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Coronavirus Diligence Briefing

Our briefing for Wednesday July 29, 2020:

Jul 29, 2020 3:21:08 PM

  • The United States recorded its largest single day increase in deaths from COVID-19 since May. California, Florida and Texas, the nation’s three most populace states, accounted for more than half of the 1300 fatalities. In the Central Valley agriculture region of California, the Latino community has been hit hard, overwhelming local hospitals. In the most populated U.S. state, Latinos make up 56 per cent of those infected with the virus and 46 per cent of deaths. As the infections spike around the country, President Trump compared his dropping popularity with that of top infectious disease specialist Dr. Anthony Fauci. Trump jeered “nobody likes me” brushing off his handling of the pandemic as the reason, he added, “It can only be my personality.”

  • European airline officials have urged the Canadian government to ease what they call “problematic” coronavirus air travel restrictions. They are calling for a safe restoration of travel between Canada and Europe. A letter sent to the Canadian government from more than 12 international airlines states that “Canada’s continued entry restriction and quarantine requirements are becoming problematic.” For airlines in the European Union and Switzerland, regulations require reciprocity for air travel to resume, with the two-week quarantine required by all non-essential travelers entering the country, Canada and the EU are at a stalemate.

  • Only 49 per cent of U.K. companies expect to return to pre-pandemic quality of business by the latter half of 2021. A survey from Deloitte suggests that slightly less than half of businesses do not expect the country to make a speedy recovery. Of the companies polled, the majority of them feel negatively towards the prospect of adding jobs and further investments. “Major corporates are expecting a long haul back to pre-COVID levels of revenue,” said Ian Stewart, Deloitte’s chief economist. Likewise, more than 53 per cent of manufacturers in the U.K. intend to make redundancies in the next year according to a survey by manufacturing trade body Make UK.

  • Spanish authorities have backtracked on a controversial “immunity card” that would allow people exhibiting specific anti-bodies to frequent high-traffic areas such as gyms and bars. The previously announced card has now been squashed by the government after backlash from epidemiologists, politicians and civil rights groups. In a press conference after a cabinet meeting, deputy for the Madrid authority, Ignacio Aguado conceded that due to its swift condemnation, the cards would not be issued. In the past week Spain has seen a drastic surge in infections with nearly 1200 new cases being reported on Wednesday.
  • Russia is slated to approve its first coronavirus vaccine by early August and will be administering it to hospitals and front-line workers later that month. Kirill Dmitriev, head of the Russian Direct Investment Fund that is providing financing for the vaccine has previously claimed it is safe, despite multiple assertions that it is being rushed into distribution. With new cases numbering at roughly 5000 a day, Russian President Vladimir Putin has said that the country is preparing for a second wave, suggesting that the situation “may worsen.”  The country has reported over 828,000 cases of the virus since the pandemic began.

Covid-19 – Due Diligence And Asset Management

High-end Dialogue Between Shi Bo of Southern Asset Management and Blackstone CEO Stephen Schwarzman

Brief: On July 21, 2020, Caixin International Roundtable invited Mr. Stephen A. Schwarzman, Chairman, CEO & Co-founder of The Blackstone Group, to the High-end Dialogue. Mr. Shi Bo, Deputy General Manager & Chief Investment Officer (Equity) of Southern Asset Management, had a dialogue with Mr. Schwarzman on the topic “What It Takes in a Post-Pandemic World”. During the dialogue session at the roundtable, Mr. Schwarzman introduced how Blackstone navigated the coronavirus crisis, attributed the success of Blackstone to timely learning from mistakes and resolutely capturing opportunities over the past 35 years and also shared his current focus of investment. Mr. Shi commented that Mr. Schwarzman is successful because he is contrarian and open-minded, giving him enough foresight to predict how to make the right investment. And, these two factors can also help us seek out opportunities from a crisis and thus invest successfully. Besides, Mr. Shi talked with Mr. Schwarzman on other issues, including the rationale behind Blackstone’s real estate investment, China’s real estate sector outlook and possible changes in the post-pandemic business models.


How COVID-19 has exposed the perils of for-profit seniors’ housing

Brief: In May 2020, Orchard Villa, a long-term-care home in Pickering, made headlines for a bad COVID-19 outbreak. Just two months into Ontario’s lockdown, 77 patients in the 233-bed home had died. A report by Canada’s military revealed horrifying conditions, short staffing, and neglect. Some family members blamed for-profit ownership, arguing that COVID-19 had simply exposed, in tragic fashion, the impact of prioritizing profits in the operation of seniors’ housing. Notably, Orchard Villa had been purchased in 2015 by private-equity firm Southbridge Capital, adding it to Canada’s growing stock of “financialized” seniors’ housing — bought by financial firms as an investment product. This has followed the trend of what’s known as financialization in the global economy, in which finance has come to dominate in the operations of capitalism, prioritizing investor profits over social, environmental, and other goals. In seniors’ housing, financialization has arguably intensified the profit-seeking approach of private owners, with harmful outcomes for residents and workers alike.


Will COVID-19 Ignite Private Equity's Dry Powder?

Brief: The COVID-19 pandemic has pushed global financial markets into a prolonged period of volatility and uncertainty, reminiscent of the 2007-08 financial crisis. Many businesses have languished since March. Private equity professionals are optimistic for the industry to adapt and play a meaningful role in a global economic recovery. Takeaways: Private equity firms are sitting on a highly concentrated source of capital available for deployment given fruitful fundraising efforts in recent years. The pandemic has spawned a number of potential investment opportunities from: (a) assisting existing portfolio businesses; (b) investing in emerging industries that have thrived in light of the current economic conditions; and (c) purchasing distressed assets or providing businesses with additional capital. Powder Reserves: Generally speaking, liquidity becomes a primary concern during market turmoil as financial institutions begin to retreat from their traditional role as market makers for bonds and financial assets. The "Big Five" banks of Canada have recently announced billions set aside during the second quarter of 2020 as loan loss provisions, concentrating on helping existing borrowers avoid default instead of extending further credit.


Northern Trust Universe Data: Institutional Investment Returns Rebound Amid COVID-19 Market Recovery

Brief: Institutional plan sponsors saw significant investment gains during the second quarter of 2020, according to the Northern Trust Universe, with a median plan return of 10.6% as markets rebounded from a massive sell-off in equities at the start of the COVID-19 pandemic in the first quarter of the year. The Northern Trust Universe tracks the performance of more than 320 large U.S. institutional investment plans, with a combined asset value of more than $1 trillion, which subscribe to performance measurement services as part of Northern Trust's asset servicing offerings. Public Funds had a median return of 11.14% for the second quarter, outpacing the other institutional segments tracked by Northern Trust. Corporate ERISA pension plans returned 10.55% at the median and Foundations and Endowments produced a 9.24% median return in the quarter ending June 30, 2020. "Investors’ willingness to take on additional risk propelled returns in the equity and corporate fixed income sectors, bringing those markets close to their all-time highs by the end of the second quarter," said Mark Bovier, regional head of Investment Risk and Analytical Services at Northern Trust.


Fintech Funding Slides as Coronavirus Casts a Chill with Venture Capitalists

Brief: Aritra Chakravarty, founder of London-based online accounts and investments provider Dozens, admits it’s a tough time to be seeking up to 15 million pounds ($19 million) for a start-up. “It’s definitely a bearish market” said Chakravarty, who is seeking funding for Project Imagine, the company behind his fintech ventures. He is looking to crowd funding and government-backed COVID 19-support schemes for technology firms to make up for any reticence from venture capital investors. Data suggest his caution is warranted. Fintechs, which have been one of the hottest draws for venture capitalists in recent years, raised $6.3 billion in the second quarter, down 41% on the year, according to data from analysts at Forrester shared with Reuters. Investors and entrepreneurs say that while the COVID-19 pandemic has boosted demand for fintechs in areas such as digital payments and online trading, it has hurt more vulnerable sectors such as online lending.


COVID-19 took a bite out of Canada's startup M&A, but deals may be coming soon

Brief: The number of deals are down, but the chatter’s not. The COVID-19 pandemic and the accompanying economic crisis have significantly reduced the number of merger and acquisition deals, especially in the Canadian startup space. But some investors and experts speaking to the Financial Post say pent-up demand and economic upheaval could lead to a wave of activity in the next little while. “There’s no question that the M&A market is heating up,” said Rick Nathan, senior managing partner with Kensington Capital, a Toronto-based investment firm that pursues a mix of venture capital investment and private equity. Kensington has backed such Canadian tech firms as D-Wave, TouchBistro and Pandora. “I certainly can’t get into anything specific, but I can tell you that several of our portfolio companies are actively considering different kinds of M&A. That could be bulking up by buying something, or it could be that they are thinking about putting themselves in play to sell the company.” Nathan said three companies in Kensington’s portfolio have been involved in M&A activity in just the past six weeks.


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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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