about the risks to retail investors who are increasingly making short-term bets via low-cost trading platforms rather than sticking to long-term investments. “We’re seeing significant inflows from retail investors who conduct more trading than investing,” Jay Clayton said in a Thursday interview on CNBC’s “Squawk Box.” The rise of new, low-cost, easy-to-use trading apps combined with ultra-low interest rates has unleashed a flood of retail money into stocks from investors looking to cash in on the market rally. That money has often flowed into highly risky trades, including stocks that have filed for bankruptcy. Robinhood Markets Inc came under here criticism in June when a 20-year-old customer took his own life after believing he incurred a large loss using the free trading app. The firm has since expanded its educational content for options trading.“I encourage people to educate themselves, but short-term trading is more risky than long-term investing and I do worry about this risk investors take,” Clayton told CNBC.He also defended a recent agency proposal to significantly raise the reporting threshold for large institutional investment managers after critics said it would reduce market transparency.


Commentary: Keep Emerging – and Diverse-Manager Programs on Track Amid COVID-19 Disruption

Brief: At a congressional hearing on diverse asset managers before the Committee on Financial Services in June 2019, Rep. Maxine Waters drew a line in the sand. She noted that in the past, when diversity efforts in financial services failed to gain traction, "we let it go," but she insisted that in the future, "It won't be that way anymore." She was speaking of the need to not merely discuss investing in diverse managers, but to begin taking concrete actions that will see asset owners and institutional investors actually deploy capital.Fast forward one year and attention in Washington has since turned to other pressing matters — from the upcoming election to, more recently, the response to the COVID-19 pandemic and ongoing social unrest.The attention deficit seems to underscore that while awareness can certainly help, progress will ultimately be found through a market that doesn't just recognize the challenges confronting diverse managers, but takes the necessary steps to eliminate the barriers. The data suggest investors will be rewarded for doing so, in the form of alpha and fund manager outperformance. The question facing the industry, however, is whether the market will revert to old habits and old standbys against a suddenly uncertain backdrop in which asset owners now have to contend with volatility that upsets target allocations, creates possible liquidity issues (particularly among endowments), and imposes significant due diligence challenges in a shelter-in-place world.


Asset Managers Got Opportunistic – With Each Other

Brief: Investments in asset and wealth managers exploded, even though activity slowed substantially during March and April — the height of the economic shutdown. The PwC report looked at U.S. managers acquired by other American firms and foreign companies. Gregory McGahan, PwC financial services deals leader and a report author, expects that M&A will continue to flourish in the second half of the year. With the economic slowdown and uncertainty over the future, investors have kept up pressure on managers over fees. Managers are also racing to buy firms with some of the asset classes that have done well recently, including private credit. PwC argued that investors had the temerity to circumvent travel restrictions and other logistical problems because market volatility, economic uncertainty, and investor redemptions posed a bigger problem long term. “Some buyers swooped in on opportunities that emerged as Covid-19 intensified new or persistent problems in the market, including fee compression,” wrote McGahan and Arjun Saxena, deals strategy leader for financial services. The quest for scale and products such as ESG (environmental, social and governance) oriented strategies will drive transaction, the authors predicted. 


Real Estate: ‘The Office is not Dead Yet’

Brief: As the prospect of a second wave of coronavirus still looms, many parts of the world are slowly reopening and people are returning to their workplaces, ever-changing social distancing measures in place. For many office-based businesses, this poses a challenge – it’s not always easy to maintain your personal space in a lift heading up to the tenth floor. But in the midst of an accelerated trend towards more flexible working, offices are not dying out just yet. It’s the way companies will use them that is likely to change, according to Paul Kennedy, head of strategy and portfolio manager for real estate in Europe at JP Morgan Asset Management (JPMAM). The future of city office lets is a major topic, he tells Funds Europe. This is not a new trend, he says.  “There’s been a trend towards flexible working, towards more technology-based solutions for many years now. If we look back, if this crisis had happened five or ten years ago, the technology wouldn’t have stood up as much. I think the conclusion we’ve reached as a business is that we can all work from home – but we don’t want to.” Office rents can be pricey, though. Regardless of how governments lift lockdowns, companies will rethink how they manage their office space in terms of functionality and safety – and in terms of saving on capital costs.


Distress Mounts in U.S. Real Estate Market Frozen by Pandemic

Brief:The U.S. commercial real estate market is showing ever greater signs of stress, but there are still few deals to be had. Transactions fell 68 per cent in the second quarter across all property types compared with 2019 as potential buyers and sellers remained far apart on the prices of buildings, according to data released Wednesday by Real Capital Analytics. The paralysis set in despite near-record amounts of capital ready to be deployed by some of the world’s biggest real estate investors. “The buyer and seller expectations are not aligned,” said Simon Mallinson, an executive managing director at RCA. “Sellers aren’t being forced to the market because there’s no realized distress and buyers are sitting on the sidelines thinking there’s going to be distress.” Second-quarter sales plunged 70 per cent for apartments, 71 per cent for offices, 73 per cent for retail and 91 per cent for hotels, according to RCA. Industrial property transactions were a brighter spot. Sales dropped only 50 per cent in the second quarter, as online shopping thrived and manufacturers leased space to avoid supply chain disruptions. For markets to function, there needs to be some agreement on what assets are worth. But the surging coronavirus outbreak is fueling uncertainty, making the outlook for commercial property just as cloudy as it was in March when lockdowns put the economy into deep freeze.


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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