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Coronavirus Diligence Briefing

Our briefing for Tuesday March 16, 2021:

Mar 16, 2021 4:07:30 PM

  • In the United States, while the vaccination drive continues to pick up speed, there is more than just the virus standing in the way: politics. Recent polls have found vaccine hesitancy falling overall, but opposition among Republican voters is still notably strong. A poll from the Associated Press found that 42% of Republicans say they probably, or definitely will not get a COVID-19 inoculation, compared with 17% of Democrats – a 25-point split. “This is going to be the big issue,” said Ashish Jha, Dean of the Brown University School of Public Health. “And if we get stuck at 60 or 65% vaccinated, we are going to continue to see significant outbreaks and real challenges in our country…”
  • While countries in Europe continue to have their doubts on the AstraZeneca COVID-19 vaccine, Canada seems to be moving in the opposite direction. The country’s National Advisory Committee on Immunization (NACI) has now expanded its recommendation for the use of the AstraZeneca vaccine to include people 65 years of age and older. When pressed in a news briefing on Tuesday to address the possible impact on vaccine confidence from the change in guidance in such a short period of time (AstraZeneca was approved in Canada last month), NACI chair Dr. Caroline Quach-Thanh said the following: “It’s not that we’re flip-flopping, it’s just that we try to monitor the evidence. It’s always easier if Health Canada and NACI agree, but it doesn’t have to be…” 
  • In the United Kingdom, The Guardian is reporting senior doctors, government scientific advisers and a former head of the civil service have spoken out in favour of a public inquiry into the government and Prime Minister Boris Johnson’s handling of the COVID-19 pandemic. The UK’s death toll due to the coronavirus currently sits at almost 126,000, which is one of the worst death tolls per capita of any of the world’s large economies. The potential inquiry will look into everything from lockdown tactics to test and trace programmes. Last July, Prime Minister Johnson promised to set up an “independent inquiry”, but the government has since backtracked on this, instead stating now is not the time to launch such a task and they are focussed on protecting and saving lives.
  • Reuters is reporting coronavirus infections are rising exponentially again in Germany, putting at risk further plans to lift lockdown restrictions. An epidemiologist appeared on a German TV network and stated the country was indeed in the third wave of the pandemic, driven by the fact it has loosened restrictions in recent weeks, just as a more transmissible variant has spread. The number of cases per 100,000 reported on Tuesday were 83.7, up from 68 a week ago, and the Robert Koch Institute, Germany’s government body responsible for disease control and prevention, said that number could reach 200 per 100,000 by the middle of next month.
  • The Philippines government has said the recent surge in coronavirus infections will have limited impact on the economy as officials opt for localized lockdowns. Economic Planning Secretary Karl Chua also mentioned the rise in vaccinations should help – the government expects 2.4 million doses to arrive over the next several weeks. The Philippines will also limit foreign arrivals in its main Manila airport to 1,500 passengers a day starting March 18th. Most foreigners are still barred from entering the country.
  • Brazil is moving on to its fourth health minister since the coronavirus pandemic began in the country. President Jair Bolsonaro announced on Monday night that Dr. Marcelo Queiroga will take over for Eduardo Pazuello. Dr. Queiroga was previously president of the Brazilian Society of Cardiology, while Pazuello was a former army general before taking on the health leader role. President Bolsonaro said Dr. Queiroga will choose his working team and a transition will take place “in one or two weeks”. Brazil really needs the fourth time to be the charm as they deal with one of the darkest stretches any country in the world has seen during the pandemic. Close to 280,000 Brazilians have died from COVID-19 and currently the intensive care units in 22 out of 26 states are nearing capacity.

Covid-19 – Due Diligence And Asset Management

Private Equity Investors Fret Over Record U.S. Buyout Prices

Brief : Private equity firms are paying more for leveraged buyouts to keep pace with soaring valuations of acquisition targets, making some investors leery of whether the industry can keep delivering on promises of lucrative returns. The booming stock market and cheap debt financing have helped push leveraged buyout prices to a record high, driven by sectors that have grown as people work and stay at home during the COVID-19 pandemic, such as technology and business services. Private equity firms paid an average 13.2 times a company’s annual earnings before interest, tax, depreciation, and amortization (EBITDA) for U.S. leveraged buyouts in 2020, an all-time high, up from 12.9 times in 2019, according to financial data provider Refinitiv. Some investors are growing concerned about whether buyout firms can deliver the 15% to 20% annual returns they target when they raise new funds.

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Private Equity’s Presence in Health Care is Growing

Brief: Private equity is expanding in health care, becoming a larger source of industry capital across buyout, growth, and venture strategies, according to UBS Group’s chief investment office. Health care represented 14 percent of deal activity in private equity last year, up from 9 percent in 2007, UBS said in a note this week. Digital health companies are turning to private equity firms as their main source of capital, receiving $35 billion of investments in 2020, according to the report. Although health care accounts for 5 percent of the world’s data, UBS said the industry remains one of the least digitalized. The investing opportunity for private equity is vast in the sector, with a total 146,000 private companies dwarfing the 2,700 publicly-traded health-care companies globally, according to the report. “The universe of potential investable companies for private equity is larger,” UBS said. “Private equity is a primary source of capital for innovation, especially for early-stage drug discovery where corporate funding is often scarce.”

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Apollo to Test Partial Remote Work as Vaccinations Increase

Brief: Apollo Global Management Inc. will test giving employees the option of working remotely two days a week through the end of the year, according to a person familiar with the matter. The exact start of the experiment will depend on when Covid-19 vaccines become more broadly available, the person said. Employees will be given at least 30 days’ notice. Firms across Wall Street have been struggling with how -- and when -- to get employees back at their desks. Many are treading lightly or delaying the effort, given looming virus variants and the difficulties in obtaining vaccines. Apollo’s decision, made in response to employee feedback over the past year, is also an attempt to attract top talent, the person said. The plans were announced Thursday at a town hall meeting led by incoming Chief Executive Officer Marc Rowan and co-Presidents Jim Zelter and Scott Kleinman, the person said. “Our teams have proven to be highly productive in remote and hybrid settings,” a company spokesperson said Tuesday in a statement. “As vaccines soon allow us to welcome back more of our workforce, we will be testing a hybrid approach designed to uphold our apprenticeship model and team camaraderie, while offering our colleagues, and future colleagues, greater flexibility to do their best work.”

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Bridgewater Co-CIO Sees Inflation Spiral Forcing Fed Into Action

Brief: The world is on the verge of a new inflationary wave that could force the Federal Reserve to raise rates earlier than planned, according to the co-chief investment officer of the world’s largest hedge fund. The Biden administration’s “extreme” approach to fiscal stimulus looks set to turbocharge consumer prices while threatening the post-crisis bond and stock rally, Greg Jensen at Bridgewater Associates said in an interview. “The pricing-in of inflation in markets is actually the beginning of a major secular change, not an overreaction to what’s going on,” Jensen said. “Economic conditions and inflation will adjust faster than either markets or the Fed are expecting.” While market-derived inflation expectations have surged near a 12-year high, the Fed has signaled patience with a heating economy and projected no rate hike for the coming two years. It’s a stance policy makers are expected to reiterate at the end of their meeting Wednesday. Between the upcoming $1.9 trillion stimulus program and the ending of lockdowns, traders are betting the economic revival will force the Fed’s hand sooner. Eurodollar contracts suggest a roughly 75% chance of tighter policy by December 2022.

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Inflation is Coming – And Active Funds Aren’t Prepared, Bank of America Warns

Brief: Actively managed funds aren’t positioned for rising inflation — which is coming, according to Bank of America Corp. “They remain persistently overweight mega caps but underweight small caps,” Bank of America’s equity and quant strategists said in a research report Monday. That’s despite small-cap stocks being better positioned as the economy reopens from shutdowns during the pandemic, as well as having historically outperformed during the “mid-cycle” when inflation rises, they said.  A majority of actively managed U.S. large-cap funds failed to beat the Standard & Poor’s 500 index in 2020 for an eleventh straight year of underperformance, according to a report released last week by S&P Dow Jones Indices, a unit of S&P Global. Amid expectations for an economic rebound this year, the Bank of America strategists estimated the U.S. has now shifted into a “mid-cycle” phase.  “In this phase, small caps and value have typically outperformed large caps and growth,” the strategists said in the report. “Small caps and value stocks were also some of the best-performing assets during the inflationary period of the late 60s.”

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Why Every Real Estate Investor Will Become an Impact Investor

Brief: Covid-19 is set to dramatically accelerate the intersection of real estate and ‘impact investing’, the practice where positive and measurable social and environmental outcomes are placed alongside financial returns as the ultimate objective for fund managers and their institutional allocators. Impact strategies have attracted growing volumes of capital in recent years, reflecting an emerging consensus that investors can do well by doing good. As an asset class that is physical, local and designed explicitly with communities in mind, real estate has always had an intrinsic impact dimension and has been at the forefront of impact investing’s journey from specialist focus to mainstream product. But it may be the pandemic that proves the defining moment in this convergence – initially and most visibly in the areas of homes, healthcare and education. In addition to its enormous public health ramifications, Covid-19 has exposed a range of systemic problems in advanced economies. The experience will shock investors into profoundly rethinking their role and responsibilities, beyond solely maximising financial returns, to encompass tackling structural societal challenges.

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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