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Our briefing for Tuesday October 27, 2020:
Oct 27, 2020 3:33:01 PM
- After confirming the vote for Amy Coney Barrett as the latest judge to join the Supreme Court, United States Senate members have departed the Capitol for a pre-election break, thus making it almost impossible a coronavirus stimulus package will be passed anytime soon. The latest negotiations between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have the Trump administration at $1.9 trillion for a plan, while the Democrats are at $2.4 trillion. Besides the $500 billion gap on stimulus, both sides continue to bicker on the language of the bill. When Fox News pressed a White House spokesperson on Tuesday for the prospects of a deal, she said, “we’re hoping within weeks”.
- In Canada, a survey from FP Canada, a professional organization for financial planners, found that more than two in five Canadians believe their finances won’t be able to withstand a second wave of COVID-19. The survey’s results revealed 30% of Canadians already worry they’ll never recover from the economic impact of the pandemic, while 42% don’t believe they could survive a second wave. Canadians also aren’t too optimistic their fortunes will be changing anytime soon – with just under 13% believing the country’s economy will strengthen in the next six months.
- United Kingdom Prime Minister Boris Johnson’s coronavirus restrictions are even starting to get under the skin of his own party. More than 50 Conservative members of Parliament have demanded the prime minister show a clear path out of lockdown for parts of northern Britain, which helped give the Conservative party the majority they won in last year’s election. The large group of MPs’ are warning Johnson his localized strategy is seen as disproportionally targeting areas of the north, thus deepening the divide between the region and the wealthier south of England.
- Ahead of a key meeting on Wednesday, Germany’s Chancellor Angela Merkel is preparing to propose tougher restrictions on movement and contact in order to stem the surge of the coronavirus. Chancellor Merkel will propose measures such as closing restaurants and banning major events to Germany’s 16 state premiers. However, such as her other European counterparts, Merkel does not want to go back to a lockdown such as the spring – instead wanting to keep the economy running with schools and daycares remaining open, unless they are in regions with exponentially higher infection rates.
- In the midst of a pandemic, you would think a country would make sure their doctors are being paid – however this doesn’t seem to be the case in India. Hundreds of frontline doctors, along with other healthcare workers have launched an indefinite strike in Delhi over months of unpaid salaries. The physicians have been staging sit-in demonstrations and hunger strikes for weeks to demand the authorities release their salaries that are overdue by three months. Delhi is India’s national capital and has been one of the worst affected areas in the country during the coronavirus pandemic.
- According to the region’s Chief Executive Carrie Lam, Hong Kong is drafting a law that would make COVID-19 tests mandatory for people with symptoms and other specific groups. During a weekly briefing, Lam said the enacted law would mandate tests for known clusters and high-risk groups but didn’t elaborate any further. The government had mentioned earlier in the month it was studying legal framework for mandatory coronavirus testing. The news comes as Hong Kong plans to ease some restrictions this week such as allowing restaurants to operate at a 75% capacity (up from 50%) and masks won’t be required when exercising in indoor venues.
Covid-19 – Due Diligence And Asset Management
How Fund Due Diligence Has Changed During Covid-19
Brief: Private equity relies heavily on manager skill (alpha) with a large divergence between the strongest and weakest performers in a cohort. Studies have shown that it is possible for some investors to effectively navigate this disparate market and consistently add value, through careful fund selection. Robust due diligence processes, both investment and operational, are a critical part of successful fund/manager selection, but how has this changed during the pandemic? The most obvious impact is from travel restrictions preventing on-site, in-person due diligence meetings. Investors are aware that reviewing track records and strategy can only provide a certain amount of comfort. A large part of the investment consideration is around the people, team dynamics and culture. There is a lot that can be gained from seeing how a team interacts with each other, when visiting a private equity firm’s office - it is often the smaller clues or comments before and after the formal meeting that provide the most insight. Forming a view over a conference call with the team in multiple locations is hard: there is a lack of “vibe” and nuance that can only be gleaned when in-person.
Brazil’s Coronavirus Splurge is Sparking a Rebellion in Markets
Brief: President Jair Bolsonaro’s stimulus spending spree won praise far and wide for saving Brazilians from the worst of the pandemic’s economic pain. But now, as the worst of the health crisis eases, anxiety is mounting in financial circles about how he’s going to pay for it. Investors have been unloading the currency and stocks, sparking routs that are almost unparalleled in the world this year, and they’re increasingly refusing to buy anything but the shortest of short-term government bonds. At $107 billion, Bolsonaro’s relief program looks more like the massive stimulus packages engineered by the world’s wealthiest nations than those cobbled together by Brazil’s junk-rated peers in emerging markets. Equal to 8.4% of the country’s annual economic output, it’s even proportionally bigger than the plans enacted by the U.K. and New Zealand. All of which turns Brazil into something of a Covid-19 economic case study: Can a mid-tier developing nation emulate the fiscal and monetary response of the world’s most credit-worthy countries and get away with it? Or will it sink into financial crisis?
Demonstrating Control in a Crisis: How Covid-19 has Reaffirmed the Hedge Fund Allocator Shift to Dedicated Manager Accounts
Brief: In the 12 years since the 2008 financial crisis, many large institutional investors have adopted Dedicated Managed Account (DMA) structures in order to address the challenges in commingled hedge funds that were exposed during the crisis (click here for a brief refresher). These investors were well-prepared to more effectively manage their portfolios through the market volatility which has resulted from the Covid-19 pandemic while eliminating many of the structural risks that can be exacerbated during a crisis scenario. Let’s look at some of the ways that allocators in 2020 have been able to use the benefits of DMAs to more effectively manage through the market impact of Covid-19.
Pharmaceutical Industry M&A Activity Grew by 17 Per Cent in H1 as Deal Values Drop 56 Per Cent
Brief: According to the research data analysed and published by ComprarAcciones.com, merger and acquisition (M&A) deal activity in the pharmaceutical sector rose by 17 per cent in H1 2020, disregarding the economic toll of the global pandemic. It saw a total of 41 deals during the period, but the Q2 2020 deal value total of USD3.3 billion was the lowest quarterly total since Q1 2018. According to PwC, the pharma sub-sector posted a drop of 56 per cent in deal value from H2 2019 to H1 2020. For the PLS sector as a whole (pharma, biotech and medical devices), the decline in deal value was a massive 87.2 per cent during the same period. Pharma and Life Sciences (PLS) M&A Total Deal Value Sank from USD272.9 billion to USD35 billion YoY. The total deal value for the pharmaceutical sub-sector in H1 2019 was USD100.1 billion. In contrast, its total deal value in H1 2020 was valued at USD7.7 billion.
Listed U.K. DB Sponsors Issue Profit Warnings Over COVID-19
Brief: More than 60% of listed companies sponsoring defined benefit plans issued a profit warning in the first three quarters of the year as they worked to balance cash flows with meeting pension obligations. Of the 524 profit warnings from U.K. companies, 228, or 44%, came from firms that sponsor a DB plan. Many of the warnings cited the impact of the COVID-19 pandemic as a reason, showed analysis by Ernst & Young. Also, 48 sponsors of U.K. DB funds issued more than one warning in the nine-month period. The sectors with the highest number of warnings were travel and leisure, industrial support services, construction and materials, retailers and household goods and home construction. While these sectors were the hardest hit, a third of all listed companies issued profit warnings in the nine months to Sept. 30. However, in the third quarter, listed companies that sponsor a DB plan issued 32, largely COVID-19 related, profit warnings, down 25% from the same period in 2019.
Mideast’s Top Private Equity Firm Ready to Pounce as Rivals Fade
Brief: The biggest private equity and alternative asset manager in the Middle East is on the lookout for deals after the economic fallout of the pandemic made companies cheaper to buy and scandals thinned out the competition. Investcorp Holding BSC, which manages about $34 billion, is looking to do more in the region across the health-care, transport, logistics and industrial sectors, said Walid Majdalani, the firm’s head of private equity for the Middle East and North Africa. The firm, which has channeled $1.4 billion into the region over the past decade and made a return of about 1.8 times on invested capital, is also facing less competition from other private equity investors, he said. Over the past four years, Investcorp helped sell three family-controlled companies in which it held stakes on the Saudi stock exchange. “We see a lot of opportunity to replicate what we have done already in Saudi Arabia -- the difference is now business owners are a lot more realistic about valuations,” Majdalani said. “Also, in terms of other people who do what we do and have teams on the ground, today we don’t see a lot of competition.”
