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.
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?
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.
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.
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.
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.”