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Covid-19 Diligence Briefing

Our briefing for Thursday July 2, 2020:

  • As the United States hit 50,000 new coronavirus cases a day, including a record 10,000+ in Florida, the government has purchased nearly the entire stock of a drug proven to be effective to severely ill patients with the virus. According to a news release, the Department of Health and Human Services (HHS) buyout of Gilead’s remedesivir represented 100% of projected production for July, followed by 90% in August and September. HHS Secretary Alex Azar called the move “an amazing deal” struck by United States President Donald Trump. The move wasn’t as well received in the rest of the world with the European Union reaching out to Gilead Sciences Inc. about “reserving a significant number of doses” for its block member states.

  • In Canada, the country’s most populous province looks to move into Stage 3 of its COVID-19 reopening plan. Ontario’s 24 of its 34 public health units have been in Stage 2 of its reopening plan for nearly three weeks. While new cases are in the 150-range for the province, more than half of Ontario’s 34 public health units currently have fewer than 10 active cases. Ontario’s Health Minister Christine Elliott noted while they would like to move into the next stage as soon as possible, the government still needs another week of data before they make their decision.

  • In the United Kingdom, the Office for National Statistics (ONS)most recent report shows the fall of coronavirus infections across England leveling off. The ONS says their data shows the current trend as being flat, which is significant as the country plans a significant easing of their restrictions this weekend with pubs and restaurants opening on Saturday.

  • German Chancellor Angela Merkel has called the fallout from the coronavirus as Europe’s “most difficult situation in its history.” Chancellor Merkel has called on the EU member states to quickly come to an agreement on the $750B euro recovery fund to counter the economic consequences of the coronavirus. The EU nations are still fighting over the volume, financing and type of aid and have a little over two weeks to get on the same page when the 27 member states meet for a summit on July 17th and 18th.

  • Trying to avoid a second full lockdown, Israel is instead imposing targeted lockdowns in neighbourhoods with COVID-19 flare-ups. Earlier this week, Israel experienced a single day record for coronavirus cases in back-to-back days. The country’s first lockdown left a third of the population looking for unemployment insurance.

  • The Philippines announced Thursday they will release 15,000 prisoners in hopes to ease congestion and contain the spread of the coronavirus. The majority of the prisoners being released had committed light or bailable offences. Since Rodrigo Duterte became President in 2016, his war on drugs have helped fill the country’s prisons. Manila and Cebu City remain the coronavirus hotspots in the country and earlier this week, President Duterte said Cebu City will remain in lockdown for two more weeks.

  • Tokyo, Japan’s 107 confirmed cases on Thursday were the highest noted in nearly two months. Despite this, government officials say they have no plans of reintroducing a state of emergency. Home to 14 million people, Tokyo has seen at least 50 new cases every day for the past week. Government officials had been hoping with the state of emergency lifted on May 25th that those numbers would be fewer than 20 per day. Because of this, Tokyo government officials have decided to move away from numerical targets and instead focus on expert advice on how to rein in the virus to avoid more economic damage.

Covid-19 – Due Diligence And Asset Management

Investor Who Made Billions with GFC ‘Big Short’ Bet Quits Hedge Funds

Brief: Just over a decade after John Paulson shot to fame and fortune, he's become the latest big-name money manager to quit the hedge-fund business, saying this week he's converting his firm into a family office. Paulson never managed to sustain the success and notoriety he found by betting against the housing market in the run up to the last financial crisis. Now, in the midst of an another period of economic turmoil, he's returning outside investors' money to focus on his own fortune, which the Bloomberg Billionaires Index puts at $US4.4 billion ($6.4 billion). He joins a list of industry legends who have recently called it quits amid a generational shift. Louis Bacon said in the past year that he was stepping back, as returns that were once routinely in the double digits dribbled away. David Tepper also said he was transitioning his firm, though he planned to keep a few outside clients. Stan Druckenmiller and George Soros, two legends of the 1990s, were among the first to switch to the family office model. The move also underscores the wider tumult in the investing world, where fund managers who for decades bestrode Wall Street as revered money makers find themselves struggling to compete with computer-driven, index-tracking funds that closely follow seemingly ever-rising markets at a fraction of the cost of traditional offerings.

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Top-Performing U.S. Equity Funds This Year Are Betting On a Transformed World

Brief: U.S. equity funds that were able to best weather the global economic upheaval from the coronavirus pandemic this year are turning to healthcare, e-commerce and electric vehicle stocks as they look ahead to 2021. Few expect a quick economic recovery or containment of the virus that would allow a widespread return to office buildings and schools. Instead, top-performing fund managers say they are positioning their portfolios to benefit from an increase in new forms of technology as businesses and consumers change their habits amid a lingering pandemic. “It’s depressing to see the data that among the developed world, we’re having the worst situation, but we’re looking for the big industry trends that will persist no matter how long (COVID-19) goes on and will continue afterwards,” said Michael Lippert, whose Baron Opportunity fund is up 30.7% for the year to date. As a result, Lippert has been buying shares of warehouse company Rexford Industrial Reality Inc as a play on the growth of ecommerce and data, and cybersecurity firm Splunk Inc in anticipation that remote work will persist well into next year. Shares of Rexford are down nearly 10% in the year to date, while shares of Splunk are up nearly 33%.

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Rescue Cash Too Hot for KKR Proves Irresistible to Many PE Peers

Brief: Even inside battle-scarred KKR & Co., entering the political fray was enough to stoke unease. As several of the private equity titan’s portfolio companies got loans from an emergency U.S. program aimed at helping small businesses survive the coronavirus pandemic, executives at the firm’s New York headquarters issued a blunt message: Return the money to taxpayers. Yet across the cash-rich private equity world, many firms pushed ahead, benefiting from the $669 billion Paycheck Protection Program run by the Small Business Administration and Treasury Department, according to lawyers and lenders with knowledge of the strategies. Now, some of those firms face the prospect of tough public scrutiny, as the Trump administration acquiesces to pressure from lawmakers to name borrowers who drew potentially forgivable loans from taxpayers. After the government broadly excluded private equity firms from the program, dozens found ways to steer around the restrictions, often adjusting governance or ownership arrangements with portfolio companies in sectors including entertainment, fitness, sports and dermatology, the people said, asking not to be named discussing confidential arrangements.

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Bridgewater’s Dalio Says Capital Markets No Longer ‘Free’

Brief: Recent central bank actions mean capital markets are no longer “free,” according to Bridgewater Associates’s Ray Dalio, founder of the world’s largest hedge fund. “Today the economy and the markets are driven by the central banks and the coordination with the central government,” said Dalio, speaking at the Bloomberg Global Asset Owners Forum on Thursday. As a result, “capital markets are not free markets allocating resources in traditional ways.” The Covid-19 pandemic brought economic activity to a standstill and sent markets spiraling downward in March. The Federal Reserve’s unprecedented multi-trillion dollar response eased concerns and helped fuel a shock recovery in financial markets even as the U.S. economy continues to struggle. Dalio said the U.S. now has the worst wealth gap since the 1930s, adding that central banks will need to continue to pump money into the economy. “You’re going to see central bank balance sheets explode, they have to because the choice is the sinking ship,” he said. Dalio also said that investors should favor stocks and gold over bonds and cash because the latter offer a negative rate of return and central banks will print more money.

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Gundlach Sounds off on V-Shaped Recovery Prospects: ‘Highly Optimistic’ at Best

Brief: Billionaire bond investor Jeffrey Gundlach believes a quick economic recovery is "highly optimistic" — and probably not even plausible given that a rebound to pre-coronavirus levels will take at least a year to materialize.  Themarket’s powerful surgefrom its March lows has been propelled in part by investor expectations of a rapid“V-shaped” rebound, especially as coronavirus lockdowns get eased. However, Gundlach told Yahoo Finance in an interview that scenario is unlikely for a number of reasons. "I think that whatever the consensus is on the so-called shape of the recovery, I'm taking the under," the CEO of $135 billion DoubleLine Capital, said on Wednesday.  According to Gundlach, a sharp recovery from asteep, depression-like plunge "basically implies is that you can take 20% of the entire workforce...[and] put them on unemployment benefits, have them produce nothing,” the investor said, referring to the staggering post-lockdown job losses. To date,nearly 50 million peoplehave filed jobless claims in the wake of the COVID-19 crisis.

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You’re Doing It Wrong: A Tail-Risk Hedger Calls Out His Industry

Brief: Portfolio hedges aren’t insurance, Ari Bergmann wants to point out. Bergmann created some of the first derivatives while at Bankers Trust in the 1990s, and he is passionate that tail hedge managers are shooting themselves in the foot by trying to get investors to see the strategies as insurance with a small annual cost. “If you make money on insurance, you are an arsonist,” he said. During an interview, Bergmann, who founded Penso Advisors in 2010 to provide risk mitigation strategies, got on a roll. “Why do you need insurance? The market came back. That tells you that you don’t need insurance. Insurance doesn’t help. Between the Federal Reserve and the government, you have the best insurance. That’s for free and the taxpayers are paying you.” Brevan Howard owns a minority stake in Penso. Tail-risk hedging funds are designed to profit from rare episodes like the global financial crisis or March’s Covid Crash. They took off in 2008 as they generated profits even as stock and bond markets fell around the world. Nassim Nicholas Taleb’s 2007 bestseller The Black Swan, which argued that unexpected events are more common than most people think, gave these hedge funds added tail wind.

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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.

Our briefing for Tuesday June 30, 2020:

  • In the United States as coronavirus cases spike in multiple states, lockdowns are now either on hold, or tightening for about 40% of the American population. A Financial Times article notes more than 25% of states have begun tightening restrictions, while at least 16 other states have postponed their further reopening indefinitely. During a Senate health committee meeting on Tuesday, CDC Director Robert Redfield called on Americans to start adopting and embracing the use of face coverings as a sign of personal responsibility, and to help slow the spread of COVID-19.

  • In Canada, the mayor of the country’s most populous city wants to make mask wearing mandatory in all indoor spaces. During a news briefing on Tuesday, Toronto Mayor John Tory, along with the medical officer of health want city council to adopt a temporary by-law. If the by-law is passed, mandatory face coverings in indoor spaces could go into effect as early as July 7th and remain in place until September where city council could extend the order if necessary. The Toronto mayor’s move is in contrast to Premier Doug Ford who earlier rejected a mandatory mask policy for the entire province when prompted by mayors throughout the Greater Toronto and Hamilton areas. These densely populated areas have been some of the hardest hit by the coronavirus in Canada.

  • United Kingdom Prime Minister Boris Johnson followed through on his promise of a plan to “build back better and to build back bolder” from the coronavirus pandemic. Prime Minister Johnson outlined the government’s most radical planning changes since World War II, which will include investments in road and rail projects, new homes and invest in towns that felt left behind with green buses and broadband internet. “We cannot continue simply to be prisoners of this crisis,” said Johnson. The announcement is juxtaposed with the mayor of Leicester urging residents to stay home and demanding  government help due to a revived COVID-19 outbreak.

  • The European Union announced their list of 14 countries that will be allowed into the EU’s 27 member states, along with four other nations as of July 1st. Those allowed entry include Canada, Australia, Japan, New Zealand and South Korea. Not making the first cut as noted on Monday, the United States, along with Russia, Brazil and India. Countries considered for the EU’s safe list are also expected to lift any bans those countries might have on European travellers. However, CBC is reporting Canada won’t be one of those countries; keeping their borders closed to foreign nationals for at least another month. The new list of permitted nations is to be updated every 14 days with either countries being added or dropped depending on how nations cope with their coronavirus cases.

  • India will begin administering a locally made COVID-19 vaccine starting in July. Hyderabad-based firm Bharat Biotech will have an unspecified number of people taking the vaccine after tests in animals suggested the drug named Covaxin was safe and triggered an effective immune response. Covaxin was developed from a strain of the virus that was isolated locally and weakened under laboratory conditions.

  • In Australia, Victoria State Premier Daniel Andrews has subjected more than 30 Melbourne neighbourhoods to a lockdown that will last until Wednesday July 29th. The areas locked down are home to 300,000 of the city’s five million residents. Residents in the restricted areas will be allowed to leave their homes only for work, school, exercise and to buy food, or other essential items. People from other locations will be prevented from entering the hardest hit areas with police on patrol conducting random checks. The southern state of Victoria has seen 233 recorded COVID-19 cases since Thursday, most of those in Melbourne.

Covid-19 – Due Diligence And Asset Management

Quarterly Hedge Fund Liquidations Rise to Highest Since 2015

Brief: Hedge fund liquidations in the first quarter jumped to the highest level in more than four years as the coronavirus pandemic triggered sharp losses across global markets. About 304 funds shuttered in the first three months of the year, the most since the fourth quarter of 2015, according to a Hedge Fund Research Inc. report released Tuesday. That represents an increase of more than 50% from the 198 liquidations in the last quarter of 2019. Meanwhile, about 84 hedge funds opened in the three-month period, the lowest quarterly estimate since the financial crisis, when startups totaled 56 in the fourth quarter of 2008. Closures have exceeded launches for seven consecutive quarters, according to HFR. Hedge funds have faced a tough money-raising environment for much of the last decade as investors revolted over high fees and lackluster returns. Now startups are dealing with the turmoil caused by lockdown restrictions and social distancing efforts designed to combat the Covid-19 crisis. But things may be turning around as institutional investors gear up for a return to choppy markets. A Credit Suisse Group AG report issued this week found that net demand for hedge funds was at its highest in at least five years going into the second half of 2020.

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Goldman Sachs Says a National Mask Mandate Could Slash Infections and Save Economy from a 5% Hit

Brief: A federal face mask mandate would not only cut the daily growth rate of new confirmed cases of Covid-19, but could also save the U.S. economy from taking a 5% GDP hit in lieu of additional lockdowns, according to Goldman Sachs. Jan Hatzius, Goldman’s chief economist, said his team investigated the link between face masks and Covid-19 health and economic outcomes and found that facial coverings are associated with sizable and statistically significant results. “We find that face masks are associated with significantly better coronavirus outcomes,” Hatzius wrote in a note to clients. “Our baseline estimate is that a national mandate could raise the percentage of people who wear masks by 15 [percentage points] and cut the daily growth rate of confirmed cases by 1.0 [percentage point] to 0.6%... He first focused on to what extent, if at all, the actual use of face masks reduces the infection rate of Covid-19 by looking at differences in population behavior by state. For example, Hatizus found only about 40% of respondents in Arizona say they “always” wear face masks in public, compared with nearly 80% in Massachusetts.

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Investors Pick Hedge Funds to Lead Them Through Choppy Markets

Brief: Hedge funds are back in demand as institutional investors including pensions and endowments gear up for a return to choppy markets. Investors are favoring hedge funds heading into the second half of the year, with the industry garnering the most interest among 10 major asset classes, according to a Credit Suisse Group AG report released this week. Net demand, or the percentage of respondents increasing allocations minus the proportion decreasing them, is the highest in at least five years at 32%, the data show. “Given manager performance and the wider return dispersion we’re seeing, this is an environment where hedge funds can shine and separate themselves from the pack,” Joseph Gasparro, who helps hedge funds build capital as head of Americas capital services content at Credit Suisse, said in a telephone interview. “The incredible run-up in equities from late March to early June, the ‘easy money’ if you will, is likely not going to repeat. The environment going forward will include more uncertainties, with investors relying on hedge funds to help navigate.” Hedge funds have largely held their own as the spread of the coronavirus pandemic halted the global economy, ending Wall Street’s longest-ever bull market and seizing up credit markets…

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Jefferies CEO Says ‘No One is Under Pressure to Come Back’

Brief: Jefferies Financial Group Inc. Chief Executive Officer Richard Handler, fresh off the firm’s record quarterly revenue from trading bonds despite the challenges of working remotely, is taking pressure off his traders and bankers to return to the office anytime soon. “I am in awe of how our people became a virtual firm within days of learning about Covid,” Handler said in a phone interview Monday after posting results for the fiscal second quarter. “Our people will work from home until they feel safe coming back.” Handler is emphasizing flexibility a week after larger rivals including JPMorgan Chase & Co. and Goldman Sachs Group Inc. began recalling the first waves of employees to their towers. His New York-based investment bank lost its longtime chief financial officer, Peg Broadbent, from coronavirus complications in the early weeks of shutdown that forced much of the industry to work at home. “While we all want to come back,” Handler said, “no one is under pressure to come back immediately.” The firm’s fixed-income and equity traders brought in $730 million in the three months ended May 31, almost double the amount a year earlier.

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Pandemic Puts Direct Lending in Danger Zone

Brief: Players in the direct lending market are sharpening their focus on portfolios, as companies battered by the coronavirus pandemic call on their creditors for help and concerns over deal structures intensify. The pandemic hit following years of growth in the direct lending asset class. A May report by Preqin said the asset class has been "the success story of the decade" in North America, with assets growing to $222 billion as of June 2019, compared with $85 billion at the end of 2007. The COVID-19 pandemic, however, could lead to the asset class falling "out of favor," with opportunities set to be focused on distressed debt and other strategies. "Direct lending is likely to become more attractive during a recovery period, as companies seek financing to get back on their feet," the report said. In Europe, direct lending deal volumes are expected to be less healthy than last year, Deloitte LLP said in its Deloitte Alternative Lender Deal Tracker Spring 2020 report. Deals totaled 484 in 2019, a 13.1% increase on 2018 numbers. European direct lenders raised the equivalent of $32.8 billion in capital to deploy, topping the previous record of $27 billion in 2017.

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Wall Street Theories on Billions Sloshing Through Schwab Funds

Brief: More than $8 billion is on the move in Charles Schwab Corp.’s exchange-traded funds, stirring speculation the firm could be adjusting the packaged strategies it offers clients as markets gyrate amid the pandemic. Over the past seven trading days, $4.6 billion has exited from a group of four ETFs including Schwab’s fundamental equity and intermediate-maturity Treasury funds. The firm’s emerging-market equity and inflation-focused bond offerings were among four products to rake in $3.9 billion at the same time. Schwab is the biggest holder of all of the funds, according to the latest available filings. The size of the flows -- more than half of the funds posted at least one record daily flow in the period -- and the broad range of ETFs involved is stirring speculation that Schwab is shifting exposure in its model portfolios. Such prefabricated packages of ETFs offer a one-stop solution to a client’s investment needs. Instead of spending time selecting individual funds, investors can pick a portfolio aligned with their goals and risk tolerance. It’s unclear how much cash follows such models, but it’s thought that when one makes a strategic shift, billions of dollars can move between ETFs.

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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.

Our briefing for Monday June 29, 2020:

  • As the global coronavirus infection count has now surpassed 10 million worldwide, New York state governor Andrew Cuomo is calling on United States President Donald Trump to issue an executive order requiring everyone to wear masks. Once the epicenter of the coronavirus pandemic, governor Cuomo had to use a slow and steady approach to help bend the curve, while other states fast-tracked their reopening, and are now experiencing similar numbers to what New York state felt a few months ago.

  • North of the border, as Canadians see what Americans are going through, Prime Minister Justin Trudeau is in no hurry to reopen the land border with the United States. Referring to the travel restrictions that are set to expire next month, Prime Minister Trudeau said he would continue working with America on what steps need to be taken into the month of August. Canada’s chief public health officer said on Monday the coronavirus is largely under control in the country but warned lifting pandemic measures too soon without a proper system of contact tracing and isolation would likely lead to relapses.

  • United Kingdom Prime Minister Boris Johnson referred to the coronavirus pandemic as an outright disaster and nightmare for the country while being interviewed on Times Radio Monday. The Johnson government is set to roll out its next phase of economic response this week, which will emphasize the ability to “build, build, build” its way out of the crisis. Prime Minister Johnson said now was not the time for a full inquiry into his government’s response to the coronavirus as the 43,000 deaths suffered only trails the United States and Brazil, according to statistics from Johns Hopkins University.

  • The European Union (EU) will issue a list of 15 non-EU states that will be allowed to travel into the block on Tuesday. The first phase of travel partners must show data they are handling the pandemic at least as well as the EU. That list right now includes China, where the virus first originated, as long as China reciprocates and allows EU nations to travel into their country as well. Not expected to be on the EU’s initial list of 15 countries; the United States.

  • The World Health Organization (WHO) announced during a Monday news briefing they will be sending a team of officials into China to better understand how the coronavirus originated. WHO leaders hope the visit will help better prepare them for the future. Elsewhere in China, CanSino Biologics have produced a vaccine that has received approval to be used on the Chinese military. The news comes after CanSino’s vaccine had undergone successfully phase one and phase two trials in the country.

  • Drug maker AstraZeneca has struck a $127M deal with Brazil for the production of its potential COVID-19 vaccine. Under the agreement, Brazil will start to locally manufacture AstraZeneca’s experimental vaccine. The country’s health official said they will look to produce 30 million doses of the vaccine with half of it being ready by December and the other half to arrive a month later. Brazil trails only the United States for coronavirus cases (1.2 million) and deaths (55,000+).

  • In yet another potential sign of how easy the coronavirus travels, Australian officials have concluded the formerly innocent act of sharing a cigarette lighter may be to blame for the country’s latest outbreak. The Victoria Premier revealed over the weekend one of the cases has been traced back to a Melbourne hotel, which was also acting as a quarantine space for returning travellers. While no new cases were linked to travellers, virus spread may have occurred when hotel workers shared the cigarette lighter. Victoria state recorded its largest daily outbreak since April 11th on Monday and is seriously considering reimposing social distancing restrictions to help curb ongoing spread.

Covid-19 – Due Diligence And Asset Management

BlackRock Sees Big Risk of U.S. Easing Pandemic Support Too Soon

There is a significant risk that the policy response to the coronavirus crisis in the United States could be scaled back too soon, BlackRock Investment Institute’s global chief investment strategist Mike Pyle said on Monday. Pyle said that although there had been a strong U.S. fiscal and monetary policy response to COVID-19, there were concerns about the outlook. “There are significant risks around the U.S. retrenching (policy support) too soon,” he said during a presentation on the BlackRock Investment Institute’s mid-year outlook. Pyle said the firm was cautious on emerging markets because of a reduced capacity on the policy front to respond to the coronavirus shock compared with more developed economies, as well as a challenging public health dimension, especially in Latin America. Scott Thiel, chief fixed income strategist at the BII, said emerging markets also faced a greater risk of a policy mistake.

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Hedge Fund Score Big Gains on Dividend Trades That Burned Banks

Brief:One of the largest financial market dislocations of the Covid-19 era has generated big gains for hedge funds that bet the turmoil would prove short-lived. The winning trades involved dividend futures, which derive their value from shareholder payouts by companies in benchmark stock indexes. Historically among the most stable of equity-linked investments, the securities have swung even more wildly than share prices over the past three months. One of the most heavily traded contracts in Europe tumbled almost 60% in March as a spate of dividend cuts spooked investors and banks dumped futures to hedge exposures at their structured product units. While firms including BNP Paribas SA, Societe Generale SA and Natixis SA lost money on their positions in the first quarter, the sell-off created buying opportunities for a clutch of bargain hunters. Ovata Capital Management, Oasis Management Co., York Capital Management and AM Squared Ltd. all scored double-digit returns on dividend futures as the securities snapped back from the March rout, buoyed by unprecedented government stimulus. The bets have helped the funds post year-to-date gains, bucking a 5% slump through May for the Bloomberg All Hedge Fund Index.

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Asset Owners Take a Break From Virus-Ravaged Market

Brief: Real estate consultants and some investors are considering pressing pause on certain investments as the COVID-19 health-care crisis and recession batter the asset class. One Los Angeles-based pension fund has paused some real estate investments in part due to concerns around the valuation of properties. On June 23, the Los Angeles City Employees' Retirement System's board adopted a fiscal year 2021 real estate plan. Recommended by its consultant, Townsend Group, the plan said that whenever possible the $18 billion pension fund should halt new commitments to open- and closed-end funds with pre-specified portfolios as well as pause in funding recent open-end investment commitments because these assets' carrying value may not reflect current, lower market values.  LACERS has a 7% target allocation to real estate and $777 million invested in that asset class. The pandemic has already rocked the real estate industry. Open-end fund redemption queues are elevated at roughly $14.4 billion, doubled since Dec. 31, the Townsend report to LACERS said.

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Hedge Funds Are Rushing to Get Out of Bearish U.S. Stock Bets

Brief: Fast-money hedge funds are rushing to cover their bearish U.S. stock bets even as the equity rally threatens to break down. Speculative investors bought a net 206,227 S&P 500 Index E-mini contracts in the week to June 23, the most since 2007, according to the latest Commodity Futures Trading Commission data. Net short positions in the contracts were at their highest in almost a decade as the U.S. equity rebound pushed the benchmark back toward record territory. The surge in short-covering comes as traders wrestle with what to do after a pause in one of the most unloved rallies in recent financial history. The S&P 500 had climbed more that 40% from its late-March low to early June, despite concerns that investors were over-optimistic about the pace of the U.S. economic recovery. U.S. stocks fell almost 3% last week as the coronavirus spread showed no signs of slowing down. Other measures of trader positioning also point to an increase in short-covering activity. Short interest as a percentage of shares outstanding in the $266 billion SPDR S&P 500 ETF Trust had fallen to 4.9% Friday from 6.7% at the end of May, according to data from IHS Markit.

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Knighthead, Certares Plan $1 Billion Fund for Travel Industry

Brief: Knighthead Capital Management and private equity firm Certares Management are raising $1 billion for a new fund that would seek to capitalize on a rebound in travel businesses disrupted by the Covid-19 pandemic, according to people with knowledge of the plan. Knighthead, the investment company led by co-founder Tom Wagner, will be equal partners with Certares in the venture, said the people, who asked not to be named because the plans aren’t public. The fund would take about 10 to 15 debt and equity positions over a five-year period. Representatives for Knighthead and Certares, both based in New York, declined to comment. Knighthead is one of several funds seeking to take advantage of market distortions caused by the pandemic, which caused governments worldwide to suspend travel and order residents to stay at home to fight the virus. The amount of travel-related debt trading at distressed levels swelled amid the lockdowns. For companies in the Americas alone, distressed debt issued by airlines, hotels and leisure and transportation businesses has increased more than five-fold to $28 billion since early March, data compiled by Bloomberg show. Knighthead, which has around $4.1 billion in assets under management, specializes in event-driven distressed credit and special situations across a broad array of industries.

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It’s Gotten Harder to Divorce Your GP

Brief: As established managers and mega funds increasingly dominate the private capital industry, certain investor protections may be becoming less common. This includes no-fault divorce clauses, according to Preqin’s 2020 report on private capital fund terms. These provisions allow limited partners to remove and replace their general partner or terminate their limited partner agreement, even if the situation is not covered in the terms of the agreement. Such clauses are considered “critical” by many limited partners, according to a recent survey by the Institutional Limited Partners Association. “While only 25 percent of respondents have experienced a GP removal within the last five years, ILPA members consider no-fault removal provisions to be an essential investor protection worth fighting for,” the group said in a report on the findings. “Whereas for-cause removal provisions can only be triggered by an unattainably high bar, no-fault provisions are more straightforward to execute and serve as a guaranteed forcing mechanism in cases of egregious mismanagement or behavior.” According to the ILPA survey, 62 percent of group members had these provisions in place for at least half of the funds they invested with last year, while 37 percent had no-divorce clauses in more than 75 percent of the funds they allocated to.

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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.

Our briefing for Friday June 26, 2020:

  • The United States has reached a new daily high for COVID-19 infections at 40,000 surpassing a record set at the height of the pandemic in April. Areas of the Southwest have been hit especially hard with states like Texas and Arizona going back on reopening measures. The high numbers of confirmed cases are believed to be in part due to increased testing, but experts are suggesting the virus is seeing a second surge. According to John Hopkins University, the previous daily record was set on April 24th with 36,400 confirmed cases.

  • In Canada, the total number of confirmed cases has reached 102,600, with Quebec and Ontario continuing to have the highest number of infections. However, Canada has begun to show signs of improvement with new confirmed cases dwindling to numbers not seen since the beginning of the pandemic in March. Experts foresee a second wave in Canada to be more sporadic than the first, with outbreaks being isolated compared to widespread infections seen at the height of the pandemic. Dr. Isaac Bogoch, an infectious disease physician and scientist with Toronto General Hospital says, “It’s going to be a game of whack-a-mole.”

  • Deaths from COVID-19 in the United Kingdom have surpassed 43,000, one of the highest in the world. However, with infections on the decline, Parliament has begun to clarify regulations for re-opening businesses. New legislation will allow pubs and restaurants to serve patrons outside to insure social distancing. As of next Monday, U.K. residents will be allowed to travel for holidays without the need to self-quarantine upon return. The countries on the approved holiday list include France, Spain and Italy, while trips to the U.S. will be on hold until at least December.

  • Brazil is second behind only the United States for deaths relating to COVID-19 accumulating a toll of over 50,000. With over a million confirmed cases, Brazil is still without a health minister after the previous two ministers were fired for disagreements with President Jair Bolsonaro. The president has also been criticized for refusing to wear a protective face mask in public, calling social distancing “a job-killing measure” and promoting the anti-malarial drug hydroxychloroquine despite strong evidence against its use for treating COVID-19.

  • Also setting a new daily record, India confirmed an additional 17,296 cases of COVID-19 in the last 24 hours. However, according to the Union Healthy Ministry figures, over 58 per cent of those previously infected have recovered. In the last five days the country has seen the third highest amount of new cases globally and has reported the fourth highest amount of deaths. Makeshift hospitals have been set up in city centers with doctors tending to cardboard beds numbering in the tens of thousands. Lockdowns have been put in place across the country with most districts seeing curfews of 7 P.M.

  • The United Arab Emirates and China have launched a Phase 3 clinical trial for a COVID-19 vaccine according to state media in the two countries. An agreement was signed on Wednesday by an artificial intelligence company in the U.A.E and a leading pharmaceutical company in China. Their efforts to create a vaccine have surpassed the first two phases which see small groups of people inoculated with the third phase of the process typically involving tens of thousands test subjects. The World Health Organization says there are currently sixteen candidate vaccines in clinical trial worldwide. 

Covid-19 – Due Diligence And Asset Management

Wall Street falls as Fed action weighs on bank stocks, virus cases surge

Wall Street’s major indexes dropped on Friday as the United States set a new record for a one-day increase in coronavirus cases and bank stocks fell following the Federal Reserve’s move to cap shareholder payouts. The S&P 500 banks sub-index declined 3.9% after the Fed limited dividend payments and barred share repurchases until at least the fourth quarter following its annual stress test. In the previous session, banks stocks had powered Wall Street’s main indexes higher, helping them offset investor fears due to rising virus infections in several U.S. states, including Texas, Oregon and Utah. Cases rose across the United States by at least 39,818 on Thursday. Texas, which has been at the forefront of easing restrictions, paused its reopening plans after the state recorded its one of the biggest jumps in new infections. The uptick in cases has also threatened to derail a strong rally for Wall Street that brought the S&P 500 within 9% of its February all-time high on the back of record government stimulus measures.

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Investors see 'king of distress' Apollo having its best ever crisis

Brief: A credit crunch is hitting many indebted companies, and Apollo Global Management Inc never had it so good. The private equity firm’s shares hit an all-time high earlier this month, outperforming its peers, as investors bet it can invest its $40 billion of unspent capital in cash-strapped companies that are struggling in the aftermath of the COVID-19 pandemic. Central banks and governments around the world have unveiled a raft of credit support and economic programs to help businesses. However, aid is often limited for companies with weak credit ratings, driving many of them into the arms of Apollo and other private equity firms. Since the onset of the crisis, Apollo has invested $1.2 billion alongside Silver Lake Partners in Expedia Group Inc, whose online booking business was hit hard by the coronavirus-induced stay-at-home orders and travel bans. Apollo also provided $250 million to U.S. pipeline operator NGL Energy Partners LP to refinance existing loan facilities. While other private equity firms, such as Blackstone Group Inc and Ares Management Corp, are also very active in this space and have seen their shares rally, Apollo’s stock has outperformed because of the New York-based firm’s record of capitalizing on such opportunities, analysts and investors have said.

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Wall Street-owned loans tricky for hoteliers in virus era

Hotel owner and developer Danny Gaekwad survived steep drops in business after the 9/11 attacks and the recession of the late 2000s, but nothing prepared him for the revenue tailspin that followed lockdowns and travel restrictions in March to stop the spread of the new coronavirus. At one hotel, a Holiday Inn in Ocala, Florida’s horse country, revenue last April was $38,000, a drop of almost 90% from the previous April. His problems were compounded by the type of loan he took out for the hotel — a $13 million loan that was bought by Wall Street investors. Commercial mortgage-backed securities loans like the one Gaekwad has for the Holiday Inn are packaged in a trust. Investors then purchase bonds from the trust using properties like a hotel as collateral. The loans are attractive to borrowers because they typically offer lower rates and longer terms. About 20% of hotels across the U.S. use these loans and they represent close to a third of all debt in the hotel industry, according to the American Hotel and Lodging Association. Unlike banks, which have been more flexible in renegotiating loan terms to help them through the tough times, hotel owners like Gaekwad say it has been much more difficult to get any forbearance from representatives of bondholders, and they worry that their businesses may not survive because of the lack of relief.

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‘Black Swan’ author says if investors don’t use a ‘tail hedge,’ he recommends ‘not being in the market’—‘We’re facing a huge amount of uncertainty

That’s “Black Swan: The Impact of the Highly Improbable” author Nassim Nicholas Taleb offering his view on the risks swirling in the market and a growing lack of clarity about the future in the era of a deadly pandemic that has created a public-health and economic crisis. Speaking during an interview on CNBC on Friday, the popular author, shared the notion that investors should be hedged against so-called “tail risk,” which refers to extreme events that have a low probability of happening in a distribution of outcomes. Taleb has spent his career chronicling so-called “tail risk” events, which have a tiny probability of occurrence, but nonetheless take place more often than one would guess, and therefore often are underestimated by the broader investment community. Taleb said the current market landscape, perhaps, has amplified uncertainties, even if the stock market has been mostly rising, despite signs of a spreading COVID-19 pandemic that is re-intensifying in places and threatening to de-rail projections for a “V-shaped,” or quick, economic recovery. “We are printing money like there’s no tomorrow,” Taleb said, referencing the Federal Reserve’s efforts to ease the financial pain of the epidemic by delivering trillions of stimulus to the market. The Fed also cut interest rates to a super low range of 0% and 0.25% back in March, and may not have a lot of room to further ease the economic pain of the viral outbreak and other problems that could arise amid this crisis. “And COVID seems to be there even if the pandemic…dies down, you will still have people cautious enough that it will impact a lot of industries,” he said.

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Elizabeth Warren demands answers from private equity industry on coronavirus response, lobbying

Sen. Elizabeth Warren has written to the CEO of private equity lobbying group the American Investment Council demanding more information about the organization’s efforts related to the federal government’s multitrillion-dollar coronavirus relief law. In a letter to Andrew Maloney, which was delivered Wednesday and obtained by CNBC, Warren demanded information about the group’s communication with the Treasury Department and White House officials, including Jared Kushner, whose family real estate business has financial ties to private equity firm Apollo Global Management. She also questioned how the industry plans to protect the employees of the companies in which they invest. “I am particularly concerned that the private equity industry you represent may exploit this crisis to continue extracting value out of struggling companies, lining the pockets of wealthy firms at the expense of workers and communities struggling to respond to this pandemic across the country,” wrote the Massachusetts Democrat. In a statement given to CNBC through a spokesperson, Maloney said, “Senator Warren’s home state of Massachusetts is a booming private equity success story.” “Our industry employs over 240 [thousand] workers there, invested over $31 billion in 2019 alone, and recently delivered over 18% returns for the local pension program,” he noted.

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Hedge Funds Cling to High Fees — Even in a Pandemic

Very few hedge funds are offering investors fee discounts during the coronavirus pandemic, according to a new survey by Seward & Kissel. The law firm, which polled alternative investment firms about the impacts of Covid-19 on fundraising and remote work, found that less than 10 percent had granted investor-friendly concessions on fees, liquidity, or reporting terms. Roughly three-quarters of respondents managed hedge funds, while the rest ran closed-end vehicles such as private equity or real estate funds. Steve Nadel, partner at Seward & Kissel, suggested that managers may be “more reticent” to grant concessions given how quickly markets have bounced back. High demand for opportunistic strategies may also contribute to why managers don’t currently feel the need to lure investors with discounts and other perks. “With opportunistic structures, because they are bespoke and because they are limited capacity, it evens the playing field in favor of managers, because demand for a particular product is often going to exceed supply,” he said.

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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.

Our briefing for Thursday June 25, 2020:

  • Three American states have set new records for daily infection rates. Florida, Texas and California have all seen major increases in infections as new cases have surged across the country. Texas and Florida reported over 5,000 new cases in the last day, while California shattered its own daily infection record with over 7,000 new confirmed cases. Twenty-nine states have seen rates of infection increase over the last the week. If the current trajectory continues, Houston will become the city with the most confirmed cases, rivalling the numbers in Brazil. 

  • A report by the Canadian Institute for Health Information showed just how much the country failed its citizens in long-term care homes. The new study showed that the amount of Canadian COVID-19 deaths that occurred in long-term care homes was about twice the average of rates in other developed countries. As of May 25th, long-term care residents accounted for 81% of Canadian COVID-19 deaths, compared to an average of 42% for the other 16 countries in the study.
  • United Kingdom data released on Thursday showed 73% of citizens who contracted the virus had volunteered information about their recent contacts to the government’s test-and-trace in the first three weeks of service. UK health officials are surprised and worried though there are still one-in-four people who tested positive and could not be reached by contact tracers. This could become problematic as the country continues to emerge from its lockdown with pubs and restaurants set to open late next week. 
  • In France, one of the world’s most iconic structures has been reopened to the public. Starting Thursday, the Eiffel Tower was open to visitors, but for the first week people can only use the stairs. Visitors can go up the east side of the structure, down the west side, and anyone over 11 years of age are required to wear a mask. The top floor of the Eiffel Tower will open later in the summer, depending on how the situation evolves officials said as the iconic structure celebrates its 130th anniversary. 
  • As confirmed cases of COVID-19 in India have reached nearly 200,000, the capital city of Delhi has surpassed Mumbai as the country’s hardest-hit city. Hospitals in the region are struggling to cope with the influx of new patients. With cases numbering over 70,000, three private hospitals have turned away patients for lack of unoccupied beds. Government-run hospitals are now refusing entry to all but those with severe symptoms, despite laws requiring them to admit anyone seeking medical attention. 

  • Once essentially free of the coronavirus, Australia is now sending 1,000 army personnel into the south-eastern state of Victoria to help contain an outbreak. Melbourne, the state capital has been the only source of community transmission of the coronavirus in the country for weeks. More than 1,300 officials are going door-to-door in the hopes of testing 100,000 people over the next 10 days. Australia has reported just over 7,400 cases and 104 deaths in a country of over 25 million people, far fewer cases than many other nations.

Covid-19 – Due Diligence And Asset Management

‘A Last Resort’: WestJet Lays off 3,333 Employees in Face of COVID-19 Downturn

Brief: WestJet Airlines will permanently lay off more than 3,000 employees across the country as a result of the COVID-19 pandemic’s devastating effect on air travel demand.In avideo messageWednesday, CEO Ed Sims announced major organizational changes at the Calgary-based airline, including the consolidation of call centre activity in Calgary and the restructuring of office and management staff. In addition, airport operations at all domestic airports except Calgary, Edmonton, Vancouver and Toronto will be contracted out.The restructuring will result in 3,333 permanent job losses, including 430 call centre positions (72 in Calgary, 73 in Vancouver, 35 in Halifax, and 250 in Moncton, N.B.), as well as 2,300 airport operations staff, including customer service agents and baggage handlers. Sims said he is hopeful that whatever company WestJet ends up contracting out its airport operations to will ultimately be able to rehire many of the laid-off airport employees… For WestJet, which was acquired last year by Toronto-based Onex Corp. in a $5-billion friendly takeover deal, these are the most challenging circumstances it’s faced since the airline was founded in 1996, said Calgary-based aviation consultant Rick Erickson. Leisure travel has been squashed, although the public’s appetite for flying will return when the “fear factor” of catching the virus declines, he said.

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Bridgewater’s Bob Prince Says Virus Impact Could Last Two Years

Brief: Bob Prince, co-chief investment officer of the world’s biggest hedge fund at Bridgewater Associates, said the impact of the coronavirus pandemic could last 18 to 24 months, complicating monetary and fiscal policy efforts to bolster the economy. “There’s a huge amount of uncertainty,” Prince, who helps manage the firm’s investment process alongside co-CIOs Ray Dalio and Greg Jensen, said Wednesday in an interview during the Bloomberg Invest Global virtual event. Bridgewater’s hedge fund has suffered losses this year amid the market chaos surrounding the coronavirus pandemic. The firm’s flagship Pure Alpha II fund fell 20% in 2020 through May. Bridgewater got hit by the crisis at “the worst possible moment,” when its portfolios were positioned to profit from rising markets, Dalio wrote in mid-March. The Westport, Connecticut-based firm saw a 15% drop in assets during March and April, declining to $138 billion. Bridgewater wasn’t alone in getting caught on the wrong side of a sell-off that began in late February. Several prominent names have stumbled as the spread of the pandemic halted the economy and put an end to Wall Street’s longest-ever bull run. But U.S. stocks have since defied initial gloomy expectations, rallying 37% since the March low, with stimulus from the Federal Reserve and the easing of lockdowns fueling hopes for a fast recovery.

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Companies Could Face Stress Testing Post Pandemic, CEO of Man Group Says

Brief: Man Group chief executive Luke Ellis said that corporates could face stress testing after the Covid-19 pandemic, similar to those imposed on banks after the 2008 financial crisis. “There will be a drive to some form of stress testing of businesses, to make sure they have less operational gearing so that they are able to withstand things,” said the CEO of the world’s largest listed hedge funds company. Man Group manages $104.2bn as of March 31. Ellis was speaking at the Bloomberg Invest Global online forum. When asked what regulation might emerge from the current crisis, Ellis said that it would be “similar to what banks have, but not just around financial constraints”. Businesses could be required to limit the amounts of financial leverage — or debt — they can have, for instance. He also said that “just-in-time manufacturing” would have to be rethought: “It started as a good idea, reducing inventories, but got to a place where major manufacturers... had one hour of spare parts and supplies [...] which meant they couldn’t withstand any sort of shock at all.” “What we’ve seen that in the 10 years since the last crisis, [is that] an awful lot of the corporate community has moved to maximum leverage that they can possibly get onto their balance sheet — so maximum financial leverage but also maximum operational gearing and minimal resilience,” Ellis said during the webinar, which was focused on how funds, such as those managed by Man Group, can outperform in the age of Covid-19.

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Brookfield Says Office Demand Has Increased as Workers Return

Brief: Brookfield Asset Management Inc., one of the world’s biggest real estate investors, is seeing higher demand for office space as workers return to socially-distanced buildings. Rather than ditching their skyscraper offices after the pandemic, companies are keen to return to the workplace after spending as long as three months in lockdown, Bruce Flatt, chief executive officer of Brookfield, said at the Bloomberg Invest Global virtual conference on Wednesday. “Today we’re leasing greater amounts of space to people than they had before,” Flatt said. “They want to accommodate their people and get them back quickly. They’re increasing their footprints versus taking less.” Most companies that Brookfield leases offices to are bringing workers back, said Flatt. The only reason some weren’t was a lack of social distancing space. Brookfield has reopened nearly all of its global offices, he said, with about 70 per cent of London workers returning and around 30 per cent of New York employees. Brookfield is well-positioned to weather the pandemic. Flatt last month said the company had US$46 billion in client commitments for new investments and US$15 billion in cash, other financial assets and long-dated credit facilities across its various businesses that remain largely undrawn.

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Virtual Meetings Prove Effective For  Managers Amid Pandemic – Survey

Brief: Most asset managers have found video conferencing an effective alternative to interacting with clients now that the coronavirus pandemic has severely hampered the ability to meet with clients face-to-face, according to results of a survey by Cerulli Associates.  While almost all (95%) of managers surveyed by Cerulli in April said that in-person meetings are the most effective way to interact with clients, travel restrictions brought about by the COVID-19 pandemic have prevented such interaction. So, with face-to-face meetings not being an option for most managers, 75% find conference calls or video conferences with clients a highly effective alternative method of communication since the outbreak of COVID-19, while 17% find them somewhat effective. "The amount of people that said video calls are effective could be a sign of a more long-term trend," said Cerulli analyst Christopher Swansey in a phone interview, noting that face-to-face meetings are still crucial for due diligence. "I don't think they'll be replaced, but I think you'll see a lot more meetings conducted virtually in the future…

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Goldman Sachs CEO David Solomon Sees V-Shaped Recovery Into 2021 Before Comeback Slows

Brief: Goldman Sachs CEO David Solomon still sees a V-shaped recovery ahead even as coronavirus cases are increasing throughout the US.It just might not bring the economy back to its pre-pandemic levels as quickly as hoped.Appearing in theBloomberg Invest Globalvirtual conference, Solomon said the US is "somewhere in the middle" of its turnaround. Just as economic activity nosedived in the second quarter, the CEO sees reopenings driving a similar turn higher through the end of the year."This crisis has had a profound impact on the economic environment that we're operating in," he said on Wednesday. "My guess is when you look at the shape of the recovery, the initial shape is going to look quite like a V." Solomon added that uncertainty still clouds such forecasts and second shocks could endanger the nation's long-term trajectory. The healthcare industry represents a major variable, as an effective coronavirus vaccine is largely viewed as the best bet for boosting consumer confidence. Human behavior can also deviate from expectations and either accelerate or halt reopening measures. These factors will likely slow the US economic bounce-back after 2020 and push a full rebound further down the road, Solomon said. "I do think we're going to see a sharp V to start with, but it's very open-ended as to what kind of economic friction we're going to see as we get through the end of the year and into 2021," the CEO said.

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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.

Our briefing for Tuesday June 23, 2020:

  • Dr. Anthony Fauci appeared before United States law makers on Tuesday and said the country is “seeing a disturbing surge of infections.” A key member of the White House coronavirus task force, Dr. Fauci said the way you need to address the recent surge is testing to identify, isolate and contact trace in an effective way. Dr. Fauci’s views though are seemingly in direct conflict with United States President Donald Trump. After stating at a political rally over the weekend, he wanted to see less testing, White House officials tried to say the President was only joking. President Trump’s response on Tuesday: “I don’t kid. By having more tests, we find more cases. It sounds bad, but actually we’re finding people, many of those people aren’t sick or very little – maybe young people.”
  • The Canadian federal government has extended the time period for temporary layoffs, by up to six months, giving employers more time to rehire employees who were laid off due to COVID-19. Employees who were laid off, prior to March 31st have six months or December 30th for employers to bring them back to work, whichever comes first. Prior to this extension, a worker would deem to be terminated if their temporary layoff notice expired before the employer brought them back to work, which was normally three months.

  • United Kingdom Prime Minister Boris Johnson announced as of July 4th, the government will replace the two-metre social distancing rule with “one metre plus” guidance. The July 4th date is significant as this is when pubs, restaurants, hotels and hairdressers will be given approval to reopen their establishments. Prime Minister Johnson told the House of Commons on Tuesday: “From the outset we have trusted in the common sense and perseverance of the British people. We have been clear that our cautious relaxation of the guidance is entirely conditional on our continued defeat of the virus.”
  • Germany has reimposed a lockdown for the first time since releasing restrictions last month. The western city of Gutersloh, home of the processing plant where 1,550 employees have tested positive for the coronavirus, and the surrounding area have been shut down by the prime minister of the state. Prime Minister Armin Laschet said the current lockdown will last initially for one week in hopes it will become clearer to what extent the virus has spread among people outside of the meat processing plant.

  • Saudi Arabia state media have reported the nation has banned international visitors making the Islamic pilgrimage, or Hajj this year in order to stop the spread of the coronavirus. Only a very limited number of people who are residents of Saudi Arabia will partake in the Hajj this year. Pre pandemic, the pilgrimage would have attracted an estimated two million people to Mecca for one of the most significant moments in the Muslim religious calendar.
  • On the other hand, one of India’s most celebrated religious processions is expected to go ahead with limited capacity after the country’s highest court ruled it could do so. The Rath Yatra, a Hindu festival, takes place in various cities around the country with the most famous in the coastal city of Puri, where more than a million people normally attend. The Supreme Court had previously ruled against the celebration, citing the risk of the coronavirus, but overturned its own decision when the Odisha state government (where Puri is located) promised to conduct the festival in a “limited way”. The religious festival started today and runs for a week. Meanwhile India recorded close to 15,000 cases on Tuesday, marking the sixth straight day of more than 12,000 new daily cases.

  • The Philippines set a new daily record of 1,150 new coronavirus cases on Tuesday, surpassing its previous record of 1,046 on May 29th. The country is struggling with a sudden spike in coronavirus cases in Cebu City, which led President Rodrigo Duterte to assign his Environment Secretary and former military general to lead a task force to try and contain the region’s outbreak. Meanwhile, a Presidential spokesperson said Metro Manila remains the epicenter of the coronavirus pandemic in the Philippines.

Covid-19 – Due Diligence And Asset Management

Fink Cautions Virus Impact on Small Business Still Unknown

Brief: BlackRock Inc. Chief Executive Officer Larry Fink said the full extent of the coronavirus pandemic on the U.S. economy’s smaller companies remains unclear, even as cities begin reopening. “We still have not witnessed the full impact on small and medium businesses,” Fink said in an interview Tuesday on Bloomberg Television. The virus’s spread forced a shutdown across the country, upending sectors from energy to consumer. Signs of acute pain for small businesses are already showing: about 14% of companies that received support from the Paycheck Protection Program, a key pillar of the U.S. government’s aid to small businesses, expect they’ll need to reduce their workforce after using the loans, according to a new survey from the National Federation of Independent Business. Last week, 13 U.S. companies sought bankruptcy protection, matching the peak of the global financial crisis, data compiled by Bloomberg show. While larger corporations have stabilized, the fate of other parts of the economy will be determined by how Covid-19 is handled in the coming months, he said. Fink’s remarks come as the world’s largest asset manager navigates a year of turmoil that includes the pandemic and a wave of protests over racial inequality that began in the U.S. He said he expects market uncertainty, which spiked in mid-March, to remain elevated for months to come.

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Pimco’s Roman Sees U.S. Inflation Remaining Low for Years

Inflation in the U.S. is likely to come back slowly, keeping the Federal Reserve from raising interest rates for an extended period, according to the chief executive officer of Pacific Investment Management Co. Over the next couple of years, prices are likely to increase to the 2.3% to 2.4% level, Emmanuel “Manny” Roman said Tuesday at the Bloomberg Invest Global virtual event. The central bank has learned its lesson from past interest rate increases and will be determined to avoid another “temper tantrum,” he said. “The days of inflation we remember are gone,” Roman said. “We don’t think the Fed is going to raise rates for a very long time.” Led by the Fed, central banks have been cutting interest rates and buying securities to combat the effects of the coronavirus pandemic, an intervention that helped stabilize global markets. Even as U.S. unemployment soared to its highest level in decades, stock markets have recovered most of their post-pandemic losses and corporate debt investors have poured money into junk bonds. U.S. equities rose to a two-week high Tuesday amid a report that President Donald Trump supports sending another round of checks to Americans and data that showed manufacturing nearing expansion. Pimco, with about $1.8 trillion in mostly fixed-income assets under management, is raising at least $6 billion for distressed credit and other corporate debt opportunities to take advantage of dislocations driven by the coronavirus pandemic.

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April Hedge Fund Redemptions Totalled USD38.1 bn, says Backstop BarclayHedge

Brief: The Covid-19 pandemic’s impact on hedge fund redemptions continued in April as the industry experienced USD38.1 billion in outflows. While a sizeable sum, the net redemption total was less than half of March’s USD85.6 billion redemption total. April’s redemptions represented 1.3 per cent of industry assets, according to the Barclay Fund Flow Indicator published by BarclayHedge, a division of Backstop Solutions. A positive note was a USD101.2 billion monthly trading profit fuelled by an April stock market rally, bringing total hedge fund industry assets to more than USD2.99 trillion as April ended, up from USD2.86 trillion at the end of March. Data from 6,000 funds (excluding CTAs) in the BarclayHedge database showed the greatest volume of April redemptions coming from hedge funds in the US and its offshore islands where investors pulled out USD21.7 billion during the month. Investors redeemed nearly USD13.1 billion from funds in the UK and its offshore islands during the month, while funds in Continental Europe experienced nearly USD2.6 billion in outflows.

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Manager Due Diligence in Times of Covid-19

Brief: A lively debate is currently taking place amongst allocators as to whether onsite due diligence and face-to-face meetings are still necessary given the current environment. The simple answer must be a resounding: yes, absolutely. Due diligence, both investment and operational, has always been an integral part of a well-structured investment process. Those of us who have been around since pre-2008 can certainly attest to the fact that a lot has changed since, and the days are long gone when it was possible for managers to simply refer to their stellar track records and assume that investments would be forthcoming without any other questions being asked. Investors have learnt that having a detailed understanding of a strategy is just the beginning and that the operational framework in which a strategy is implemented is also of great importance. The question, of course, is how to best ascertain all of this during the current period, whether process adjustments can and should be made and, critically, whether there are additional risks that necessitate closer scrutiny at present.

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Dyal Capital to Borrow Against Fund Investments to Pay Out Windfall, Source Says

Brief: Dyal Capital Partners is nearing a $1 billion loan against the fee revenue of private equity firms in which it has acquired stakes and will use the proceeds to return cash to its investors, a person familiar with the matter said on Monday. The loan pertains to investments made out of the firm’s $5.3 billion Dyal Capital Partners III fund, the source said. While private equity firms often borrow against companies they own to fund dividends to their investors, such borrowing at fund level is less common. The loan has an “A-“ credit rating, according to the source, underscoring the confidence of lenders that it will be paid back in the face of economic uncertainty brought about by the COVID-19 pandemic. Dyal, a subsidiary of asset manager Neuberger Berman Holdings, owns stakes in major private equity firms such as Silver Lake and Vista Equity Partners. It had initially looked to raise $500 million, but increased the size of the loan due to strong investor interest, primarily from large insurers, the source said. The loan carries a 4.4% fixed coupon and is expected to close on Tuesday. A spokesman for Neuberger Berman declined to comment.

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How One Strategy Delivered During the Covid-19 Crisis

Brief: Trend-following strategies have earned a reputation for outperforming during periods of crisis. That theory was borne out during the height of the Covid-19 crisis — up to a point. In a new paper entitled “The Coronavirus Crisis: What is the same? What’s different?,” Katy Kaminski, chief research strategist and portfolio manager at quantitative investment firm AlphaSimplex, analyzed nine substantial drawdowns in equity markets since 1998. The paper classified drawdowns into two categories: corrections, for losses of 15 percent over periods of two months or less, and crises, for more sustained, deeper losses.  Kaminski and AlphaSimplex junior research scientist Ying Yang concluded that the Covid-19 market crisis was “one of the fastest crisis periods in history.” They found that short-term, pure trend-following strategies proved better than other strategies — including other styles of trend-following strategies — at navigating the turmoil. 

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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.

Our briefing for Monday June 22, 2020:

  • As coronavirus cases top nine million around the world, health experts in the United States are worried Florida could be the next epicenter for the pandemic. The sunshine state are one of ten states to see a record number of cases in the last week as they now have surpassed 100,000 cases. Florida and Texas on Saturday, along with California on Sunday each reported record one-day cases in excess of 4,000. A Financial Times article notes that half of all new daily infections in the United States are originating in the deep south, some of which were the earliest in reopening to help stabilize their economies.
     
  • In Canada, the last three regions in Ontario, which includes the country’s most populous city, Toronto will be able enter stage 2 of its reopening on Wednesday. The move will allow residents of Toronto to dine-out on patios, get a haircut and shop within indoor malls, if they so choose. Elsewhere in the country, the Bank of Canada said the long-term economic damage from COVID-19 means a prolonged and bumpy course to recovery. In his first speech as the new governor of the Bank of Canada, Tiff Macklem warned Canadians that the short and sharp economic bounce-back over the coming months won’t likely last as ongoing physical distancing rules may mean workplaces can’t be as productive as they once were.

  • In the United Kingdom, 2.2 million of its most vulnerable residents will have more restriction rules eased as the country gains control over the coronavirus. As of July 6, those most vulnerable with pre-existing conditions will be allowed to form support bubbles with another household and meet in groups of up to six people outdoors. In recent weeks, the more vulnerable residents of the UK were only permitted to go outside once a day and meet with one other person outside, while maintaining social distancing.

  • Germany’s reproduction rate has jumped three times from what is needed to contain the virus after an outbreak at a meat processing plant has infected thousands of workers. The reproduction number indicates how much the virus is spreading in the country. A reproduction rate of 1 means each person with the coronavirus will infect another person. In May, Germany’s R-number had fallen to 0.75, but thanks to the outbreak, data published by the Robert Koch Institute puts the country’s current R-number at 2.88. Chancellor Angela Merkel, who has a scientific background, has repeatedly said Germany must keep their R-number below 1 if they want to successfully combat the virus.

  • Starting July 7, Dubai will open to tourists in an attempt to revive its economy. Those arriving at the Dubai Airport would need to present proof that they are not infected or take a test at the airport. Those testing positive will be required to enter quarantine for 14 days. Dubai also said nationals and residents will be allowed to travel outside the country with fewer restrictions as of Tuesday. Citizens will need to complete a health declaration form, be free of COVID-19 symptoms on departure and take a test again upon return. Anyone who tests positive upon re-entering Dubai must self-isolate for 14 days.

  • Australia is moving fast on trying to contain a fresh outbreak of the coronavirus in the Melbourne area. The region is home to the country’s second largest city and has accounted for nearly 90% of the 126 cases detected nationally over the last week. The Victorian state government has said it would reimpose restrictions on social gatherings after the surge they believe was caused by family get-togethers attended by people with mild symptoms. Officials have also criticized those who have gone to shopping while awaiting COVID-19 test results.

Covid-19 – Due Diligence And Asset Management

Schwarzman Sees ‘Big V’ Economic Rebound in Next Few Months

Brief: Steve Schwarzman, chief executive officer of Blackstone Group Inc., said the economy is likely to benefit from a V-type recovery in the next few months. The co-founder of the world’s biggest alternative asset management firm weighed in on markets in an interview Monday during the Bloomberg Invest Global virtual event. “You’ll see a big V in terms of the economy going up for the next few months because it’s been closed,” he said. Markets are benefiting from both liquidity and optimism that the coronavirus crisis can eventually be contained, Schwarzman said, but he cautioned on the economy, “It’ll take quite a while before we sync up and get back to 2019 levels.” The spread of the pandemic seized up credit markets and put an end to Wall Street’s longest-ever bull market earlier this year. The damage pushed the Federal Reserve to flood the markets with trillions of dollars in stimulus, which, combined with the easing of lockdown restrictions and hopes for a fast economic recovery, have helped the S&P 500 index rally almost 40% since its March low. Blackstone has been “aggressively” looking to put some of its $150 billion in dry powder to use, Schwarzman said in April.

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UBS May Increase Home Working After Coronavirus

Brief: A significant proportion of UBS’s (UBSG.S) staff could continue to work from home even after the coronavirus crisis has ended, the bank’s Chief Operating Officer Sabine Keller-Busse said on Monday.A third of the bank’s employees could work away from the office, she said, according to Bloomberg. UBS, Switzerland’s biggest bank, is deciding which tasks could be carried out from home and which would be transferred to the office. “It is conceivable that in the future up to a third of the staff will work remotely on a rotating basis,” a UBS spokeswoman said. The changes will be implemented globally, although the exact number of UBS’s 70,000 staff has not yet been determined. At the peak of the coronavirus crisis, more than 80% of the bank’s staff worked from home. Even before the pandemic, some of the employees did not come to the office, with this figure likely to be increased.

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Ackman’s Blank Check Company Could Raise Up to $6.45 Billion

Brief: Bill Ackman’s blank check company is seeking to raise as much as $6.45 billion through an initial public offering combined with a commitment from the billionaire’s hedge fund. The company known as Pershing Square Tontine Holdings Ltd. doesn’t specify what sectors it will be targeting, according to a regulatory filing Monday. The special purchase acquisition company, or SPAC, is aiming to initially raise $3 billion from outside investors with an a minimum of $1 billion in additional funds coming from funds associated with Ackman’s hedge fund, Pershing Square Capital Management. The blank check company plans to raise $3 billion from outside investors and between $1 billion and $3 billion from funds associated with Pershing Square. If the IPO over-allotment option -- the so-called greenshoe shares -- is exercised by the banks, it would bring the total to $6.45 billion. SPACs raise money on the public markets to make an acquisition within a set period of time. A target isn’t identified until after the shares start trading. At $3 billion, Pershing Square’s Tontine listing would be the largest SPAC IPO on record globally, according to data compiled by Bloomberg. That would surpass Michael Klein’s Churchill Capital Corp. III, which raised $1.1 billion earlier this year.

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Millennium Seeks $3 Billion of Private Equity-Style Capital

Brief: Millennium Management is in talks to raise as much as $3 billion in capital that it can draw on as needed to finance trades. The fundraising by Izzy Englander’s hedge fund will probably continue through the first half of next year, according to a person with knowledge of the matter. Building up such “callable” capital is a strategy often used by private equity funds. Investors would be required to commit at least $25 million to Millennium, and would only be allowed to withdraw 5% of their money per quarter, said the person, who asked not to be identified because the information is private. A representative of New York-based Millennium declined to comment. Millennium, which manages about $44 billion, is among a cohort of large hedge funds raising capital even as the industry endures an investor exodus. Investors have pulled more than $130 billion since the start of last year, according to data compiled by eVestment. This latest capital raising is part of Millennium’s drive to lock up investors’ money for longer to give it greater flexibility and avoid a rush of withdrawals when markets are in turmoil. The hedge fund was one of many that struggled in the first three weeks of March as coronavirus lockdowns shut much of the global economy. It has since recovered and was up 9% this year through June 15, the person said.

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U.S. Banks are ‘Swimming in Money’ as Deposits Increase by $2 Trillion Amid the Coronavirus

Brief: It’s the banking world’s version of the rich getting richer. A record $2 trillion surge in cash hit the deposit accounts of U.S. banks since the coronavirus first struck the U.S. in January, according to FDIC data. The wall of money flowing into banks has no precedent in history: in April alone, deposits grew by $865 billion, more than the previous record for an entire year. The gains were all driven, in one way or another, by the response to the pandemic: The government unleashed hundreds of billions of dollars to bolster small businesses and individuals via stimulus checks and unemployment benefits. The Federal Reserve began abarrage of efforts to support financial markets, including an unlimited bond buying program. And an uncertain future prompted decision makers, from two-person households to global corporations, to horde cash. More than two-thirds of the gains went to the 25 biggest institutions, according to the FDIC. And that was concentrated at the very top of the industry: JPMorgan Chase, Bank of America and Citigroup, the biggest U.S. banks by assets, grew much faster than the rest of the industry in the first quarter, according to company data.

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Brookfield Delays Payments While Asking Tenants to Pay Up

Brief: Asset manager Brookfield, which owns stakes in numerous malls, is demanding retailers pay back rent even as the Toronto-based investment group has missed mortgage payments, the Financial Times reported Sunday (June 21).Merchants who lease kiosks and small stores inside Brookfield malls have been told to pay rent for April and May, a time when they were forced to close, sources familiar with the discussions told the paper. The tenants, who requested anonymity, said they have asked for until next year to come up with the payments. In response, Brookfield has asked them to provide extensive financial information, including personal tax returns for 2019 and 2020, the merchants told the Times.A half dozen tenants wrote a letter to management at one of the Canadian group’s shopping centers seeking help, the report said. “I will not address the merits of your ‘petition,’ ” a Brookfield lawyer responded. The attorney added that confidentiality clauses in leases “could be deemed a default of your agreement with Brookfield. ”In a request for comment, Brookfield said 75 percent of its tenants have requested changes to their leases. The company said it had talked with all of them and they are prioritizing small businesses given their scale and immediate cash flow requirements.

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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.

Our briefing for Friday June 19, 2020:

  • In the United States, all eyes will be on Tulsa, Oklahoma over the weekend as President Donald Trump holds his first campaign-style rally since early March. The rally has health officials nervous as it is planned to take place in an indoor arena that can hold 20,000 people, but local officials are expecting 100,000 people to show up in the Tulsa area. For those who do get into the arena, attendees will not be required to maintain social distancing, or wear masks. Elsewhere in America, California Governor Gavin Newsom issued a statewide order for people to wear masks or facial coverings in public spaces, including public transportation, those seeking medical care, shopping and in most work scenarios. However, the governor didn’t address how this order would be enforced in America’s most populous state.

  • In Canada, the average number of Canadians infected by someone with the coronavirus has been falling since the third week of May. Nationally, the reproduction number, or the average number of Canadians infected by someone, is down to .65. This means on average three Canadians with the virus will  pass it on to two other individuals. At the height of the pandemic, every infected Canadian would pass on the virus to three more individuals. Health experts attribute the falling numbers to increased use of masks, lack of gatherings and the warmer weather.

  • United Kingdom biosecurity experts have recommended downgrading the country’s official coronavirus alert level, following a steady decrease in new cases for the virus. The level has been downgraded from a four to a three, which means while the virus is deemed to be in general circulation, transmission is no longer high, or rising at exponential rates. Prime Minister Boris Johnson said with the alert level coming down, the government can now start making progress on plans to end the lockdown. Prime Minister Johnson highlighted he would be giving guidance “very shortly” to help businesses, particularly the hospitality industry on how to reopen. Pubs and restaurants are scheduled to be allowed to reopen on July 4th.

  • A German government spokeswoman has said the country’s new coronavirus smartphone app has been downloaded 9.6 million times since it was launched on Tuesday. The 9.6 million would be equivalent to 12% of Germany’s population, but it is unknown whether some people have downloaded it on multiple phones.

  • According to a Reuters report, the European Commission is in advanced talks with pharmaceutical company Johnson & Johnson to reserve or buy up-front doses of its COVID-19 vaccine under development. If true, it would mark the first move since the 27-member European Union agreed to an emergency fund with more than $2 billion euros available to reach deals with up to six vaccine makers.

  • With India’s COVID-19 cases expected to surge by the end of July, India’s capital city is creating the “world’s largest quarantine facility”. The new facility to be set-up by Delhi’s border, will have 10,000 recyclable beds made out of cardboard to save on sanitation time. Studies have shown the virus doesn’t remain on cardboard surfaces for more than 24 hours. The city’s deputy chief minister has speculated the national capital may have to deal with more than 500,000 cases by July 31st.

  • China’s government and independent researchers are saying the latest outbreak in Beijing originated from Europe. According to China’s Centre for Disease Control and Prevention, “The results of preliminary genetic sequencing research show that this virus came from Europe… but is older than the viruses currently circulating in Europe.” A Chinese CDC official had told local media that the virus could have started spreading in Beijing as early as the start of May. Before last weekend’s noted cases, Beijing had no confirmed symptomatic infections for almost two months.

Covid-19 – Due Diligence And Asset Management

Fed Adds Coronavirus Scenarios to This Year’s Bank Stress Tests

Brief: Historically unique financial conditions brought on by the coronavirus have changed the way the Federal Reserve is conducting its stress tests for banks this year. In addition to the usual rigors that measure how well institutions are prepared for sharp downturns, the Fed is adding three new scenarios this year, Vice Chair for supervision Randal Quarles announced Friday. The scenarios examine different patterns of recovery and look to see how banks will respond. The initial testing focus was for stress in corporate debt and real estate and an unemployment rate higher than the 10% peak that prevailed during the Great Recession from 2007-09. In effect, that situation was less drastic than the current jobless level, at 13.3%, but more so than the conditions in debt markets, which have eased amid aggressive Fed actions. “But the larger issue is the unprecedented uncertainty about the course of the COVID event and the economy,” Quarles said in prepared remarks. “The range of plausible forecasts is high and continues to shift. We don’t know about the pace of reopening, how consumers will behave, or the prospects for a new round of containment. There’s probably never been more uncertainty about the economic outlook.”

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MSD Partners Raises $1.1 Billion for Real Estate Credit Bets

Brief: MSD Partners has raised about $1.1 billion for a fund dedicated to bets on structured credit secured by real estate, beating an initial target of $750 million. The MSD Real Estate Credit Opportunity Fund gathered about $300 million from Michael Dell and his family, as well as MSD employees. The vehicle will make and purchase commercial real estate loans and securities, in addition to structured investments.“ Since launching the fund, we have been investing actively, particularly during the recent market dislocation,” portfolio manager Rob Platek said in a statement, adding that the fund is positioned to tackle opportunities that arise in the current market environment. MSD Partners was formed in 2009 by partners of MSD Capital, the family office for Dell, the founder of the namesake computer maker. Starting with $400 million of capital two decades ago, the firms collectively manage about $16 billion. Dell is worth about $29 billion, according to the Bloomberg Billionaires Index. Previous wagers by the MSD Partners real estate credit team include buying transferable development rights attached to New York’s Grand Central Terminal and providing financing to One Thousand Museum, a luxury condominium in downtown Miami.

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Hintze’s CQS Cuts at Least 50 Jobs as Hedge Fund Retrenches

Brief: Hedge fund firm CQS has slashed at least 50 jobs in an overhaul, as billionaire founder Michael Hintze retrenches to focus on core credit trading strategies. The cuts are mainly concentrated in sales and support areas, but have also affected trading teams focused on asset-backed securities, according to people with knowledge of the matter, who asked not to be identified because the information is private. CQS is seeking to reduce costs following a slump in high-fee earning hedge fund assets, the people said. The firm employed more than 280 people globally at the start of December, according to a letter to investors seen by Bloomberg. A spokesman for the London-based money manager declined to comment. While CQS still manages $17 billion, up from about $15 billion in March, its share of lucrative hedge fund assets has shrunk to about a third of the money managed by the firm, down from around half last year. That’s putting pressure on revenues. The CQS Directional Opportunities strategy, run by Hintze himself, is facing redemptions after losing 33% in March and another 17% in April, according to people familiar with the matter.

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Covid-19 Business Disruption to End in 10 Months

Brief: Business activity across most sectors and regions is expected to return to a stable level within a year and grow to pre-Covid levels by the end of 2021, according to a survey of Fidelity International’s in-house analysts. This month’s survey shows growing optimism over the path of the Covid-19 outbreak, with business disruption estimated to come to an end within 10 months, according to the global average of responses.  Fiona O’Neill, director, global research, Fidelity International, said: “Against tough economic data, green shoots are starting to emerge. China is leading the recovery, with our analysts expecting a wait of just under 6 months to reach stability, a sign the country’s economic momentum is gathering pace. “The general upbeat picture is confirmed by a noticeable jump in the proportion of Fidelity analysts seeing positive leading indicators in their sectors.” O’Neill highlighted that the energy sector has seen the greatest improvement in fortunes, led by the stabilising price of oil, with 73% of analysts responding that leading indicators are positive, up from just 8% two months ago.

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BlackRock CEO Larry Fink Ranks China Among Biggest Opportunities

Brief: BlackRock Inc. Chief Executive Officer Larry Fink said China remains one of the firm’s top regions for growth despite uncertainties brought on by trade tensions with the U.S. and the virus outbreak.“We are here to work with China,” Fink said via video conference at the Lujiazui Forum in Shanghai on Thursday. “We firmly believe China will be one of the biggest opportunities for BlackRock.”The company is expanding in China to tap one of the fastest-growing wealth markets. China’s trillion dollar industry opened further in April, luring investment from companies including BlackRock, Vanguard Group Inc. and JPMorgan Chase & Co. While the further liberalization of the money management sector in China has been overshadowed by the coronavirus crisis, wealth firms are nonetheless laying out plans to tap a market in which retail funds alone could reach $3.4 trillion in three years, says Deloitte LLP.Fink added he was hopeful that the U.S. and China would continue to develop their relationship. “Despite the noise in the markets now, I am optimistic that the U.S.-China relationship can continue to develop for the whole world in a positive manner,” Fink said.He also sees signs that China and the rest of the world are slowly recovering from virus-induced slowdowns.“Encouraging signs are emerging,” Fink said. “As dramatic as this has been, I do believe the global economy will stabilize and recover steadily.”

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RBC, Brookfield CEO’s Join Push Against Canada’s Travel Restrictions

Brief: The heads of 27 Canadian companies, including the CEOs of two large banks and Brookfield Asset Management Inc., are urging Prime Minister Justin Trudeau and provincial premiers to ease air travel restrictions. Most international flights have been cancelled and the U.S.-Canada border has been shut to most travellers since March 21 — a policy that was extended to July 21. Last week, Air Canada Chief Executive Officer Calin Rovinescu called the restrictions “disproportionate” as the coronavirus outbreak improves in most parts of Canada. Now Rovinescu has the backing of the chief executive officers of nine companies in the S&P/TSX 60, who are among the 27 signatories to a letter published in Canada’s Globe and Mail newspaper on Thursday. “We are now entering a new phase, one in which we must find a responsible way to co-exist with COVID-19 until there is a vaccine. This includes prudently and thoughtfully opening aviation and lifting restrictions to safely resume travel throughout all provinces of Canada, as well as from select countries,” the executives wrote.

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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.

Our briefing for Thursday June 18, 2020:

  • Once the epicentre of the pandemic in the United States, and now slowly reopening after flattening their curve, New York state is considering a quarantine for those entering. During a news conference on Thursday, Governor Andrew Cuomo acknowledged his health experts have advised him to issue a quarantine. The news comes as states that opened earlier such as Florida, Texas and Arizona have all experienced their highest single-day increases in new COVID-19 cases. New York City is planning to enter stage two of its reopening on Monday.

  • In what has become a worldwide trend, Canada has now announced a new cell phone app that will alert the user if they’ve come in contact with someone who tested positive for COVID-19. The technology works by having people who test positive upload their results anonymously to the app, under the guidance of a health-care professional. During a news briefing, Prime Minister Justin Trudeau said there are over 30 million smartphones in the country that could take on this app, but it will be up to the individual whether to use it or not. The app will be tested in Ontario first, before being available to hopefully all provinces by July.

  • The United Kingdom is switching course, dumping their contact-tracing app produced by the innovation arm of the National Health Service (NHSX), in favour of a new model based on Apple and Google technology. The NHSX model was criticized by privacy advocates and has experienced technical problems and delays. Speaking at a news conference on Thursday, UK Health Secretary Matt Hancock refused to issue a timetable for the new app saying the government is working on it, want to make sure the technology can help and is working effectively.

  • A German slaughterhouse was temporarily shut down on Wednesday after 650 of its workers tested positive for the coronavirus. The director of quality management for the company acknowledged the plant had a number of foreign workers who had travelled in recent weeks and might have been carrying the virus with them. The director also noted social distancing was not easy at the slaughterhouse facility. In reaction to the outbreak, the German government announced it would bring in new laws to protect workers.

  • Earlier in the week, Brazil recorded 32,000+ new coronavirus cases in a 24-hour time period, the most since the pandemic began. The country reported close to 1,300 deaths from the disease on Wednesday, which brought their death toll to 46,510, trailing only the United States for most in the world. Brazil is closing in on 1 million cases overall, again only trailing the United States for most worldwide.

  • India’s Prime Minister rejected media reports that the government was considering reimposing lockdowns. Instead Prime Minister Narendra Modi said the country has to think about further unlocking areas, while minimizing all possibilities of harm to people. This will prove to be a difficult task as India is a country of 1.3 billion people and have recently recorded their largest one-day spike of coronavirus cases, at close to 13,000.

  • After what New Zealand’s Prime Minister acknowledged as an “unacceptable” failure of the system, Australia is warning that their country’s borders could remain shut until at least next year. The two neighbouring countries were in talks of creating a travel bubble, but Australia’s Tourism Minister is urging its residents to consider a holiday at home.

Covid-19 – Due Diligence And Asset Management

Dalio’s Bridgewater Warns of Possible ‘Lost Decade’ for Stocks

Brief: A reversal of the strong growth seen over the years in U.S. corporate profit margins could lead to a “lost decade” for equity investors, Ray Dalio’s Bridgewater Associates warns. The margins, which have provided a big chunk of the excess return of equities over cash, could face a shift that would go beyond the current cyclical downturn in earnings, Bridgewater analysts wrote in a note to clients dated June 16. “Globalization, perhaps the largest driver of developed world profitability over the past few decades, has already peaked,” the analysts said. “Now the U.S.-China conflict and global pandemic are further accelerating moves by multinationals to reshore and duplicate supply chains, with a focus on reliability as opposed to just cost optimization.” The pandemic-induced collapse in demand has already resulted in a huge fall in profit margins in the short term, the analysts added. Intel Corp. and Taiwan Semiconductor Manufacturing Co. are cited as two examples of companies that have announced their intentions to build production facilities in the U.S., despite the higher costs.

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Lawyers Warn of Spike in Suits Against Hedge Fund ‘Fraudsters’

Brief: Frauds tend to be revealed amid a crisis — Bernie Madoff’s $64.8bn Ponzi scheme came to light not long after the financial fallout of 2008 as investors tried to retrieve their funds. It remains the largest financial fraud in US history and led to Madoff receiving a 150-year prison sentence. "When the music stops, often one sees the skeletons come dancing out of the closet," Paul Austin, director of business intelligence at City law firm Enyo Law, told FN. Noting the Madoff case,Austin said he expects similarlegal trouble for hedge funds and scrutiny of the industry as a result of the 2020 market shocks. "When things are going well and everyone's making money, it's harder to identify fraud because there's less scrutiny, but now there will be some nervous hedge funds out there." "People will use the crisis as an excuse to try to renege on contracts" Austin added. "As well as the contractual claims, you'll have fraud claims since during the bad times fraud gets uncovered. You might also see a surge in criminal claims as a result of Covid-related fraud." Austin said the recent decline in face-to-face meetings and lack of physical research, driven by workers in lockdown, will be a contributing factor towards what he says will be a surge in litigation. "Social distancing has made due diligence more challenging," he said. "Going to premises, interviewing people in person — that has stopped."

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Wall Street Rewrites Market Playbooks for Pandemic’s Second Wave

Brief: As the world braces for a second wave of infections from the coronavirus, stocks are priced for a booming global economy, bonds point to a protracted downturn and currency volatility is rising. Investors are increasingly uneasy with these conflicting signals among asset classes, but they are also resigned to them, and have adjusted their playbooks accordingly. Tried-and-tested strategies that directed buyers into stocks in good times and bonds in bad times began to unravel in the face of unconventional monetary policy a decade ago. They are being dropped now as central banks ramp up their response to the virus and governments pledge more than $8 trillion of fiscal stimulus to combat the fallout from the pandemic. “It’s a hard shift in markets and at the heart of all of this -- undoubtedly -- is the Federal Reserve’s efforts to revive the economy,” said Shyam Devani, chief strategist at SAV Markets in Singapore. “There are glimmers of 2008 financial crisis investing, but this time, from equities to bonds to currencies, there is a sense that stakes could be higher.” MSCI Inc.’s broadest measure of international stocks shows member companies trading at more than 19 times next year’s earnings. These kinds of levels haven’t been seen since the dot-com bubble burst in 2002. And what’s worrying is they come as millions of people are cast into unemployment by what the United Nations has called the most challenging crisis since World War II.

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KKR Buys Vacation Parks Firm Roompot in $1.1 Billion Deal

Brief: U.S. private equity firm KKR (KKR.N) said on Thursday it had reached an agreement to buy Dutch vacation parks firm Roompot from French private equity firm PAI Partners. KKR and Roompot did not disclose the price of the deal, but a source familiar with the transaction said it valued the Dutch company at around 1 billion euros ($1.12 billion). PAI put Roompot up for sale last October. It is the second-largest operator of vacation parks in Europe, operating its own 33 parks in the Netherlands, Belgium and Germany, and providing services to more than 100 other operators across Europe.  With over 2,100 employees catering for approximately 3 million guests per year, the company generates around 400 million euros in annual sales. PAI Partners bought Roompot for 600 million euros in 2016 from Dutch investor Gilde.

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Fund Managers Fear Markets “Overvalued” as Cash Levels Collapse

Brief: The highest number of managers since 1998 believe that the stock market is “overvalued”, as cash levels are collapsing and growth expectations jump, according to the latest Bank of America Merill Lynch fund manager survey. Although investor sentiment is past “peak pessimism”, optimism in June is both fragile and neurotic, with a second wave of the Covid-19 pandemic posing the biggest tail risk, the bank said in its report.  Only 18% of the 212 survey panellists expect a V-shaped recovery, against the 64% who believe we are headed for a U- or even W-shaped recovery. June also saw the largest fall in cash levels since August 2009, from 5.7% to 4.7% (led by institutional investors not retail investors.) Meanwhile, hedge fund net equity exposure soared from 34% to 52% - the highest since September 2018 as they chase the “pain trade” higher. The report also found that fear of prolonged recession was down to net 46% in June from 93% in April. But how the world will look post-Covid was a key issue for global fund managers, with large structural shifts expected.

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BNP Paribas Decides to Shut Down Onshore Wealth Management Business

Brief: French banking major BNP Paribas has decided to shut down its onshore wealth management business having assets under management of $14.5 billion, officials said on Tuesday.The entity said the move is driven by strategic reasons, wherein it wants to focus on businesses like corporate and institutional banking, and cannot be linked to the Covid-19 crisis. “BNP ParibasWealth Managementhas decided to exit its onshorewealth managementbusiness in India in order to focus on areas where its global footprint and diversified business strengths allow it to provide clients with more value-added services,” a spokesperson said. According to officials in the know, there are about 60 people working for the business in India and they have been given the option to either relocate to other businesses like its wholly owned brokerage subsidiary Sharekhan, which has products for the high networth individuals or join its offices in Hong Kong or Singapore.

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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.

Our briefing for Wednesday June 17, 2020:

  • In the United States, Dr. Anthony Fauci, a leading member of the White House coronavirus task force has urged states including Arizona, Texas and Florida that have seen recent surges to remain vigilant. The director of the National Institute of Allergy and Infectious Diseases is asking state leaders to move aggressively to prevent current cases from turning into a surge. Dr. Fauci’s comments follow United States Vice President Mike Pence, and head of the coronavirus task force, who penned an op-ed piece for the Wall Street Journal. In the article, Vice President Pence blamed the possibility of a second wave on media hype, and that “such panic is overblown”.

  • In Canada, the federal Liberal government will update the country on the state of government finances on July 8th. The government’s usual budget unveiling was shelved back in March due to the coronavirus pandemic. Prime Minister Justin Trudeau warned that because of the economic uncertainty created by the global pandemic, the budget update will be a “snapshot” and not a full-blown report, as per usual. Government opposition leaders, including the Bloc Quebecois accused the Liberals of unveiling the information during a time people will likely be paying little attention.

  • According to a YouGov survey, half of the United Kingdom’s businesses would have to cut staff within three months of the furlough scheme ending, due to the poor state of the economy in the aftermath of the coronavirus pandemic. Fifty-one percent of about 500 businesses surveyed said they would cut staff as under the current plan, companies will begin to shoulder costs related to the furlough scheme in August until its proposed ending in October.

  • The European Union (EU) has unveiled a plan that would see the European Commission centrally purchase a COVID-19 vaccine on behalf of all EU countries. The plan would see the commission pay upfront for some of the costs faced by vaccine producers, in exchange for the right to buy a set number of doses at a fixed price. The EU hopes their process would cut the red tape and produce a single point of contact for vaccine producers instead of dealing with 27 (the number of countries in the EU) separate processes.

  • Earlier in the week, Philippine President Rodrigo Duterte said partial restrictions would remain in place in the capital city of Manila for another two weeks. The area is still battling with the virus as one of the world’s longest and strictest lockdown measures were eased on June 1st to reduce the economic impact. President Duterte also reinstated strict lockdown rules in Cebu City, the country’s fifth most populous city, following increases in new infections.

  • China has raised its emergency level to its second highest level and has cancelled more than 60% of the flights in and out of Beijing due to the latest coronavirus outbreak in the country’s capital city. The raising of the threat level for the city of 20 million people means the cancellation of classes, suspended reopenings and stronger requirements for social distancing. China had relaxed many of its coronavirus controls after declaring victory over the pandemic in March.

  • Just one week after declaring themselves coronavirus free, New Zealand Prime Minister Jacinda Ardern called 2 new cases of the virus an “unacceptable” failure of the system. After a 24-day run with no new cases, two women who recently arrived from the United Kingdom were allowed out of quarantine early without being tested for the virus, even though one had mild symptoms. The two women then made a 650 KM (400-mile) road trip to see a dying relative. The pair were eventually swabbed and proved to be infected, but the realization was only made after their road trip. Prime Minister Ardern has now ordered the military to oversee New Zealand’s border controls to prevent similar failures in the future.

Covid-19 – Due Diligence And Asset Management

Bain Capital Raises $3.2 Billion for Latest Distressed Fund

Brief: Bain Capital Credit has closed a new distressed debt and special situations fund, with more than $3.2 billion in commitments, according to Jeff Robinson, one of the firm’s managing directors. About 50% of that total has been invested and committed, with the majority being deployed in the last three months, Robinson said. “While we do this in all market environments, now is one of the most attractive ones we’ve seen,” Robinson said in an interview. “On the distressed side, in any 10-year period, there are maybe two great years to be a distressed investor, and we’re in the midst of those two great years.” The firm raised capital from existing and new investors for the program called Bain Capital Distressed and Special Situations Fund 2019. It invests globally, including in North America, Europe, Asia and Australia. Bain joins firms like Blackstone Group Inc., Oaktree Capital Group LLC and Carlyle Group Inc. in looking to capitalize on potential opportunities created by the coronavirus pandemic that has hammered businesses. The first wave of deal flow early in the crisis included companies that needed to raise liquidity as they contended with high levels of cash burn and an erosion of enterprise value, according to Robinson.

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HSBC Revives 35,000 Job Cut Plan After Pandemic Pause

Brief: HSBC is resuming plans to cut around 35,000 jobs which it put on ice after the coronavirus outbreak, as Europe’s biggest bank grapples with the impact on its already falling profits. It will also maintain a freeze on almost all external hiring, Chief Executive Noel Quinn said in a memo sent to HSBC’s 235,000 staff worldwide on Wednesday and seen by Reuters. “We could not pause the job losses indefinitely - it was always a question of ‘not if, but when’,” Quinn said, adding that the measures first announced in February were “even more necessary today”.  An HSBC spokeswoman confirmed the contents of the memo. HSBC (HSBA.L) had postponed the job cuts, part of a wider restructuring to cut $4.5 billion in costs, in March saying the extraordinary circumstances meant it would be wrong to push staff out.However, Quinn said it now had to resume the programme as profits fall and economic forecasts point to a challenging time ahead, adding that he had asked senior executives to look at ways to cut more costs in the second half of 2020.The bulk of the job cuts are likely in the back office at Global Banking and Markets (GBM), which houses HSBC’s investment banking and trading, a senior executive familiar with the plans said.

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Why Investors Should be More Terrified of a ‘Blue Wave’ of Democrats than Trump Being Re-Elected

Brief: Another four years of President Trump may not excite everyone, but it could be way better than having what’s known as a ‘blue wave’ of Democrats taking control over the House and Senate in November — at least from an investor standpoint. “I think the markets will be most concerned of what they call the blue wave, not just the executive branch going Democratic but certainly the Senate swings as well,” said Wells Fargo Investment Institute chief investment officer for wealth and investment managementDarrell Cronk on Yahoo Finance’s The First Trade. “I think why they would be concerned of that, mostly, is because it would put in jeopardy the 2017 Tax Reform Act. There are discussions that certainly the Democrats would like to repeal that legislation and bring the tax rates back up somewhere around 28% to 29%, which would be pre-2017 levels. That would certainly challenge margins and earnings growth in an environment where it’s already challenged.” Of note is that there are 35 seats identified as up for grabs in the Senate in November, according to polling tracker 270toWin. Currently the Senate has 53 Republicans and 47 Democrats. In the House, Ballotpedia estimates 74 of the 435 House races are in play. The Democrats control the House, 233 to 197. But a blue wave must not be ruled out amid dissatisfaction among voters with how Trump has handled the twin crises of the COVID-19 pandemic and racial injustice.

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How Covid-19 is Reshaping Asset Management

Brief: Covid-19 continues to take its toll on financial markets, presenting major challenges for asset managers, from active funds to passive investments. The implications have been significant and central banks have now injected close to $100 billion to prop up investment funds hit by the market turmoil, raising questions about the systemic risks posed by the sector. With the effects of the crisis likely to be felt for several years ahead, how can asset managers adapt to this ‘new normal’ and begin to prepare for future challenges? Given the scale of Covid-19 and its impact on the global economy, asset managers were always likely to face high levels of volatility and challenging market conditions. However, the immediate reaction to the crisis produced varying results for different investment strategies and approaches. Passive funds tracking equity and bond indexes, which have proved highly popular with investors in recent years, have been exposed to the full extent of market volatility from the very beginning of the crisis. These funds suffered significant losses in value throughout February and March, but they weren’t the only immediate losers. Funds managed with traditional quantitative methods have experienced a similar struggle. These funds typically work on the assumption that patterns can be found in historical data and then used to inform investment choices.

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Hedge Fund Industry Split Over Return to Work and Client Meetings, as Lockdown Measures Ease

Brief: Most hedge fund industry employees have been working remotely during the coronavirus pandemic, but now firms are split over when staff should return to work and when businesses can resume face-to-face contact with investors and other clients, a new study by the Alternative Investment Management Association has found. The survey data suggests firms with smaller headcounts are more confident on resuming client contact and overseas travel later this year. But firms with larger staff numbers do not expect to return to normal until 2021, suggesting they face bigger practical challenges in ensuring social distancing among employees.  AIMA, the trade body for the globally hedge fund industry, recently surveyed 240 members – two-thirds of which were hedge fund management firms, with the remaining third comprising service providers and investors - altogether representing more than 67,000 employees. The survey found that some 92 per cent of hedge fund industry employees have been working either entirely (67 per cent) or mostly (25 per cent) from home throughout the Covid-19 lockdown. As countries begin to ease lockdown measures, AIMA’s study has found that the hedge fund industry is divided over how to proceed back to work.

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M&G, Legal & General, Standard Life Keep Property Funds Frozen

Brief: Asset managers M&G, Legal & General, Standard Life and Janus Henderson said they were keeping their property funds frozen as valuers continue to struggle to assess real estate assets due to the coronavirus crisis. M&G froze its $3.2 billion UK Property Portfolio in December, as uncertainty over Brexit and weakness in Britain’s retail commercial property sector prompted redemption requests. Most other UK property funds also halted redemptions in March, as valuers said there was “material uncertainty” about property values at the end of the first quarter due to the coronavirus pandemic. As the second quarter draws to a close, M&G said its valuers were still applying a material uncertainty clause due to the lack of property deals. However, it said its clause did not apply to the industrial and logistics property sectors where there had been transactions. Legal & General said there was no change to the lock-up of its 2.9 billion pound ($3.7 billion) fund. Standard Life said two funds totalling about 500 million pounds remained frozen due to valuation difficulties, while Janus Henderson said the material uncertainty clause still applied to its 500 million pound fund. The funds are expected to remain frozen till at least September due to the valuation challenges, and some of those which usually offer daily redemptions may need to change structure to survive, industry sources say.

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