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Covid-19 Diligence Briefing

Our briefing for Thursday January 21, 2021:

  • In his first full day in office, United States President Joe Biden has launched sweeping changes on how America will deal with the coronavirus. Where the Trump administration left much of the pandemic handling to individual states, the Biden administration will be aiming a coordinated federal response, focused on boosting vaccines, increasing testing, reopening schools and addressing inequalities highlighted by the pandemic. The Biden administration will invoke the Defense Production Act, which will expand vaccine manufacturing and its power to purchase more vaccines and the President will sign a series of executive orders, including mask-wearing in airports and on certain public transportation.
  • In Canada, the Canadian Federation of Independent Business (CFIB) said more than 200,000 businesses could close permanently due to the COVID-19 pandemic. The CFIB said Thursday the latest figures are from a survey sent to its members that show one in six, or about 181,000 Canadian small business owners are now seriously contemplating shutting down. Based on the CFIB update forecast, more than 2.4 million people could be out of work – representing 20% of private sector jobs. In 2020, 58,000 businesses became inactive in the country, according to the CFIB.
  • Speaking on a BBC radio program, a United Kingdom government scientific adviser said pubs and restaurants in the country should not open before May. Dr. Marc Baguelin, who sits on the Scientific Pandemic Influenza Group on Modelling (SPI-M), a sub-group of Sage, said the premature opening of the hospitality sector could lead to a lot of pressure on hospitals and “another wave of some extent.” Elsewhere in the UK, scientists are urging people in the country to invest in wearing medical-grade face masks as concerns grow over highly contagious COVID-19 variants. Medical-grade face coverings were originally to be reserved for health workers, but French health officials believe many cloth masks don’t guarantee protection against the new variants.
  • The European Union (EU) is joining in Canada’s frustration with drug maker Pfizer as they plan to cut deliveries by as much as half to some EU countries. Romania, Poland and the Czech government are bracing for the disruption to last weeks. Italy might channel their frustration into legal action, threatening to do so after being told to expect a 20% cut next week, after reducing this week’s supply by almost 30%.  Pfizer and their German partner BioNTech have declined to comment on the cuts beyond their statement last week, which announced the decrease in deliveries as they ramp up manufacturing in Europe.
  • Reuters is reporting India’s government has cleared commercial exports of COVID-19 vaccines with the first recipients set to be Brazil and Morocco as of Friday. The Indian government was holding off on exporting doses overseas until it began its own immunization program last weekend. Earlier in the week, India sent free supplies to neighbouring countries including Bhutan, Maldives, Bangladesh and Nepal. The inoculation developed by AstraZeneca and Oxford University are being manufactured at the Serum Institute of India, the world’s largest producer of vaccines.
  • China plans to impose strict COVID-19 testing to travellers during the Lunar New Year holiday season. The festive celebration, even in the middle of a pandemic, is expected to draw tens of millions of people to travel. In a notice posted online, China’s National Health Commission said people returning home to rural areas from other provinces would have to produce a negative COVID-19 test taken within seven days. New infections are at their worst point in China since March 2020, which has caused the country to rush to build a massive quarantine camp that can house more than 4,000 people. The camp is located on the outskirts of Shijiazhuang, the provincial capital of Hebei province, which surrounds China’s capital, Beijing.

Covid-19 – Due Diligence And Asset Management

BlackRock CEO Says U.S. Must Roll Out Vaccines Aggressively

Brief : The best measure of success for the new U.S. government of President Joe Biden will be the speed at which it rolls out COVID-19 vaccines, BlackRock Chief Executive Larry Fink said on Thursday. Speaking at online event organized by a business forum linked to Italy’s G20 presidency, Fink said he was confident the new administration would focus on sustainability in the first 90 days and smother any tensions with other countries. It’s about ... have America stand again for the principles of democracy ... and multilateralism ... and at the same time be aggressive and forthright in terms of the rollout of the vaccination,” the head of the world’s biggest asset manager said. Fink said it was a priority to rebalance the economy given the uneven impact of the pandemic across different sectors, but that could not happen until the population reached herd immunity and industries built on “aggregation” could be revived. “The economy will accelerate ... (once) we feel safe and secure again,” he said.

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Amazon Offers Assist with US COVID-19 Vaccine Distribution

Brief: Amazon is offering its colossal operations network and advanced technologies to assist President Joe Biden in his vow to get 100 million COVID-19 vaccinations to Americans in his first 100 days in office. “We are prepared to leverage our operations, information technology, and communications capabilities and expertise to assist your administration’s vaccination efforts,” wrote the CEO of Amazon’s Worldwide Consumer division, Dave Clark, in a letter to Biden. “Our scale allows us to make a meaningful impact immediately in the fight against COVID-19, and we stand ready to assist you in this effort.” Amazon said that it has already arranged a licensed third-party occupational health care provider to give vaccines on-site at its facilities for its employees when they become available. Amazon has more than 800,000 employees in the United States, Clark wrote, most of whom essential workers who cannot work from home and should be vaccinated as soon as possible. Biden will sign 10 pandemic-related executive orders on Thursday, his second day in office, but the administration says efforts to supercharge the rollout of vaccines have been hampered by lack of co-operation from the Trump administration during the transition. They say they don’t have a complete understanding of the previous administration’s actions on vaccine distribution.

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Wall Street Gets Frugal With Employees After Pandemic Windfall

Brief: Deluged by client orders and often working from home, Goldman Sachs Group Inc.’s workforce generated 15% more revenue per employee during the tumult of 2020. But as the year wound down, the firm had spent an average of just 2% more on each person. Inside JPMorgan Chase & Co.’s investment bank, revenue per employee surged 22%. The figure for pay: up 1%. For months, the question has hung over the industry: How would investment banks reward workers hauling in a windfall during a pandemic spreading pain and economic disparity? The answer -- at least broadly -- is not so lavishly. While few big U.S. banks disclose figures revealing how they compensated Wall Street-oriented workforces, the few that do offered striking snapshots of restraint. Even companywide figures at major banks hint at similar trends. And no wonder: Earnings reports in recent days underscored anew how hard 2020’s tumult battered other business lines such as lending, where banks stockpiled tens of billions to cover bad loans. Despite the flurry of activity on Wall Street, total revenue at the nation’s six banking giants was little changed last year. The group boosted average pay per employee by a mere $271. Now those same firms are bracing for tougher times in Washington, where Democrats skeptical of large financial-industry paychecks are ascendant. From President Joe Biden’s recent picks of veteran watchdogs -- such as Gary Gensler for the Securities and Exchange Commission and Rohit Chopra for the Consumer Financial Protection Bureau -- to his focus on inequality, there are signs the industry faces both tougher scrutiny and regulation.

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Cybersecurity, the Cloud and Covid-19: Facing the Challenges Head-On

Brief: The coronavirus pandemic has brought considerable challenges to the way hedge funds and asset management firms do business, with far-reaching consequences for cybersecurity, data safety and business communications. The need for fully flexible working around the pandemic continues to change. Collaboration tools have been key to successful working environments as staff need to work in the same way and securely, regardless of location.In the early stages of the pandemic, the major tech challenges centred around endpoint security. Individuals may have been using personal devices for professional purposes, and the prevalent model was of decentralised security and centralised data. We no longer look to secure a network or server in the same way. Endpoint security is now key, and every device needs security protection. With so many entry points to firms' applications and data, managing the security at the end point has been at the forefront since early 2020 across the sector. These challenges have generally been overcome across the market, and RFA has been ahead of the curve with our MDR and AI tools. Most of our clients were already using an iteration of the cloud to harness their data, but some have advanced their programmes to embrace what the cloud can offer in terms of data management. RFA have always been supporters of a public or hybrid cloud offering, and by having our own Security Operations Centre (SOC) we offer an end-to-end secure cloud-based solution to our clients which has helped them – and us – during the upheaval of the past 12 months. The hedge fund community faced the challenges of 2020 head-on, and I have every confidence that it will do the same through 2021.

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Covid Crisis Spurs 30 Per Cent Jump in M&A Activity Targeting Enterprise Software, says Hampleton Partners Report

Brief: The latest Enterprise Software M&A report from Hampleton Partners, an international technology mergers and acquisitions adviser, reveals that the number of deals targeting enterprise software assets has jumped, with 836 deals recorded in the second half of 2020 compared to 641 deals in the first half of the year. Total transaction value disclosed across all deals in the space was also sky-high, reaching USD112 billion – the highest amount on record. Valuation multiples remain healthy but have dipped slightly: the trailing 30-month median EV/S multiple came in at 3.4x, while the EV/EBITDA came in at 14x. This is possibly because the pandemic motivated sellers to decrease pricing to a more appetising level for buyers earlier this year. Meanwhile, the second half of 2020 saw the highest recorded share of private equity and financial buyer transactions: 38 per cent of all deals were carried out by financial buyers, up from 34 per cent in 2018 and 33 per cent in 2019. Miro Parizek, founder, Hampleton Partners, says: “The new circumstances and challenges around Covid-19 have created opportunities for software services.

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State Street to Eliminate 1,200 Jobs

Brief: State Street Corp. is preparing to lay off staff, a plan revealed about a month after media reports that the firm is considering a sale of its asset management business. During an earnings call on January 19, State Street’s chief financial officer said that the firm is eliminating about 1,200 positions, mostly in middle management. Last month, Bloomberg and the Wall Street Journal reported that the firm was exploring options for its State Street Global Advisors, including a possible sale of the more than $3 trillion asset manager to UBS Group. The roles State Street plans to eliminate are primarily a result of changes to its operating model and business process, as well as automation, Brendan Paul, a spokesperson for the firm said in an email Wednesday. According to Paul, the employees whose roles have been eliminated will be entered into State Street’s talent pool and may be “redeployed” to new roles. “At the onset of the pandemic, we committed to suspending headcount reductions through 2020 in order to provide our employees with some security during a time of tremendous economic uncertainty,” Paul said. At that time, the company built an internal talent network, which helped to keep more than 3,000 employees working for State Street in 2020, Paul said. State Street expects to spend $82 million on employee severance charges, its financial highlights report shows. During the earnings call, State Street’s president and chief executive officer Ronald O’Hanley declined to comment on “market rumors,” but he did say that the firm’s asset management business is strong thanks to organic growth.  “We see the world evolving, and therefore we need to think about how to add capabilities, both product and distribution capabilities, or distribution access to this,” O’Hanley said. He added that the firm would “continue to look at inorganic activities” for State Street Global Advisors.

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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 January 20, 2021:

  • In the United States, infectious disease expert Dr. Anthony Fauci will lead an American delegation at the World Health Organization’s (WHO) annual meetings this week to re-engage with the governing health body and take a more active role in the coronavirus pandemic. “Once the United States resumes its engagement with the WHO, the Biden-Harris Administration will work with the WHO and our partners to strengthen and reform the organization, support the COVID-19 health and humanitarian response, and advance global health and health security,” according to a statement from President Biden’s team. Former United States President Donald Trump withdrew America from the WHO last year in response to their handling of the pandemic, and their relationship with China.

  • Canada received some bad news on Tuesday in their fight against the coronavirus pandemic on the vaccine front. The federal government learned the “temporary” delay from Pfizer via their European plant will mean no new delivery of doses next week. CTV News is reporting that means Canada is set to receive just over 171,000 vaccine doses of the Pfizer vaccine over the next two weeks, instead of the more than 417,000 planned before the drug company announced its delay. This has left the Liberal government scrambling but trying to maintain their goal of having six million Canadians vaccinated by March remains on track, even though Prime Minister Justin Trudeau admits there “is still a lot of work to do.” During a news conference on Tuesday, Ontario Premier Doug Ford, desperate to keep the vaccination train moving, reached out to the United States and their Pfizer factories to share the wealth. However, with America suffering the worst from the pandemic, the request is likely to fall on deaf ears.

  • In the United Kingdom, The Telegraph is reporting government ministers are working on plans for easing lockdown restrictions, but it won’t be happening for a while. The Telegraph says the first areas could be moved out of full lockdown and moved into Tier 4 in early March, with only minimal further easing expected before Easter (which is early April). Elsewhere in the country, due to the recent lockdown, Chancellor Rishi Sunak is drawing up plans to extend the UK’s furlough scheme. The government’s $82 billion USD plan, paying as much as 80% of workers’ wages is set to expire at the end of April, but Chancellor Sunak is weighing various options to push the program into the summer.

  • Bloomberg is reporting the United Arab Emirates (UAE) vaccine rollout, deemed to be one of the world’s fastest, is fueling one of the best stock rallies. The Dubai Financial Market General Index has climbed about 12% this year, reversing its 10% slump from 2020. According to Bloomberg, only two major markets are performing better. Financial analysts believe the vaccine distribution is a prime reason for this. The UAE have administered more than two million coronavirus vaccine doses, inoculating close to one-fifth of their population.

  • The Philippines will allow China’s Sinovac Biotech Ltd to hold clinical trials for its coronavirus vaccine. President Rodrigo Duterte will take the Sinovac inoculation once it becomes available as government officials claim this is the one he prefers but will do so in private. The news comes after China in recent days agreed to donate 500,000 coronavirus vaccine doses to the Philippines in attempt to strengthen the ties between the two nations. The Philippine Food and Drug Administration is still waiting for Sinovac to submit documents on late-stage trials before processing its separate application for emergency use in the country.

  • Scientists around the world continue to worry about the COVID-19 variants, and recent news from South Africa might explain why. Reuters is reporting the new COVID-19 variant in South Africa can evade the antibodies that attack it in treatments using blood plasma from previously recovered patients and may reduce the efficacy of the current line of vaccines. The South African variant is 50% more infectious than previous versions and has already spread to at least 20 countries since being reported to the WHO in late December. British scientists and politicians have already expressed concern that vaccines currently being used or in development could be less effective against the variant.

Covid-19 – Due Diligence And Asset Management

US Treasury Yield Curve Predicted to Steepen as Investors Await Biden’s Planned Stimulus

Brief : Long-term US Treasury yields are predicted to rise even higher with a steeper yield curve as the economic outlook improves, with President-elect Joe Biden set to inject fresh fiscal stimulus after his inauguration on Wednesday. Last week, yields on US 10-year debt reached their highest levels since March, rising to 1.17 per cent as expectations of a return to higher inflation and economic growth prompted investors to sell longer-dated government debt. The yield curve also steepened to levels not seen since 2016, according to ratings agency S&P. Investor optimism was sparked initially by the outcome of run-off elections in Georgia favouring the Democratic Party, which is expected to help Biden push through a planned USD1.9 trillion relief package to support the US economy while vaccines are rolled out.  Support for the stimulus package came from Biden’s nominee for Treasury Secretary, former Federal Reserve chair Janet Yellen, who said the “smartest thing we can do is act big” as she outlined the plan before the Senate finance committee on Tuesday. If passed by Congress, relief would include direct payments of USD1,400 to all Americans, in addition to USD440 billion aid for small businesses, and USD415 billion for fighting the virus. Brad Tank, CIO of fixed income at US-based asset manager Neuberger Berman, says that yields have risen rapidly in 2021, and are likely to keep going up. Tank says that so far there has been a “fairly orderly adjustment of bond prices to improved growth and inflation expectations”. US 10-year Treasury yields have doubled since August and currently hover around 1.10 per cent yield, with almost 20 basis points of that increase coming since the start of this year.

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Morgan Stanley Boosts Targets After Blowout Trading Quarter

Brief: Morgan Stanley boosted both its short and long-term operating targets on Wednesday after coronavirus-induced volatility in financial markets helped the Wall Street bank post a quarterly profit that sailed past estimates. The company also confirmed plans to buy back $10 billion of shares this year, more than three times the figures announced by its retail banking peers, as it wrapped up results for U.S. lenders, which pointed to a modest rebound in the economy. “We are in the growth phase of this company for the next decade,” Morgan Stanley Chief Executive Officer James Gorman told analysts on a conference call. Morgan Stanley increased its two-year target for return on tangible equity to 14%-16%, from an earlier forecast of 13%-15%. The metric measures how well a bank is using its capital to produce profit. The company also raised its longer term target for the same metric to more than 17%, from its previous outlook of 15%-17%.

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Fund Managers Look for Bright Spots Amid Gloomy UK Dividend Figures

Brief: The annus horribilis that was 2020 in which payouts from UK companies were slashed by more than 40%, could be a positive development if it leads to a more sustainable dividends market, according to UK fund managers. The idea of a positive reset for UK dividends was part of a cautiously optimistic response to the latest dividend figures. While managers acknowledged they are the lowest since 2011, they also pointed to signs of a slight recovery in Q4 and the hope that the vaccine rollout will spark a recovery in both earnings and dividends over the next year and beyond. According to the UK Dividend Monitor produced by Link Group, UK dividends fell by 44% in 2020 to £61.1 billion, effectively wiping off eight years of growth. The headline dividend figures were the lowest since 2011. Unsurprisingly, Covid-19 accounted for £39.5 billion of the cuts with 67% of companies either cancelling or reducing their dividends between Q2 and Q4. Link’s figures also show that the financial services sector was by far the most affected sector in 2020 with £16.6 billion of dividends either cut or cancelled between April and December, equivalent to two-fifths of the Covid-related cuts.

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Africa Private Equity Has $2 Billion Cash Pile After Virus Dip

Brief: Private-equity investors in southern Africa are closing deals again after a virus-induced lull, tapping a cash pile that stood at more than 30 billion rand ($2 billion) in June, according to an industry association. Businesses in the education, health care and retail sectors operating online are among the top picks for investors seeking to take advantage of market gaps amplified by the Covid-19 pandemic, Tanya van Lill, chief executive officer of the Southern African Venture Capital and Private Equity Association, said by phone. “From a venture-capital perspective, we are seeing a lot of activity in East Africa and West Africa, specifically in Nigeria and Kenya, where there has been investment in the fintech, agritech and insuretech space,” Van Lill said. “From a private-equity perspective, it’s fairly equal across the continent, though we are seeing a lot of activity in North Africa.” Prior to the pandemic, private-equity capital was increasingly allocated to infrastructure and energy projects in the region. However, lockdown restrictions imposed as a result of the virus meant firms couldn’t get on the ground to perform due diligence processes and close deals. They also battled to raise funds and sell out of investments, Van Lill said.

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Health-Care Expertise Paid Off for Covid-19 Short Sellers

Brief: The success of short sellers during the pandemic appears tied to their health-care expertise and information processing skills, according to a paper from researchers in Germany and Australia. The Covid-19 pandemic is a “health-care crisis by nature,” making health-care-related information valuable across industries and a competitive edge for some short sellers, said Karlsruhe Institute of Technology researchers Levy Schattmann and Jan-Oliver Strych and University of Sydney business school professor Joakim Westerholm in a paper this month. They found short sellers with health-care expertise outperformed a control group that lacked it in their general market trading. The study drew from a German sample of daily short-selling data from November 1, 2012 through June. The researchers covered 266 different short sellers and 214 different stocks, “including a range of well-known brokers and hedge funds like J.P. Morgan or Renaissance Technologies,” according to the paper. As volatile markets moved fast last year as a result of the Covid-19 pandemic, short sellers’ health-care expertise and ability to process aggregate information became more important to producing superior returns than having insight into specific companies, the researchers found. 

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Qatar Fund Put Pandemic Bets on Distressed Debt, High-Grade Bonds

Brief: Qatar Investment Authority is generating strong returns on a multi-billion dollar bet it made on distressed debt and highly rated bonds at the start of the COVID-19 crisis, two sources familiar with its move said. QIA, a sovereign wealth fund with assets of $300 billion, owns department store owner Harrods and stakes in Barclays and prime properties such as Canary Wharf in London, bet that investment grade bonds would rebound from lows hit in March, investing in both sovereigns and corporates, they said. It was not alone in such a shift, as sovereign wealth funds invested a net $4.5 billion across U.S. fixed income in the third quarter of 2020, the most since at least the end of 2017, latest data from eVestment shows. The S&P 500 Investment Grade Corporate Bond Index has gained about 20% since hitting a low of 417.88 in mid-March. And in a departure from its previous portfolio purchases, QIA also put significant sums into so-called distressed credit, including funds that help struggling companies.

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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 January 19, 2021:

  • In a bizarre move, United States President Donald Trump in one of his last orders before he is no longer President, moved to lift coronavirus-related travel restrictions. In an executive order issued Monday evening, President Trump said he had been advised by his Secretary of Human and Health Services to lift air travel restrictions for much of Europe, the United Kingdom, Ireland and Brazil as of January 26th. The move though is pretty much dead-on arrival. Incoming Press Secretary Jen Psaki said the Biden administration would not be lifting the restrictions. “With the pandemic worsening, and more contagious variants emerging around the world, this is not the time to be lifting restrictions on international travel,” said Psaki on Twitter. On the advice of our medical team, the Administration does not intend to lift these restrictions on 1/26. In fact, we plan to strengthen public health measure around international travel to further mitigate the spread of COVID-19.”
  • During a regular news briefing on Tuesday, Canadian Prime Minister Justin Trudeau implored his citizens not to travel and for those who have booked any trips to cancel them. Prime Minister Trudeau cited the evolving situation with the identified COVID-19 variants from other countries and noted because of this, Canada’s international travel rules could change very quickly. Since the onset of the pandemic, the federal government has continued to advise against any non-essential travel, but with the weather getting colder, Canadian airlines and travel companies continue to offer vacation packages and flight deals to warmer destinations. Acknowledging that people have the right to travel, Prime Minister Trudeau also said the government has the ability to impose penalties for those endangering others’ health.
  • The United Kingdom currently has the worst daily coronavirus death rate in the world. The figures collected by Oxford University showed an average of 935 daily deaths due to COVID-19, which would be the equivalent of more than 16 people in every million dying each day from the disease. United Kingdom Prime Minister Boris Johnson warned on Monday while the overall daily cases seem to be trending in the right direction, the country is still in a precarious position as ministers prepare for the easing of lockdown restrictions from early March. The Prime Minister said the process will be gradual with no “open sesame” moment.
  • After meeting with the leaders of Germany’s 16 states, Chancellor Angela Merkel has extended and tightened national lockdown restrictions. The lockdown has been extended until February 14 with new rules making it mandatory to wear medical masks in shops and on public transport. These new rules are on top of the restrictions that have been put in place since November which included restaurants, leisure and sporting facilities closed, with schools and non-essential shops following suit in mid-December.
  • An independent panel for pandemic preparedness and response said China and the World Health Organization (WHO) could have acted faster to avert catastrophe during the early stages of the coronavirus outbreak. The panel in its evaluation of the start of the crisis in China said the country should have applied public health measures more forcefully in January 2020 after COVID-19 was first detected in Wuhan in late 2019. The report also criticized the WHO for dragging its feet at the start of the crisis – noting the UN health agency didn’t convene its emergency committee until January 22nd, 2020 and didn’t move the coronavirus to its highest alert level until a week later. 
  • Australia is dealing with a new problem and it all revolves around tennis. The Australian Open – noted as the first of the four Grand Slams in professional tennis – is set to start on February 8th, but coronavirus cases were detected on three of 17 charter flights that carried players and staff. Therefore the 72 players on those three planes have been deemed close contacts of the four confirmed COVID-19 cases and must self-isolate in their hotel rooms for 14 days. While most are making do, the perks of professional athletics and special treatment they usually receive is making for some interesting requests/takes. World number one Novak Djokovic – who arrived on a virus-free flight sent a list of demands to tournament organizers that included allowing players to move to private homes with tennis courts while another – Spain’s Roberto Bautista Agut – ranked 13th in the world - had to apologize for comparing quarantine to prison.

Covid-19 – Due Diligence And Asset Management

Goldman Sachs Profit More Than Doubles on Underwriting, Trading Boost

Brief : Goldman Sachs Group Inc dwarfed Wall Street estimates as its fourth-quarter profit more than doubled, powered by another blowout performance at its trading business and a surge in fees from underwriting a series of blockbuster IPOs.  Revenue from global markets, which houses the bank’s trading business, registered its best annual performance in a decade as investors churned their portfolios at the end of a roller-coaster year for financial markets amid the COVID-19 pandemic. Trading, Goldman’s main revenue-generating engine, surged 43% annually. On a quarterly basis, revenue from the unit jumped 23% to $4.27 billion. Investment banking revenue jumped 27% to $2.61 billion during the quarter, driven mainly by equity underwriting, which was up 195% from the same period last year. Equities trading and investment banking revenues both comfortably beat forecasts, Oppenheimer analyst Chris Kotowski said. “It was an exceptionally strong quarter,” he said. The bank’s shares surged 2.6% in early trading, adding to a 20% gain in the past year. Goldman’s shares hit a record high of $307.87 last week, giving it a market cap of over $100 billion. Total revenue climbed 18% to $11.74 billion. The bank’s net earnings applicable to common shareholders rose to $4.36 billion, or $12.08 per share, in the quarter ended Dec. 31. Analysts had expected a profit of $7.47 per share on average, according to IBES data from Refinitiv.

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Pandemic Could be Source of Global Crisis for Years: WEF

Brief: The coronavirus has exposed the “catastrophic effects” of ignoring long-term risks such as pandemics, and the economic and political consequences could cause more crises for years to come, according to the World Economic Forum. The WEF’s annual survey of global risks lists infectious disease and livelihood crises as the top “clear and present dangers” over the next two years. Knock-on effects such as asset bubbles and price instability lead concerns over three to five years. The WEF said most countries struggled with crisis management during the pandemic, despite some remarkable examples of determination and cooperation. That highlights how leaders need to prepare better for whatever the next major shock turns out to be. “The immediate human and economic cost of COVID-19 is severe,” the WEF said in the report. “The ramifications -- in the form of social unrest, political fragmentation and geopolitical tensions -- will shape the effectiveness of our responses to the other key threats of the next decade.” While the impact of the pandemic is dominant at the moment, other events will likely come to the fore, according to the survey. As in previous years, extreme weather is seen as the most-likely risk, just ahead of a failure on climate action. Infectious diseases make the top five for the first time in at least a decade. Digital inequality and the concentration of digital power are also seen as major concerns, with WEF Managing Director Saadia Zahidi warning of a global “bifurcation in terms of growth and development.”

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Equity and Hybrid Markets Hold Solution to European Covid-19 Corporate Recapitalisation, says AFME

Brief: A report by the Association for Financial Markets in Europe (AFME) and PwC reveals that an equity shortfall of up to EUR600 billion threatens Europe’s economic recovery despite the significant public support measures and private capital made available across Europe to support economies during the pandemic.AFME is calling on the European Commission and members states to introduce measures to bolster Europe’s equity and hybrid markets and expand funding avenues for businesses, further enabling Europe’s economic recovery In a report published today (19th) in partnership with PwC, AFME warns that Europe needs to bridge a gap of EUR450-600 billion in equity needed to prevent widespread business defaults and job losses as Covid-19 state support measures are gradually reduced. The report Recapitalising EU businesses post Covid-19 reveals that despite the support provided by governments and the private sector since the start of the pandemic, 10 per cent of European companies have cash reserves to only last six months. The pan-European trade association is calling on authorities to explore and develop further short-term measures to support Europe’s equity and hybrid markets and accelerate the Capital Markets Union to help fund the recovery. Unless urgent action is taken, a spike in insolvencies could start as early as this month and threaten the EU’s recovery prospects, AFME warns.

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Hedge Fund Inflows Surge Amid Equity Valuation Concerns, JPMorgan Says

Brief: Investors have been flocking to hedge funds, an area of alternative investing viewed as a volatility dampener and portfolio diversifier, as markets move toward a post-pandemic world, according to JPMorgan Chase & Co. J.P. Morgan Asset Management saw record capital flowing into its hedge funds during the last two weeks of 2020 and into the first half of January, according to Anton Pil, the global head of the bank’s alternative investing arm. Investors are viewing hedge funds as a counterweight to stretched valuations in equities, embracing them as a diversification strategy on the expectation that they will produce more yield than fixed income, Pil said in a phone interview.  “They’ve done something which took a long time,” he said of hedge funds, an asset class that had been out of favor with investors. “They delivered returns that have a low correlation to both fixed income and equity,” Pil explained, while generally providing “pretty significant excess returns over cash.”  J.P. Morgan Asset Management’s hedge fund strategies last year produced returns ranging from high single digits to more than 20 percent, Pil said. Investors, meanwhile, face tough challenges finding yield, with the firm forecasting that a traditional portfolio consisting of 60 percent stocks and 40 percent bonds will return 4.2 percent annually over the next 10 to 15 years.   The best opportunities for alternative investing have shifted significantly over the past year, according to J.P. Morgan Asset Management’s 2021 Global Alternatives Outlook report, which is expected to be released Tuesday. While hedge funds remain among the “opportunity set” laid out by bank’s alternative asset management arm for the next 12 to 18 months, subordinated credit and real assets have now entered that framework, as well. 

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M&A Valuations Boom in the Second Half of 2020, Despite Covid-19 Impacts on the Economy, says PwC

Brief: M&A valuations are soaring, with rich valuations and intense competition for many digital or technology-based assets driving global deals activity, according to PwC's latest Global M&A Industry Trends analysis. Covering the last six months of 2020, the analysis examines global deals activity and incorporates insights from PwC's deals industry specialists to identify the key trends driving M&A activity, and anticipated investment hotspots in 2021. In spite of the uncertainty created by COVID-19, the second half of 2020 saw a surge in M&A activity. "Covid-19 gave companies a rare glimpse into their future, and many did not like what they saw. An acceleration of digitalisation and transformation of their businesses instantly became a top priority, with M&A the fastest way to make that happen — creating a highly competitive landscape for the right deals," says Brian Levy, PwC's Global Deals Industries Leader, Partner, PwC US. Dealmaking jumped in the second half of the year with total global deal volumes and values increasing by 18 per cent and 94 per cent, respectively compared to the first half of the year. In addition, both deal volumes and deal values were up compared to the last six months of 2019. The higher deal values in the second half of 2020 were partly due to an increase in megadeals (USD5 billion+). Overall, 56 megadeals were announced in the second half of 2020, compared to 27 in the first half of the year. The technology and telecom sub-sectors saw the highest growth in deal volumes and values in the second half of 2020, with technology deal volumes up 34 per cent and values up 118 per cent. Telecom deal volumes were up 15 per cent and values significantly up by almost 300 per cent due to three telecom megadeals.

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Stimulus is Like Heroin, ‘It Doesn’t do you a lot of Good Long-Term’: Wall Street Heavy-Hitter

Brief: Wall Street power player Rob Arnott — the founder of influential money manager Research Affiliates who is known to challenge conventional thinking in markets — is out with a double barreled warning to market bulls who continue to print money during the pandemic on the back of gobs of fiscal and monetary stimulus. First, don’t forget the long-term ramifications of government spending. At some point, that money is going to have to be paid back and Mr. Market won’t dig that. And secondarily, remember the health of Main Street remains detached from the bullish realities of Wall Street this past year during the health crisis. “Applying the word stimulus to spending large quantities of money on a fiscal basis that we don’t already have — creating new money from the central bank — it all feels good. Stimulus, think of it as a little bit like heroin. I have heard that heroin feels good, but it doesn’t do you a lot of good long-term,” explained Arnott on Yahoo Finance Live. The reduced spending from the lockdowns paired with the fiscal and monetary so-called stimulus, pours money into the markets. There is no alternative. With zero yields you may as well go into the markets at any price creating bubbles. And when fiscal and monetary stimulus don’t promote spending in the macro economy, it does into Wall Street and not Main Street.” Arnott founded Research Affiliates in 2002 and it has about $145 billion in assets under management.

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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 January 18, 2021:

  • The United States are feuding with China over the World Health Organization’s (WHO) scientific mission in Wuhan to get to the bottom of what led to the coronavirus outbreak. According to a Reuters report, the US is calling on China to allow WHO’s expert team to interview “care givers, former patients and lab workers” in Wuhan – something that Beijing has rebuked. The WHO’s team arrived in China on January 14 and will be holding teleconferences with their Chinese counterparts until their two-week quarantine is up. On Friday, China accused America of “spreading lies and conspiracy theories” after the Trump administration said it had new information suggesting that the coronavirus emerged from a Chinese laboratory.

  • In Canada, the province of Alberta is claiming their COVID-19 vaccine supply is on the brink of exhaustion. During a news conference on Monday, Premier Jason Kenney said, “by the end of today or early tomorrow, Albertans will have no more vaccine doses in storage to administer as first doses to Albertans.” Even with a Pfizer vaccine shipment expected later this week, Premier Kenney said it won’t have enough to continue with first dose appointments and those will not be scheduled until further notice. Elsewhere in the country, Ontario will be opening a new hospital as of February 7th and treating it as a COVID-19 care hospital that other sites can send their overflow patients to. Cortellucci Vaughan was the first new hospital to be built in the province in more than 30 years and was expected to open to the public early this year as a normal, routine hospital, but Ontario’s spike in cases during the second wave of the pandemic changed all that.

  • “Don’t blow it now. We are on the route out. We are protecting the most vulnerable. We are getting this virus under control.” These were the words of United Kingdom’s Health Secretary Matt Hancock as coronavirus cases were falling in almost every London borough for the first time in months. The Evening Standard reported over the past week, cases have fallen by as much as 30% with no borough reporting an increase. London-wide, the number of infections has decreased by almost one-third since January 1st.

  • Japanese Prime Minister Yoshihide Suga is trying to avoid becoming a short-term transitional leader, vowing in a speech to parliament to overcome the latest wave of coronavirus infections. Prime Minister Suga has seen his popularity slide since taking over as leader in September while the number of COVID-19 cases have steadily risen. The country’s leader promised his government would pass a law adding penalties and incentives to virus management, while also outlining environmental and digitization plans aimed at boosting the world’s third largest economy.

  • India started one of the more complex vaccination plans in human history over the weekend with over 381,000 receiving their first inoculation over a three-day period. India, with a population of 1.3 billion, is having its rollout watched very closely by the rest of the world to see whether COVID-19 cases can be swiftly brought under control in developing nations where health and transportation networks are often not well aligned. According to the numbers, 10.5 million people have been infected with COVID-19 in India, where it has killed more than 150,000 people. 

  • The WHO is calling out the conscious of the western world when it comes to COVID-19 vaccinations. WHO Director General Tedros Adhanom Ghebreyesus said Monday the equitable distribution of coronavirus vaccines is at “serious risk” and warned of a “catastrophic moral failure”. Director Ghebreyesus believes it isn’t right that younger, healthier adults in rich countries are vaccinated before health workers and older people in poorer countries. “There will be enough vaccine for everybody, but right now we must work together as one global family to prioritize (those) most at risk of serious diseases and death in all countries,” said Ghebreyesus.

Covid-19 – Due Diligence And Asset Management

Biden Taps Gensler as SEC Chairman, FTC’s Chopra as CFPB Chief

Brief : President-elect Joe Biden has picked a pair of veteran regulators strongly backed by progressive Democrats to lead two key Wall Street watchdogs, signaling that his administration is planning tough oversight after four years of light-touch policies under appointees of President Donald Trump. Former Commodity Futures Trading Commission Chairman Gary Gensler will be nominated to lead the Securities and Exchange Commission and Federal Trade Commission member Rohit Chopra is being tapped to lead the Consumer Financial Protection Bureau, Biden’s transition team said Monday… The selections follow weeks of intra-party wrangling over the financial regulation posts between moderate Democrats and those on the party’s left wing who want to see a sharp departure from business-friendly policies advanced during the Trump administration. They are bad news for the banking industry, which has been bracing for the prospect of stiffer rules since Biden was elected in November. Gensler, 63, is a former Goldman Sachs Group Inc. partner who gained a reputation as a Wall Street scourge when he engaged in bruising battles while advancing derivatives regulation at the CFTC during the Obama administration. Chopra, 38, is an acolyte of Massachusetts Senator Elizabeth Warren who helped her set up the CFPB before she ran for office.

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Private Equity: The Booming Biotech Sector

Brief: Investment in biotech is booming. In Europe, the biotechnology and healthcare sector accounted for 20% of overall private equity investment in the first half of 2020, according to data from funds trade body Invest Europe.  Investors in the field are faced not only with financial and ethical dilemmas, but the risks posed by the presence of bad actors.  Andrew Hessel, a microbiologist, tells the latest issue of Funds Europe that, as with all developing technologies, the risks entailed are ever-evolving.  “The core of the technology is agnostic, it’s human intention,” he says. “There’s always the potential for harm.” Hessel is chairman of Genome Project-write, a collaborative research effort focusing on large-scale synthesis and editing of genomes. A geneticist himself, he says molecular science is evolving dramatically, with scientists able to write genetic code to their own design, for example, and the programming of synthesised viruses to destroy cancer cells using computer-aided design. 20 years on since scientists sequenced the human genome, and concepts such as designer babies are no longer science-fiction. Agustin Mohedas, senior research analyst specialising in biotechnology at Janus Henderson, highlights that a moral line in the ground has been drawn when it comes to ‘biohacking’ embryos.

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Active-Management Alpha Now Key to Hedge Funds’ Success, as Economies Emerge From Covid Slump

Brief: K2 Advisors, the hedge fund investing unit of Franklin Templeton, says active-management alpha will be critical to hedge funds’ success this year, as the global economy mounts a tentative recovery from the coronavirus pandemic. Brooks Ritchey and Robert Christian, co-heads of investment research and management at K2, said the Covid-driven economic slowdown appears to be nearing an end, as individuals and corporations have been able to weather the economic storm partly due to “enormous stimulus” from governments. But they warned that vaccination challenges, virus mutations, subsequent waves of new infections, and renewed lockdowns could derail the recovery. That, in turn, could keep volatility and dispersion elevated, creating opportunities for active management. K2 Advisors’ first-quarter Q1 hedge fund strategy outlook suggested inflation “will inevitably surface” if earnings, growth and sentiment jump the gun on the recovery, though a period of reflation without inflation could boost equities. “Our underlying hedge fund managers are identifying many opportunities, both on the long and short side, and think that active-management alpha will be key to success in 2021 as beta-driven momentum slows,” the pair observed in the commentary.

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Finance Leaders Describe Some of Their New Pandemic Habits

Brief: To find out how finance executives are getting through the pandemic, Bloomberg Markets asked three leaders about some of their habits and recommendations. Here are their responses. Lori Heinel: Deputy global chief investment officer, State Street Global Advisors What is your morning routine? I’m generally awake at 5 a.m. On a good day, I hop on the stationary bike or elliptical trainer while I am reading through the news or catching the morning broadcast. What did you get to do during the pandemic that you wouldn’t have done otherwise?  I’ve been doing a lot more cooking—baking bread, trying new recipes, and cooking (and delivering) meals for family members and close friends. Where are you most eager to travel for nonwork reasons? I can’t wait to go to Colorado or Utah to ski! A very close second is Iceland. When the pandemic is over, how will your life be different than it was before? I’ve learned to slow down a bit. I got a bird feeder a few months back, and every time I look out the window, watching the birds dive in, seeing the different species, it makes me smile.

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China’s Economy Picks Up Speed in Fourth Quarter, Ends 2020 in Solid Shape after COVID-19 Shock

Brief: China’s economy picked up speed in the fourth quarter, with growth beating expectations as it ended a rough coronavirus-stricken 2020 in remarkably good shape and remained poised to expand further this year even as the global pandemic rages unabated. Gross domestic product grew 2.3% in 2020, official data showed on Monday, making China the only major economy in the world to avoid a contraction last year as many nations struggled to contain the COVID-19 pandemic. And China is expected to continue to power ahead of its peers this year, with GDP set to expand at the fastest pace in a decade at 8.4%, according to a Reuters poll. The world’s second-largest economy has surprised many with the speed of its recovery from the coronavirus jolt, especially as policymakers have also had to navigate tense U.S.-China relations on trade and other fronts. Beijing’s strict virus curbs enabled it to largely contain the COVID-19 outbreak much quicker than most countries, while government-led policy stimulus and local manufacturers stepping up production to supply goods to many countries crippled by the pandemic have also helped fire up momentum. GDP expanded 6.5% year-on-year in the fourth quarter, data from the National Bureau of Statistics showed, quicker than the 6.1% forecast by economists in a Reuters poll, and followed the third quarter’s solid 4.9% growth.

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Prophet Capital Restructures CLO Hedge Fund Amid Market Rebound

Brief: Prophet Capital Asset Management LP, an investor in loans and structured credit securities with $2.5 billion in assets, has restructured a hedge fund that had been rocked by March’s market turmoil, a company executive said on Friday. Reuters reported in March that Prophet Capital, based in New York and Austin, Texas, had temporarily blocked investor withdrawals from its Prophet Opportunity Partners LP fund with a view to ultimately dissolving it, amid extreme volatility sparked by the onset of the coronavirus. The fund primarily held high-yield collateralized loan obligations (CLO), which were hard hit amid fears over the widespread risk of corporate loan defaults stemming from pandemic lockdowns. The CLO market has since rebounded dramatically, allowing Prophet Capital to raise new cash for the fund and let investors redeem their money, said the firm’s partner David Rosenblum. Effective Jan. 1, the fund has allowed investors three options: to cash out at net asset value, remain invested but sell their legacy assets over time, or reinvest with a two-year lockup that would make it easier to manage the fund through times of extreme volatility, said Rosenblum. The restructuring underscores how default rates in the leveraged loan market have been far lower than feared, thanks largely to extraordinary interventions by the U.S. Federal Reserve.

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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 January 15, 2021:

  • The United States Centers for Disease Control and Prevention (CDC) is sounding the alarm on new, more contagious variants. The CDC announced on Friday Americans must double-down on their mitigation in efforts to protect their fellow citizens until larger numbers can be vaccinated. In every scenario explored by the CDC the United Kingdom strain will account for a majority of the cases in the United States by some point in March. British researchers estimate the strain is roughly 50% more transmissible than the common coronavirus strain.
  • Canada’s public health authority released new national modelling on Friday in tracking COVID-19 and it should come as no surprise to Canadians: the situation is getting worse. The latest data shows Canada is on track to see up to 796,630 total cases and 19,630 deaths by next Saturday, and up to 10,000 cases a day by the end of the month. “We’ve seen the kinds of impossible choices hospitals in other countries had to face when they become overwhelmed, said Prime Minister Justin Trudeau during a news conference. Deciding who gets an ICU bed and who doesn’t, well that’s not where we want to be. So please keep following public health guidelines and stay safe.” Canada also received some bad news on the vaccine front with Pfizer’s expansion plans at its European manufacturing facility, meaning a “temporary” delay on shipments of up to 50% over the next several weeks. 
  • United Kingdom Prime Minister Boris Johnson announced on Friday that the country will close all travel corridors as of Monday at 4 AM to protect against the risk of unidentified new strains. What this means is that all travelers as of Monday entering the UK will have to provide proof of a negative COVID-19 test within 72 hours of departure. They will also have to isolate for 10 days, unless they take another test, which will allow that period to be shortened to five days, if the result proves negative. The Prime Minister also announced significant ramping up of border controls, which will also require all inbound travellers to produce a negative COVID-19 test but didn’t mention about extending quarantine rules. 
  • Germany will be pushing up its next meeting with the country’s 16 regional leaders a week earlier due to the worsening situation in the country. “New infection cases are too high,” said Chancellor Angel Merkel spokesperson, Steffen Seibert. Chancellor Merkel and state leaders will meet on Tuesday after originally set to meet on January 25th. Germany on Friday surpassed two million cases and on Thursday, Robert Koch Institute chief Lothar Wieler admitted the current lockdown in place has not been effective as the one put in place last spring.
  • The United Arab Emirates (UAE) are now second in the world, trailing only Israel in coronavirus vaccine administration rates. The UAE is currently inoculating 180,000 people per day with the Ministry of Health and Prevention stating earlier in the week of a campaign to vaccinate over 50% of the population. On Thursday, UAE reported a record 3,407 new coronavirus cases. The country has China’s Sinopharm and Pfizer’s vaccinations currently available, while the Russian Sputnik vaccine is undergoing phase III trials in Abu Dhabi.
  • Brazil’s healthcare system in its largest state is on the verge of collapse as hospitals are running out of beds and oxygen tanks amid soaring coronavirus cases and a new variant. President Jair Bolsonaro said “all means” are being made to help the state of Amazonas as local news reports are quoting doctors and nurses as saying patients are dying of asphyxiation in the city’s hospitals due to a lack of oxygen. Brazil’s Vice President Hamilton Mourao is blaming the new coronavirus variant circulating in the city of Manaus, saying there was no way to foresee the collapse in the public health system.

Covid-19 – Due Diligence And Asset Management

Big Banks Unleash $5 Billion From Reserves on Loan Optimism

Brief : Wall Street’s worst fears about the fallout from Covid-19 are receding. Three of the biggest U.S. lenders -- JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. -- cut their combined reserves for losses on loans by more than $5 billion, helping fourth-quarter profit top estimates even as they faced headwinds from low interest rates. While posting results Friday, executives expressed guarded optimism about fiscal stimulus and rising vaccinations during a pandemic in which delinquencies have remained low. Still, the banks warned the economy isn’t out of the woods yet. Six of the largest U.S. banks urgently set aside more than $35 billion to cover loan losses in the first half of 2020 with the message that they simply had no idea what to expect. Now, banking chiefs are pointing to prospects for a rebound this year. Unprecedented action from the Federal Reserve and lawmakers have allayed the worst-case scenarios. “We’ve seen further improvement on both GDP and unemployment,” Citigroup Chief Financial Officer Mark Mason told reporters on a conference call, referring to gross domestic product. There are a lot of favorable indicators that “make for a more positive outlook in 2020 and hopefully a continued, stable recovery,” he said. Beyond vaccines, he pointed to more clarity on the next U.S. presidential administration and prospects for additional stimulus.

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KKR’s McVey Flags Dollar, Rates Among ‘Black Swan’ Tail Risks

Brief: KKR & Co.’s Henry McVey is advising investors to buy “tail risk” protection against the potential for low-probability events, like the dollar losing its status as the world’s reserve currency or a sudden spike in interest rates. The strategy is a form of financial insurance that typically pays off in the event of sudden selloffs, such as the pandemic-driven market chaos of last year. While McVey anticipates the current mix of economic trends and policy will drive a strong rebound in growth, he’s wary after the recent run-up in asset prices and the increase in Treasury yields. “There are two or three things that could go wrong against a generally constructive backdrop,” KKR’s head of global macro and asset allocation said in an interview on Bloomberg Television. Besides the potential loss of confidence in the dollar and a disorderly increase in rates, McVey also highlighted the “black swan” risk of a major disappointment in corporate earnings that could make investors re-evaluate equities. However, he thinks the probabilities remain low. Tail-risk hedging is a small industry that includes LongTail Alpha in Newport Beach, California, and Universa Investments, a Miami-based firm advised by Nassim Taleb, the former options trader who wrote the 2007 bestseller “The Black Swan.” The LongTail Alpha hedge fund gained 10-fold in March, rewarding investors who bought protection against a market collapse.

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Impact of Social Factors on Stock Performance Rises with Pandemic, Finds Federated Hermes

Brief: The ‘social premium’ for investing in companies with good or improving social practices is rising, according to new research from US-based asset manager Federated Hermes. In 2020, social factors were found to add up to 17 basis points each month to returns, which is two basis points higher than the result of a previous study in 2018. Lewis Grant, senior global equities portfolio manager at Federated Hermes, says that this increase reflects the fact that 2020 was a “huge turning point in society that brought some really difficult and ingrained issues to the fore”.  The impact of the coronavirus pandemic and the growth of the Black Lives Matter movement after the death of George Floyd at the hands of police in the US, both helped accelerated the trend toward social investing. “We were already seeing an increase in the importance of social factors. I think that's just what's happening in the world,” says Grant.  General sustainable funds have grown rapidly in recent years, with sustainable investment now accounting for a third of all assets under management in the US.  When Federated Hermes first started researching the topic of sustainability premia several years ago, Grant says they did not find any statistical relationship between returns and social factors at all, only for governance factors. Social factors include a company’s treatment of its staff, rates of employee turnover, health and safety in the workplace, and supply chain standards. 

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Timing is Everything During Pandemic: How Investors Can Ride the Second Wave and not Drown in it

Brief: Following the initial uplift from the announcement of a Covid-19 vaccine, markets have slowed, caught between optimism for the 2021 outlook and short-term concerns around the second wave impact. However, we expect a positive kick-off for risk assets in 2021, with conditions ripe for a co-ordinated acceleration of global growth. Over the next three to six months, as vaccine rollouts allow economic activity to resume, the return of growth and inflation will offer a temporary relief from the global economy's long-term state of 'Japanification'. This macro reflation scenario has been confirmed week after week by economic data and is supported by the promise of ongoing accommodative support from central banks.  Nevertheless, we do not expect the reflation to evolve in a straight line, with Brexit a potential bump along the road, and investors need to be mindful of ongoing volatility. Moreover, if we head into 2021 with a strong rally, this will be difficult to sustain - and investors will have to be quick to capitalise. The ongoing global recovery fuels a pick-up in global trade and especially Asian exports, similar to the previous 'reflation' episode in 2016-17. The global pandemic drove a wedge between equity sectors, starkly separating winners from losers. The technology and online retail sectors outperformed during the pandemic, as working from home and e-commerce accelerated demand for these firms.

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Standard Chartered Preparing Hundreds More Job Cuts

Brief: Standard Chartered Plc is preparing further job cuts as the emerging markets lender continues a restructuring that was postponed by the onset of the pandemic. The London-headquartered bank is expected to cut several hundred staff next month across its global businesses, with the reductions focused on more junior employees, according to people familiar with the matter. The bank has about 85,000 employees around the world. Job cuts restarted in the second half of last year as Standard Chartered, like other major lenders, faced pressure to curtail costs to cope with the impact of the pandemic. It’s one of a handful of large European banks who have resumed job reductions in the past months including HSBC Holdings Plc and Deutsche Bank AG. “A number of roles are being made redundant in line with our commitment to transforming the bank to ensure its future competitiveness, work that has been underway for the last few years,” Standard Chartered said in a statement. In July, the company said it was making a “small number of roles” redundant. Since then, several senior managers have left, including Didier von Daeniken, the head of its private banking arm. Standard Chartered Chief Financial Officer Andy Halford said in October that the firm needed to improve returns and its goal of achieving a 10% return on equity had been pushed back by Covid. The lender has said it will consider resuming dividend payments to investors after the Bank of England started to relax pandemic-related curbs in December.

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Silicon Valley’s Share of Venture Capital Expected to Drop Below 20% for the First Time

Brief: The pandemic has upended the U.S. economy and it has also had a far-reaching effect on Silicon Valley, the venture capital industry and the entrepreneurial ecosystem in America. According to PitchBook’s 2021 US Venture Capital Outlook report that was released late last month, the Bay area’s share of total VC count in the U.S. will fall below 20% for the first time in history, while other cities around the country grab larger amounts of equity capital for their home-grown innovators.  In 2020, $27.4 billion of venture capital was raised in the U.S., PitchBook reports. Of the total, 22.7% of the dealmaking occurred in the Bay Area, and 39.4% of deal value was invested in Bay area-headquartered companies. “The Covid-19 pandemic and subsequent exodus from San Francisco will only exacerbate this trend,” said PitchBook’s analyst Kyle Stanford. He notes that Silicon Valley’s share of venture capital deal count in the U.S. has fallen every year since 2006. The forces driving the continued shift: the rise of remote work during the pandemic, the high cost of living in the Valley, and the fact it’s become more expensive to finance start-ups in the Bay area. Another factor is the fact that many investors have left — either temporarily working from home or relocating all together. For example, 8VC has made 70% of its investments in California-headquartered companies, yet it moved its own headquarters from San Francisco to Austin in November.

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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 January 14, 2021:

  • In the United States, President Elect Joe Biden is expected to address the nation Thursday evening to outline his vaccination and economic rescue legislative package. Multiple media reports have the price tag somewhere between $1.3 and $2 trillion. The proposal is expected to include sizeable direct payments to American families and significant state and local funding – two sticking points in the previous round of coronavirus stimulus talks. CNN is reporting that the Biden team is taking a “shoot for the moon” approach even if they only hold the slimmest of majorities in the House and the Senate as of next week and his own Democratic party wanting something big.

  • In a news briefing on Thursday, the Canadian federal government outlined what phase two of the COVID-19 immunization process will look like. Major-General Dany Fortin, who is leading Canada’s logistical rollout of vaccine distributions, said as of April, the country is expecting to be receiving more than one million doses of approved vaccines every week. As of right now, it is expected that 20 million doses will be delivered in Canada between April and June. Canada’s immunization program has gotten off to a slow start with CBC reporting only 710,000 doses have been delivered to provinces and territories, with barely one percent of the population receiving their first dose of either the Pfizer or Moderna vaccines.

  • A United Kingdom survey of British healthcare workers has found people who have been infected with COVID-19 are highly likely to have immunity for at least five months. There is also evidence that those with the antibodies may still be able to carry and spread the virus. Preliminary findings by scientists at Public Health England (PHE) showed that reinfections in people who have COVID-19 antibodies from a past infection are rare with only 44 cases found among the 6,600 + previously infected people in the study. However, experts cautioned the findings mean that people who contacted COVID-19 in the early stages of the first wave in early 2020 may be vulnerable to catching it again since their immunity is likely gone.

  • Germany’s Robert Koch Institute (RKI) has called on its citizens to refrain from nonessential travel after the country detected new cases of the coronavirus variant. Germany has reported 16 cases of the coronavirus variant first detected in Britain and four other cases from variant found in South Africa. The country has approved tighter restrictions for people entering the country as of Thursday. Anyone coming to Germany from a high-risk area must provide proof of a negative COVID-19 test within 48 hours of arrival. As bad as things appear right now, the head of the RKI, Lothar Wieler said, “at the end of the year, we will have this pandemic under control”, and urged Germans to receive the COVID-19 vaccines as they become available.

  • As countries struggle to vaccinate just one percent of its population, Israel has quickly emerged as the frontrunner on the inoculation front. Bloomberg is reporting Israel has already vaccinated 21% of its residents, or 1.9 million people since the country’s health ministry began offering the Pfizer vaccine on December 20th. Prime Minister Benjamin Netanyahu says almost everyone in the country (although not Palestinians in the adjacent West Bank) will be vaccinated by early spring. Israel’s success is thanks in large part to its central government, limited territory and relatively small population (9.3 million). However, the country does have strong universal health insurance and a digitized medical system with extensive records that allow providers to target at-risk populations and track progress. The early spring deadline also coincides with an election in the country, one that Prime Minister Netanyahu is desperate to win and has made vaccinations his top priority to gain favour with Israeli voters.

  • The Financial Times is reporting health and technology groups are working together to create a digital vaccination passport in the expectation that governments, businesses and airlines will require proof of people having been vaccinated against COVID-19. The Vaccination Credential Initiative, a coalition of organizations including Microsoft, Oracle and United States healthcare non-profit Mayo Clinic are looking to build a system that establishes standards to verify whether a person has had their inoculation and prevent people falsely claiming that they did. However, there is already pushback against such a measure being put in place with Canadian Prime Minister Justin Trudeau making clear he is opposed to a vaccine passport claiming it could have divisive impacts on community and country.

Covid-19 – Due Diligence And Asset Management

BlackRock Results Beat Expectations as Assets Grow to $8.68 Trillion

Brief :BlackRock Inc’s, quarterly results topped analysts’ expectations on Thursday, buoyed by a rising stock market that boosted the firm’s assets under management to a record high $8.68 trillion, further widening its lead against peers. The firm drew $127 billion of total net inflows in the fourth quarter as investors poured money into its various business, including its exchange-traded funds, as well as active funds that aim to beat the market. “We begin 2021 well-positioned and intend to keep investing in our business to drive long-term growth and to lead the evolution of the asset management industry,” BlackRock’s chief executive, Larry Fink, said in a statement. Financial markets rallied in the fourth quarter, building on sharp gains of the prior two quarters, as accommodative global central bank policy and improving growth prospects helped lift investors’ risk appetite. While rallying stock markets provided a powerful boost to BlackRock’s results, the profit report showed outsized growth in inflows at a time when the rest of the industry is expected to struggle with redemptions.

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Healthcare Hedge Fund Rhenman Gauges “Crucial” Impact of Biden Administration’s Planned Reforms

Brief: The incoming US administration led by Joe Biden will be a “crucial” factor looming large over the healthcare industry this year, with planned reforms heralding potentially far-reaching implications for healthcare stocks and drug prices, Rhenman & Partners Asset Management said this week. Rhenman’s flagship Healthcare Equity Long/Short hedge fund gained 17.1 per cent in its main euro-denominated IC1 share class last year, bolstered by a 4.8 per cent monthly return in December. The strategy – which trades a range of small, medium and large pharmaceuticals, biotechnology, medical technology and service company stocks – made profits in each of those sectors last month, with medical technology and biotechnology companies bringing in the biggest gains. In an update this week, the Stockholm-based global healthcare-focused hedge fund said once the fall-out from the coronavirus pandemic is brought under control, the Biden administration’s proposed healthcare reforms will come under closer re-examination this year. While the Senate is now controlled by the Democrats, Rhenman believes major new healthcare reforms may prove tricky to push through with a weak majority.

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Wells Fargo CEO to Unveil Cost-Cutting Plan

Brief: Wells Fargo & Co Chief Executive Charlie Scharf will give investors more details on his long-awaited turnaround plan for the scandal-plagued bank this week. Although Wall Street expects Wells Fargo to report a 38% profit decline on Friday against the backdrop of the coronavirus pandemic, investors have become more bullish in anticipation of details about expansive cost-cutting plans. Wells Fargo shares have jumped 45% since Scharf teased a strategic update in October, outperforming JPMorgan Chase & Co and Bank of America Corp. Wells Fargo management has promised transformation since its 2016 fraudulent account scandal with little to show for the effort, but it feels different now, Raymond James analyst David Long said. Scharf’s “really changed the internal attitude to make improving the bank’s governance the number one priority,” Long said. Scharf started making changes shortly after taking the helm in October 2019, though he has not yet provided firm targets or timelines for progress. He installed a slew of external leaders, overhauled the reporting segments, and began to shed non-core businesses. He also implemented weekly and monthly reviews to increase oversight and address regulator concerns more efficiently.

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London Resilient at Top of European Tech Investment Table Despite COVID

Brief: London retained its position as the top European destination for tech venture capital in 2020, with levels near the record amount of the year before despite the impact of COVID-19, according to research by Dealroom.co and London & Partners. Start-ups and growth companies attracted $10.5 billion worth of funding, accounting for more than a quarter of all investment into Europe and three times the level in Paris, Berlin and Stockholm, the research found. Some of the largest deals involving London companies included a $500 million funding round for London fintech firm Revolut, a $400 million deal for electric vehicle maker Arrival and two funding rounds totalling $527 million for renewable energy firm Octopus Energy. The British capital is also home to more unicorns - start-ups with a valuation exceeding $1 billion - than anywhere else in Europe. At 43, it has more than Paris, Berlin and Amsterdam combined, according to the research. Dealroom said it had identified 81 potential future unicorns headquartered in the city. Eileen Burbidge, partner at London VC firm Passion Capital, said activity quickly rebounded after the shock of the pandemic in the first half.

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Startup Funding Touches New Records Amid Pandemic

Brief: What began as a desperate year for startups, characterized by mass layoffs as the pandemic took hold, has turned into a record venture capital funding haul.  Despite the economic tumult wrought by the coronavirus, startup investing in the U.S. reached a record high of $130 billion in 2020, according to a new Money Tree report from PricewaterhouseCoopers/CB Insights. Companies like Instacart Inc. and Stripe Inc. helped drive the surge by raising hundreds of millions apiece, even though the total number of funding rounds was lower than in 2019. The year also saw an uptick in funding for several cities outside the Bay Area, long the center of the startup universe.  Venture capital funding in 2020 rose 14% from 2019, according to the report, which includes private equity and debt investments as well. Last year also saw an increase in megarounds, meaning deals larger than $100 million, even as the number of funding rounds decreased, particularly for very young startups. The largest deals were a $1.9 billion infusion into Space Exploration Technologies Corp. and $1.5 billion in funding for Epic Games Inc., both giant funding rounds that were emblematic of the increasing muscle of private equity and mutual funds willing to write large checks to late-stage tech companies. In 2016, megarounds represented just 25% of the total money invested. That number increased to 49% in 2020—higher than ever—the report found. Large corporate players, including SoftBank Group Corp., Google Ventures and Uber Technologies Inc. also helped drive the rush to fund large startups.

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Renaissance’s Medallion Fund Surged 76% in 2020. But Funds Open to Outsiders Tanked.

Brief: Renaissance Technologies’ famed Medallion fund, available only to current and former partners, had one of its best years ever, surging 76 percent, according to one of its investors. But it was a different story for outsiders who are only able to invest in other RenTec funds — two of which had their worst years ever. The Renaissance Institutional Equities Fund, which launched in July of 2005, lost 22.62 percent through December 25, according to HSBC’s weekly scoreboard of hedge fund performance. A newer fund, Renaissance Institutional Diversified Alpha, fell even more: It fell 33.58 percent through the same time period, HSBC reported. Those two funds’ performance was so poor that they made HSBC’s top 20 losers list for 2020. Renaissance launched RIDA in February of 2012, and 2020 was its worst year since then, the report said. Renaissance declined to comment. Last year wasn’t RIEF’s first bout with turbulence. The fund was launched as a way for outsiders to partake of RenTec’s special sauce, as Medallion had only been available to insiders for several years by then. But RIEF fared poorly during the financial crisis: The fund fell 16 percent in 2008 and 6.17 percent in 2009. Its longest drawdown was between May of 2007 and April of 2009, a period when it fell 35.73 percent, according to HSBC. But until last year RIEF had produced double-digit returns for most of the past decade. Still, the earlier losses dragged down its annualized return, which is now only 8.05 percent. That’s below the Standard & Poor’s 500 stock index’s annualized return of 9.6 percent during the same time period.

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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 January 13, 2021:

  • The United States will be joining several other countries and requiring a negative COVID-19 test from all air passengers entering the country. According to Centers for Disease Control and Prevention (CDC) Director Dr. Robert Redfield, the new order will go into effect as of January 26th. Air passengers will be required to get a viral test within three days before their departure and provide written documentation of their lab results, or documentation of having recovered from COVID-19. The move is being made to help slow the spread of the virus and curtail the new variant from entering the country. CNN is reporting as of Tuesday, the new COVID-19 variant, which appears more transmissible, has already been found in 10 states in samples dating back to mid-December.

  • In Canada, the coronavirus continues to cripple the airline industry. Air Canada announced on Wednesday they will be cutting 1,700 jobs as it scales down operations in response to a new wave of lockdowns, including a stay-at-home order in Ontario, the country’s most populous province. The airline will be making a 25% reduction in service for the first quarter of 2021 and are operating at 20% capacity compared with the first quarter of 2019. Atlantic Canada seems to be taking the brunt of the cuts with suspension of flights until further notice in certain cities in New Brunswick, Newfoundland & Labrador and Nova Scotia announced over the last several weeks.

  • The United Kingdom reported their deadliest day yet so far from the coronavirus on Wednesday. The UK reported 1,564 deaths as the country’s hospitals are filling up with patients suffering from COVID-19 and the number on ventilator use surpassing peak levels of the first wave in April 2020. Despite all this, Prime Minister Boris Johnson said there are early signs current measures are working but didn’t rule out tougher restrictions. Elsewhere in the UK, industry groups representing pharmaceutical companies in America and Europe are raising doubts about the country’s strategy for giving COVID-19 vaccines to as many people as possible in the shortest amount of time. The UK has said it would allow for second doses of some vaccines to be given as many as 12 weeks after the first, longer than the timing determined by Pfizer and Moderna. 

  • Italy was already dealing with a health emergency when it comes to the coronavirus and now appear to have a political emergency. The country’s former premier Matteo Renzi said he was pulling his party’s ministers from cabinet on Wednesday, which negates the ruling coalition of its parliamentary majority. Renzi, who heads the Italia Viva party has long threatened to quit government over Prime Minister Giuseppe Conte’s plans for spending billions of euros promised by the European Union to restart the economy. If a coalition can’t be agreed upon moving forward, a national vote could be triggered in a country that has had to deal with over 80,000 COVID-19 deaths. 

  • China posted its largest daily jump in COVID-19 cases in more than five months. The country has stepped up containment measures by putting four more cities under lockdown. Official data showed most of the new cases were reported near the capital of Beijing, but a province in far northeast China also saw a rise in cases. The wave of new infections comes ahead of next month’s Lunar New Year holiday. Normally this is a time when millions of Chinese travel back to their hometowns. However, clearly apparent, these are no longer normal times and people are being urged to stay put with many provinces asking migrant workers to remain during the break. 

  • Many were hoping 2021 couldn’t possibly be any worse than 2020, the World Health Organization (WHO) has something to say about that. Given how the COVID-19 pandemic is spreading and with more infectious variants circulating in the northern hemisphere, the second year of the pandemic could be worse than the first said the WHO on Wednesday. “Certainly, in the northern hemisphere, particularly in Europe and North America we have seen that sort of perfect storm of the season – coldness, people going inside, increased social mixing and a combination of factors that have driven increased transmission in many, many countries,” said Mike Ryan, the WHO’s top emergencies official.

Covid-19 – Due Diligence And Asset Management

New Industry Data Reveals “Significant” Gulf Between Gains and Losses Among Largest Hedge Funds

Brief: Hedge fund managers have experienced “significant” performance dispersion over the past 12 months, with the biggest funds seeing the largest gaps between gains and losses, new industry data shows, once again underlining the importance of investor due diligence in separating winners from losers. Hedge funds globally ended a tumultuous 2020 on a high, generating an average monthly gain in December of some 4 per cent, to bring full-year returns to more than 11 per cent, according to newly-published year-end performance data from eVestment. The 10 biggest hedge funds tracked by eVestment generated returns of just 3.72 per cent between January and December last year – almost three times below 2020’s hedge fund industry average. But, of that grouping of the 10 largest funds, just one was close to that average, said Peter Laurelli, global head of research at eVestment, with most scoring strong double-digit gains. “Despite the high average returns across the industry, 2020 was a year where the dispersion of returns between fund types and within those various segments was significant. This was very apparent among large funds,” Laurelli noted in a commentary on Wednesday. “There were more large funds with double-digit gains and double-digit losses than not in 2020, highlighting the importance of fund due diligence and monitoring when selecting any hedge fund.

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Howard Marks Says Fed Moves Have Had Coercive Effect on Markets

Brief: Federal Reserve rate actions have had a coercive effect on the markets and forced investors to move into risk assets, according to Oaktree Capital Group co-founder Howard Marks. “This has required people to invest because they don’t want to sit around with their cash,” Marks said Tuesday in an interview on Bloomberg TV. “They don’t want Treasuries at less than 1% or high-grade bonds at 2%.” Global credit and equity markets have staged a dramatic rebound since March, when the Fed first took unprecedented steps to steady the economy amid the Covid-19 outbreak. This dramatically cut the amount of distressed debt outstanding and propped up companies that were ailing even before the pandemic hit, depriving value-oriented investors like Oaktree of new targets. “The greater question is, why is the market making new highs every day if we have these problems?” he said. “The political division in the country is a terrific one but the greatest one of course is the pandemic.” Discussing Tesla Inc.’s meteoric rise, Marks said the stock is so high some investors may want to sell. “If you describe an individual not of great needs, he should take some profits,” Marks said. “If he bought Tesla two years ago, he probably has a huge gain. It’s probably a very disproportionate amount of his financial net worth. He should absolutely cut back, unless he really wants to try to hit the long ball.” Oaktree is one of the largest distressed-debt investors in the world, with more than $19 billion committed to credit from troubled companies.

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Hedge Fund Managers Losing Millions as Order Delays Mount Up

Brief: An unprecedented number of delays when sending out orders to market is costing hedge fund managers USD20 million per year, according to new research from TradingScreen. A combination of operational inefficiencies and trade errors cause the majority of delays, while high costs associated with IT systems maintenance is also a significant contributor. The findings show that the most unprotected trade errors cost hedge funds anywhere between 3 and 10% of trade notional, which in some cases is USD5 million a year.  Time delays and execution slippage, which is the difference between the expected price and the price at which the trade is executed, impacts performance by 2 per cent of AUM, which results in costs as high as USD9.5 million annually. When it comes to IT support and administrative costs, a large hedge fund with USD5 billion AUM spends between USD3.5 and USD5 million.  Varghese Thomas, President and COO at TradingScreen, says: “From computer meltdowns to human errors, erroneous trades and order delays are caused by a myriad of factors. With so much disruption facing markets right now, hedge fund managers can ill afford not to keep execution delays down, particularly now that European share trading is likely to fragment post-Brexit.

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The World’s Biggest Short Selling Hedge Fund Is Scaling Back

Brief: Sophos Capital Management, the largest dedicated short selling firm in the world as recently as a year ago, is scaling back its hedge fund business, according to people familiar with the plans. The move by founder Jim Carruthers — widely considered a legend in the business — comes as short sellers faced one of their worst years on record. Short-biased funds lost 47.59 percent through November, according to the HFRX Equity Hedge: Short Bias Index. This year isn't looking any better. The Goldman Sachs “most shorted” index of stocks was already up 13 percent in 2020 and more than 200 percent over the past year. Carruthers did not respond to a request for comment, and his funds’ performance details weren’t publicly available. Menlo-Park-based Sophos reported $1.16 billion in regulatory assets under management, six separate hedge funds, and nine employees at the end of 2019. That made it larger than even Jim Chanos’ Kynikos Associates, which had slipped below the $1 billion mark by that time. An individual familiar with Carruthers’ plans said the short seller had been telling people he was winding down some positions since late last year, and some employees have been looking for jobs. It's unknown how long it could take to unwind some of the positions, but people close to the situation said that he is not shutting the firm down. Carruthers launched Sophos in 2014 with about $200 million, including a seed investment from Yale University’s endowment. The move by Yale led other university endowments to invest in short sellers, according to one short-biased hedge fund manager. 

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UK Cyber Sector Saw Funding Boost After First Lockdown – But Early – Stage Startup Backing Fell off a Cliff

Brief: Funding secured by cybersecurity start-ups since the start of lockdown in March increased by more than half compared to the same period in 2019, according to new research released today by Plexal and Beauhurst. This is in contrast to start-ups across all sectors, which saw investment volume fall by 10 per cent year-on-year. Only 23 of the 1,715 start-ups falling into administration, liquidation or dissolution since the start of lockdown were from the cybersecurity sector. The research also found that despite the overall boost in funding (52 per cent increase) and deal numbers (33 percent increase), highlighting the importance of cybersecurity companies during the pandemic, activity consisted mainly of a small number of very large deals, showing that investors continue to prioritise later stage businesses. The volume of funding secured by cybersecurity companies seeking funding for the first time fell to just GBP11.9m since lockdown, from GBP265 million in the same period in 2019 – as companies raising capital for the first time fell by 96 per cent.  “While increased total funding demonstrates the relevance of cybersecurity and shows that the UK’s cyber industry has not been impacted to the same extent as others, the almost complete absence of backing for early-stage firms puts the sector’s future at risk, said Saj Huq, director of Innovation at innovation centre Plexal. “It is these companies that we will ultimately rely on to solve the inevitable new cyber challenges arising from a society that is increasingly digital-first,” he added.

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PIMCO says 2021 ‘Not a Time for Excessive Optimism’

Brief: Bond giant PIMCO expects the U.S. economy to return to pre-pandemic levels later this year but warned of political and economic risks that could derail the recovery, including a sooner-than-expected withdrawal of fiscal stimulus. In its 2021 outlook published Tuesday, the California-based fixed-income investor, which manages over $2 trillion in assets, predicts that U.S. economic activity will hit pre-recession peaks in the second half of the year. Global gross domestic product, PIMCO says, will grow at the fastest rate in a decade, buoyed by the worldwide rollout of COVID-19 vaccines. But a pullback in U.S. fiscal stimulus, Chinese corporate deleveraging and continued caution in U.S. spending, investment and hiring could all disrupt the expected recovery, potentially hurting investors who have already priced in a rebound, PIMCO said in the report. “Investors may have become too complacent as reflected by the bullish consensus positioning. As these risk factors underline, we see this as a time for careful portfolio positioning and not for excessive optimism or risk-taking,” the report said. PIMCO’s comments come amid a broad market rally. The promise of the coronavirus vaccine and hopes the Democratic Congress will ramp up spending have driven U.S. stocks to all-time highs and corporate credit spreads to pre-pandemic levels.

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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 January 12, 2021:

  • In the United States, the federal government is changing their approach in the way they allocate coronavirus vaccine doses. According to Health and Human Services Secretary Alex Azar it will now be based on how quickly states can administer shots and the size of their elderly population. States will be given two weeks to prepare for the change and should have enough time to improve their data reporting to the government and ensure all vaccinations are being “properly” documented, according to Azar. The health secretary also pointed blame to the states saying they aren’t reporting vaccinations in a timely manner and adding vaccine doses are sitting in freezers in hospitals. The timing of this change in approach is also notable with the Biden administration set to take office in just over a week. 
  • Canada’s most populous province has issued a stay-at-home order in another attempt to get their latest COVID-19 outbreak under control. Citing a health care system on the verge of being overwhelmed, Ontario Premier Doug Ford made the move on Tuesday, which will come into effect as of Thursday at 12:01 AM. The stay-at-home order will require everyone in the province to remain at home with exceptions for essential purposes, such as going to the grocery store or pharmacy, accessing health care services, exercise, or essential work. “Our province is in crisis. The system is on the brink of collapse. It’s on the brink of being overwhelmed,” said Ford.

  • In the United Kingdom, Prime Minister Boris Johnson left some of his government ministers scrambling for answers over a bike ride on the weekend. The Evening Standard first reported Prime Minister Johnson riding his bike, along with his security officers at the Olympic Park in East London – 7 miles away from his official residence. Government guidelines said outdoor exercise should be limited and people should stay in their local area. With Prime Minister Johnson’s team unable to supply a statement explaining his trip, Health Minister Matt Hancock had to go into damage control saying a 7 mile outing for some exercise is allowed. “It is OK to go for a long walk or cycle ride, but stay local,” said Hancock. 
  • In Japan, the President of the Tokyo Olympic organizing committee says it is “absolutely impossible” to postpone the Games again after doing so last summer. Organizers and the International Olympic Committee previously stated event plans would be detailed in the spring. Polls in the last few days show Japanese citizens clearly don’t share the President of the organizing committee’s eagerness to see the Games through. Just over 80% of people surveyed believe the Olympics should be canceled, postponed, or believe they won’t take place as COVID-19 cases continue to surge. The President of the organizing committee’s “absolutely impossible” comment stems from the fact that many officials who have a played a key role in the preparations are loaned from other organizations.
  • Bloomberg is reporting China’s Sinovac Biotech vaccine is showing dueling data from trials performed in Brazil, Turkey and Indonesia. The main issue is that trials performed in Indonesia and Turkey were too small for any meaningful data. For instance, Indonesia’s data showed a 65% efficacy while Turkey showed 91.25% in its local trial for the same vaccine. Brazil, where Sinovac had it largest trial with more than 13,000 people, also showed dueling efficacy rates. The Butantan Institute, the company’s local partner said last week trials showed the vaccine was 78% effective in preventing mild cases of COVID-19 and 100% effective against moderate and severe infections. All of this news though isn’t stopping Indonesia who plan to be the most aggressive of the three countries mentioned with issuing the vaccine – having their President roll up his sleeve on Wednesday to receive his first dose.
  • New Zealand will be issuing new border crackdowns in the coming days to the limit the exposure of new COVID-19 cases, especially the variant strains that have surfaced in recent weeks. New Zealanders will need to show a negative COVID-19 test 72 hours before boarding a plane to the country. This is partnered with previously announced rules that as of Saturday arrivals from the United States and United Kingdom would also need a pre-departure negative test. Finally, as of Monday, once arriving in New Zealand people will need to take an extra COVID-19 test within 24 hours of landing. The existing Day 3 and Day 12 tests will continue as normal.

Covid-19 – Due Diligence And Asset Management

Private Equity in 2020: Not as Bad as You Thought

Brief: U.S. private equity firms raised “healthy” amounts of money from investors after the pandemic began last year, particularly for technology deals, even as most firms also poured cash into struggling portfolio companies, according to PitchBook’s 2020 review of the industry. Private equity firms quickly figured out how to negotiate the extremes of 2020, cannily shifting from the frozen leveraged buyout business to buying minority stakes and putting money to work in public companies, according to the report, expected to be released Tuesday. After an initial downturn early in the year, exits also rebounded as private equity firms turned to special purpose acquisition companies (SPACs), traditional listings, and other sponsors to take holdings off their hands, reported PitchBook. “What a rollercoaster 2020 was,” said Wylie Fernyhough, lead private equity analyst at PitchBook, in an interview with Institutional Investor. “Whether it was LPs having to pause allocations, or figuring out how to do due diligence online. Private equity really showed its resilience in 2020 with all these headwinds thrown at it.” 

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Chris Rokos’s Macro Hedge Fund Surges 44% in Best Year Ever

Brief: Chris Rokos’s hedge fund racked up its best year since the billionaire investor started his own macro trading firm more than five years ago, joining a string of peers who posted record gains in 2020. His $14.5 billion macro fund soared 44% as the pandemic upended markets, according to people with knowledge of the matter who asked not to be identified because the information is private. The London-based fund’s previous best year was in 2016, when it rose 20%. Macro hedge funds, which trade across asset classes to capitalize on broad economic trends, ended last year up 7% on average, according to data compiled by Bloomberg. Rokos’s returns coincide with a structural overhaul at his firm in late 2019, which allowed for bigger bets as portfolios previously run by individual traders were merged into a single pool of money. A spokesman for London-based Rokos Capital Management, which started in 2015, declined to comment. Rokos joins a slew of macro fund managers that posted double-digit gains last year as market turbulence created opportunities for the firms. Brevan Howard Asset Management, Rokos’s former employer, made 27% in its master fund, the best year since 2003, while its U.S. Rates Opportunities Fund soared nearly 99%. EDL Capital and Glen Point Capital gained 23% and 14%, respectively.

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Google Launches $3 Million Fund to Fight Vaccine Misinformation

Brief: The Google News Initiative on Tuesday launched a global open fund to fight misinformation about COVID-19 vaccines, worth up to $3 million. The “COVID-19 Vaccine Counter Misinformation Open Fund” aims to support journalistic efforts to effectively fact-check misinformation about the COVID-19 immunisation process, the initiative belonging to Alphabet’s Google said in a blog post. “While the COVID-19 infodemic has been global in nature, misinformation has also been used to target specific populations,” it added. “Some of the available research also suggests that the audiences coming across misinformation and those seeking fact checks don’t necessarily overlap.” The fund will accept projects looking to expand the audience of fact-checks, particularly to groups disproportionately hit by misinformation. Applications will be reviewed by team of 14 jurors from across the academic, media, medical and non-profit sectors, as well as representatives from the World Health Organisation. In December, the Google News Initiative pledged $1.5 million to fund a COVID-19 vaccine media hub to support fact-checking research.

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San Francisco Office Vacancy Rate Eclipses Financial-Crisis High

Brief: San Francisco’s office market is being hit so hard by the pandemic that, by some measures, it’s worse than the global financial crisis or dot-com collapse. The city’s office-vacancy rate reached 16.7% at the end of 2020, up 11 percentage points from a year prior, according to a report from commercial real estate brokerage Cushman & Wakefield. That’s a higher level than in the aftermath of the 2008 recession. The vacancy rate is being driven by a record amount of sublease space, which has surpassed the worst of the dot-com bust two decades ago, said Robert Sammons, senior director of research at Cushman in San Francisco. In addition, new leasing has effectively been on pause and hit the lowest annual level in 2020 since at least the early 1990s. Companies have been reevaluating their office needs after months of pandemic lockdowns showed them that it was possible to function with employees working from home. That’s caused a spike in vacancies, especially in cities like New York and San Francisco, where the cost of renting space is higher. The technology companies that dominate the Bay Area, in particular, have embraced remote work. Pinterest Inc. last year paid almost $90 million to cancel a large San Francisco office lease, saying it is rethinking where employees are based. 

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For Many, COVID-19 has Changed the World of Work for Good

Brief: The upheaval in global labour markets triggered by the coronavirus pandemic will transform the working lives of millions of employees for good, policymakers and business leaders told a Reuters virtual forum on Tuesday. Nearly a year after governments first imposed lockdowns to contain the virus, there is a growing consensus that more staff will in future be hired remotely, work from home and have an entirely different set of expectations of their managers. Yet such changes are also likely to be the preserve of white-collar workers, with new labour market entrants and the less well-educated set to face post-COVID-19 economies where most jobs growth is in low-wage sectors. “I think it would be a fallacy to think we will go back to where we were before,” Philippines central bank Governor Benjamin Diokno told the Reuters Next forum. “We were already geared towards the digital, contactless, industries ... That will define the new normal.” The pandemic, which according to a Reuters tally has so far infected at least 90.5 million people and killed around 1.9 million worldwide, has up-ended industries and workers across the globe.

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How European Fund Managers Avoided a Disastrous 2020

Brief: It could have been a disastrous year for the European fund management industry, but policymakers rode to its rescue. Huge fiscal and monetary stimulus packages supported markets and continued to push investors away from cash. In the end, the industry ended the year close to where it began, but this headline figure masked considerable variation underneath. The European fund industry had €10.03trn (£9trn), excluding money market funds, as at 30 November 2020 according to Morningstar data, an organic growth rate of 3.2%. In aggregate, fixed income saw the strongest inflows, at €110bn, in spite of continued low yields. Equity funds saw inflows of €91.7bn, while allocation funds saw inflows of €34.8bn. The notable weak spot was in alternatives, which saw €35.5bn exit the sector – a combination of the weakness of the property sector and a growing disillusionment with the poor performance and high fees from hedge fund strategies. Commodities had a good year, drawing in an extra net €1.6bn of assets. However, this overall picture masked huge shifts in the popularity of different asset classes through the year as economic news and investor sentiment ebbed and flowed. In November, for example, equity funds were firmly in the ascendancy as vaccine news emerged and some stability returned to US politics.

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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 January 11, 2021:

  • In the United States, the Centers for Disease Control and Prevention (CDC) said Monday that nearly nine million Americans have received their first doses of the COVID-19 vaccine and nearly 25.5 million doses of vaccines have been distributed among various states. The nearly nine million is still well short of the targeted 20 million which was expected by the end of 2020 as states say they don’t have enough staff or money to administer coronavirus vaccines at the needed rate. CNN is also reporting states are increasingly abandoning guidelines from the CDC on how to administer the vaccines and are taking their own approaches. New York state governor Andrew Cuomo has laid the blame at the feet of the Trump administration, calling the federal government’s response to the pandemic and its vaccine rollout, “an act of gross negligence.” 

  • The CBC is reporting Canada is rolling out the first study of its kind by mailing out thousands of test kits to gauge the prevalence of coronavirus in the country. The survey involves 48,000 Canadians receiving the kit in hopes they will poke their fingers and return a blood sample to the National Microbiology lab located in the province of Manitoba. The samples will be tested for the presence of coronavirus antibodies with Statistics Canada hoping of a minimum of a 45% response rate in order to obtain a good result. The kits have already been mailed out and received, catching some Canadians off-guard and questioning its validity as there has been little media coverage on the project.

  • The United Kingdom is struggling with the latest surge in the coronavirus pandemic and England’s Chief Medical Officer Chris Witty delivered some grim news while appearing on the BBC on Monday. “We’ve got to be very clear that we’re now at the worst point of this epidemic for the UK, in the future we will have the vaccine, but the numbers at the moment are higher than they were in the previous peak – by some distance.” In some of the hardest hit areas in London, Witty says the infection rate is around 1 in 20, compared to about 1 in 50 for the entire UK. During a news briefing on Monday, Health Minister Matt Hancock said it was still unclear the extent of which being vaccinated reduces one’s risk of transmitting the coronavirus.  

  • A recent survey seems to indicate French citizens are losing faith in their government to lead them through the coronavirus pandemic. The survey from the newspaper Journal du Dimanche said 62% of citizens are lacking confidence in President Emmanuel Macron and Prime Minister Jean Castex. The two have come under criticism for the slow start of vaccinations, which began on December 27th. France has reported an average of 18,000 new cases per day during the month, much higher than the government’s plan of having them around 5,000 cases per day. The country’s health minister was asked over the weekend of a possible third lockdown since the pandemic began and didn’t rule it out.

  • India will kick off one of the world’s largest inoculation campaigns on January 16th. The south Asian nation of close to 1.4 billion people will begin administering shots to nearly 30 million healthcare workers and other frontline staff most vulnerable to infection from COVID-19. According to the government’s health ministry, the vaccination program will cover another 270 million people, including senior citizens. Large urban areas such as New Delhi will lean on existing networks such as those used to vaccinate tens of millions of newborns each year against diseases such as polio. India only trails the United States in terms of COVID-19 infections.

  • China announced on Monday a World Health Organization (WHO) team of international experts investigating the origins of the coronavirus pandemic will arrive in the country on January 14th. The WHO’s team of 10 experts’ mission has been delayed in what China’s foreign ministry called a “misunderstanding” after a lack of authorization was given from Beijing. China’s National Health Commission also didn’t reveal the WHO’s itinerary, which would likely require a trip to Wuhan – something that hasn’t happened from outside sources since the pandemic began. Ahead of the governing health body’s arrival, China has been on a media blitz to shape the narrative of about when and where the pandemic began, stating more and more studies show the coronavirus emerged in multiple regions. According to Reuters, a health expert with the WHO said expectations should be “very low” that the team will reach a conclusion from their trip to China.

Covid-19 – Due Diligence And Asset Management

Hedge Fund Strategies Soar: Industry Enjoys Biggest Annual Return Since Global Financial Crisis, as Managers Weather 2020 Storm With Double-Digit Surge

Brief: Hedge funds weathered the political, social and economic shocks brought about by the global pandemic and frequent bursts of soaring volatility to score a near-12 per cent return last year – their best since 2009 – outperforming both the Dow Jones Industrial Average and FTSE 100, new data from Hedge Fund Research shows. HFRI’s main Fund Weighted Composite Index – a global, equal-weighted measure of some 1400 single-manager hedge fund strategies – finished 2020 up 11.6 per cent for the year following a 4.5 per cent rise in December. The full-year gains represent a strong rebound for the hedge fund sector as a whole, which had earlier plummeted 11.6 per cent in Q1 following three months of consecutive losses amid the initial coronavirus outbreak. The index’s annual 11.6 per cent rise builds on 2019’s 10.45 per cent annual return. The strong annual showing – the benchmark’s best since a near-20 per cent surge in 2009, at the height of the Global Financial Crisis – is likely to further draw in more yield-hungry allocators, according to HFR president Kenneth Heinz. “Hedge funds effectively navigated both December and calendar year 2020 volatility, and accelerated into 2021 with powerful, broad-based performance which continued yet broadened the high-beta equity- and crypto-driven gains to also include quantitative, trend-following macro, energy and special situations exposures,” Heinz observed.

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Singer’s Elliott Returns 12.7% on Investments in 2020

Brief: Activist investor Elliott Management Corp. returned 12.7% on its investments in 2020, turning in one of its strongest years in the past decade, according to an investor letter reviewed by Bloomberg. The New York-based hedge fund reported the same returns for both its international and onshore funds, marking their best year since 2012 and 2016, respectively, according to a person familiar with the matter who asked to not be identified because the matter isn’t public. A representative for Elliott declined to comment. The document shows Elliott was profitable every month in 2020, including in March when it eked out a 0.1% return amid a broader selloff in the markets in the wake of the coronavirus pandemic. The S&P 500 returned 16% over 2020. Elliott’s assets under management grew to $45.2 billion from roughly $41 billion at the end of June. Elliott, which is run by billionaire Paul Singer, took at least 16 new activist positions in 2020, including at Twitter Inc., Softbank Group Corp., and others, according to data compiled by Bloomberg.

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Eventus Systems Reports “Unprecedented Growth” in 2020

Brief: Eventus Systems, a global provider of multi-asset class trade surveillance and market risk solutions, has reported 'unprecedented growth' on multiple fronts in 2020, marking its strongest year to date in revenue and new client onboardings. The company has additional expansion plans for 2021, with deeper penetration in asset classes such as equities, foreign exchange (FX), fixed income and digital assets. Eventus CEO Travis Schwab says: “In a year full of so many challenges and hardships for us all, we are profoundly grateful that it was also the most monumental year since our launch. Our Series A funding round enabled us to make strategic investments that accelerated our growth in terms of staff, geographical presence, market coverage, client acquisition, product enhancements, scalability and efficiencies. I’m incredibly proud of our team and Board for the hard work, persistence, insights and first-class client service that made this growth possible. Our Validus platform is now a mission-critical piece of infrastructure for a wide range of leading financial market participants and exchanges. We ended 2020 on a particularly strong note, with one of the world’s largest non-bank cash FX trading firms and a major digital asset exchange both signing in the last week of the year.” Schwab says that following a year in which the firm established leadership as the trade surveillance platform used by many of the largest cryptocurrency exchanges, he expects further market penetration in this space, attracting not only more exchanges but also various other market participants active in digital assets.

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U.S. Bank Quarterly Profits Expected to Fall Again From Pre-COVID Levels

Brief: When the biggest U.S. banks begin reporting fourth-quarter results on Friday some of the headlines could show profits plunged by as much as 40% from a year earlier, before the pandemic struck. But investors will be focused on digging out clues to the earnings rebound expected in 2021. “You can look at Q4 as somewhat of a transition quarter as you put some of the challenges from 2020 in the rear-view mirror and look ahead to an improved 2021,” said Barclays analyst Jason Goldberg. The pandemic caused interest rates to plunge and produced a record decline in the margin between what lenders charge for loans and what they pay for money, said Goldberg. The pandemic also pushed big U.S. banks to set aside more than $65 billion for expected loan losses. From those low points, banks could see profits more than double in first and second quarters of 2021, according to Refinitiv’s IBES estimates. Bank stocks have risen 35% since early November. Since then, effective COVID-19 vaccines started being distributed, Democrats took power in Washington, promising more economic stimulus, and the Federal Reserve said it would allow banks to repurchase stock again, which will increase earnings per share.

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COVID-19, Political Unrest, Market Volatility Increase the Importance of Private Markets in 2021 and Beyond, says to Mercer Research

Brief: New strategic research from Mercer focuses on what the coming year holds for alternatives, outlining some of the issues investors may want to follow closely in an effort to optimise their portfolios. “We are seeing that though investors have been tested this year, the experiences of previous crises have made them more resilient. There were unorthodox challenges such as not being able to vet new managers in person, but clients continued to put capital to work, especially with existing investment manager relationships across all private market segments,” says Raelan Lambert, global head of alternatives at Mercer. “In 2021, investors should consider stretching their risk appetites and consider their allocation to real estate. Although the pandemic will continue to challenge the property market, 2021 is likely to be an opportune time for entering the asset class with a medium- to longer-term investment horizon. Initially, investors should prioritise allocations to the largest, most-liquid markets, where price discovery is furthest along.”

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KKR Raises $3.9 Billion in Biggest Asia Infrastructure Fund

Brief: KKR & Co. raised $3.9 billion for its first Asia-Pacific infrastructure fund, amassing the largest pool of cash in the region for investments in everything from waste management and renewable energy to communication towers. In the process of raising funds, the firm boosted its initial target from $3 billion and stopped fundraising after reaching its cap. It tapped three dozens investors in the U.S., Europe, the Middle East and Asia-Pacific, said Alisa Amarosa Wood, head of KKR’s Private Markets Products Group. KKR and its employees contributed about $300 million. Accelerating its expansion across a region that’s emerging from the pandemic and bolstered by a growing middle class, the firm is also in the midst of raising at least $12.5 billion in a fourth private equity fund and planning its first real estate and credit funds in Asia. KKR declined to comment on the other fund-raisings. Institutional investors are increasingly looking for a “one-stop shop” with deal-making, operational and capital market expertise, favoring assets with a lower-risk profile that aren’t tied to public market indexes, Wood said. “Investors are looking for a safe pair of hands,” she said in an interview.

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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 January 8, 2021:

  • United States President-Elect Joe Biden will aim to release every available dose of the coronavirus vaccine when he takes office in a little less than two weeks. The strategy differs from the current Trump administration whose plan is to hold back half of the vaccine output production to ensure second doses are available, which is the case with the Pfizer and Moderna vaccines. President-Elect Biden’s strategy doesn’t come without risks. On one hand, releasing all the vaccines will obviously boost the number of people who have their first vaccine, which will provide some immunity. However, both the Pfizer and Moderna vaccines are to be administered at specific intervals, according to their already performed trials, and vaccine manufacturing has not increased to the point many health experts had hoped. A study published in the Annals of Internal Medicine appear to be on the side of President-Elect Biden stating administering the first COVID-19 doses to more people instead of withholding supply may reduce the number of new cases.
  • In a news briefing on Friday, Canadian Prime Minister called the state of the pandemic in the country “frightening”. The prime minister is vowing the number of Pfizer and Moderna vaccines, the two inoculations authorized for use in Canada, will “scale up” in February. According to CTV News, 124,000 does of the Pfizer vaccine were delivered to 68 sites across the country this week, with 208,000 more doses per week expected for the rest of the month. Prime Minister Trudeau’s latest update comes as Ontario’s top public health officials are saying the pandemic curve is going the wrong way and its Premier Doug Ford says it’s the most serious situation they’ve been in since the start of the pandemic.
  • In the United Kingdom, the state of the coronavirus pandemic centered around travel on Friday. A study published in the journal Science said travelers coming from Spain and France contributed to the diversity of variants in the country’s latest COVID-19 outbreak. This news is coupled with the UK now requiring all passengers arriving in the country must prove they don’t have the coronavirus by showing a negative result within 72 hours of their departure. Under the new rules, anyone failing to produce evidence they don’t have COVID-19 will be fined 500 pounds and travellers arriving from countries not on the government’s open corridor travel list, will have to isolate for 10 days, regardless of their test results. 
  • In a televised address on Friday, Iran’s supreme leader said he was banning the purchase of coronavirus vaccines made by the United States and United Kingdom. “If their Pfizer manufacturer can produce a vaccine, then why do they want to give it to us? They should use it themselves, so they don’t experience so many fatalities. Same with the UK,” said Ayatollah Ali Khamenei. The decision made by Iran’s supreme leader will severely limit the country’s options for a vaccine as the country experiences the worst outbreak in the Middle East. Ayatollah Khamenei also claimed western drug companies tested vaccines on other countries “to see if they work or not.”
  • Brazil is showing signs of another coronavirus surge as their death toll has passed 200,000. The country reported more than 1,500 deaths on Thursday, the highest since July 29th. Year-end festivities, which included large gatherings and a more contagious variant being detected in Sao Paulo are all reasons for the rise in cases. To make matters worse, the largest country in Latin America has yet to approve the use of a vaccine. Neighbouring nations such as Chile and Argentina have already started inoculations. Brazil is close to giving the green light to China’s Sinovac vaccine, which proved 78% effective in its latest trial.
  • Similar to other countries throughout the world, Australia is changing their international travel rules in an attempt to keep the coronavirus and its new variants from entering the country. Prime Minister Scott Morrison told reporters on Friday after a meeting with his cabinet that passengers must wear masks on all international flights to Australia and on domestic routes. Any international traveler must return a negative COVID-19 test before they can board and the government will reduce the number of people allowed to arrive each week, which will prolong those Australians still waiting to return home.

Covid-19 – Due Diligence And Asset Management

Record Sum of Dry Power Ready for Pandemic-Hit Firms, ICG Says

Brief: Cash-rich private debt and equity providers are hunting for viable pandemic-hit businesses to fund, according to London-listed alternative asset manager Intermediate Capital Group PLC. “If a business has a shortfall purely due to Covid-19, there is plenty of capital to support them,” said Nicholas Brooks, ICG’s head of economic and investment research in a telephone interview. European private debt managers had almost $93 billion of capital available as of December 2020, with over $295 billion in the hands of private equity, according to data provider Preqin. That cash could help out a lot of companies bearing the brunt of the pandemic that have already tapped out government-backed emergency loans. It’s a relatively expensive option, but may be the only one open to some of the hardest hit sectors as parts of Europe enter their third lockdown. That means yet more pain for many of the firms identified by ICG in their analysis of financial data for around 500 private companies. Hardest hit were automotive and components, travel, hotels, restaurants and leisure, and retail, which endured months of almost zero revenues last year. “Private debt and private equity have record levels of dry powder,” Brooks added. “Funds aren’t the issue, it’s really whether a business is viewed as viable in the long-run.” It’s also a question of whether borrowers can afford the money on offer.

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Flesh-and-Blood Hedge Fund Traders Prevailed in 2020’s Tumult

Brief: The pandemic has made one thing abundantly clear for hedge funds: Trading a once-in-a-century crisis is best left to humans. Funds that survive largely on their ability to place high-conviction bets made some of their strongest returns in decades last year. Some of the industry’s best-known names such as Brevan Howard Asset Management, Millennium Management and Andurand Capital Management soared past peers as stormy markets provided rich pickings. That’s thrown a wrench into the rise of computer-driven quant funds, which gobbled up assets year after year but couldn’t protect investors or make money in 2020. Algorithms largely failed to decipher the impact of a rapidly moving virus and the response from central banks to contain economic damage. The “narrative was: stock selection is dead, the future is all about indexing and quants and the blackbox and all that,” said Craig Bergstrom, chief investment officer at the $7.5 billion Corbin Capital Partners that invests in hedge funds. “It’s another kind of arms race and there are winners, but there are definitely also losers, and it’s not the future of active management.” The market selloff in March and subsequent recovery humbled some of the most sophisticated of quants last year -- most notably behemoths such as Renaissance Technologies, Winton and Two Sigma.

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Investor Optimism Has Increased Since Start of Pandemic: Survey

Brief: Investor optimism has increased “significantly” since the start of the pandemic, according to a new survey. The Scotia Global Asset Management Investor Sentiment Index found that investor optimism spiked from a reading of 100 in May to 117 in November. The reading was even higher — 130 — among investors who use advisors. Eight-two per cent of investors who’d met with an advisor in the past six months said they felt more confident about their investments, compared to 56% of investors who hadn’t met with an advisor. The survey also found that 80% of investors who use advisors felt they were on track to meet their financial goals, and 90% were somewhat or very confident about funding their retirements. Scotia commissioned Environics to conduct an online poll of 1,024 investors with a minimum of $25,000 in household investable assets from Nov. 10 to Nov. 19, 2020. Online polls cannot be assigned a margin of error because they do not randomly sample the population.

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Venture Capital Hits Record High in U.S. in 2020 Despite Pandemic

Brief: Venture capital backed companies in the United States raised nearly $130 billion last year, setting a record despite the COVID-19 pandemic, figures from data firm CB Insight released on Friday show. While the investment total is up 14% from 2019, the number of deals is down 9% to 6,022. And so-called mega-rounds, deals that are $100 million or higher also hit a record amount and number with $63 billion raised in 318 deals. “What we’re seeing is a ‘rich get richer’ phenomenon where successful, high momentum technology companies are vacuuming up most of the financing,” CB Insights chief executive Anand Sanwal told Reuters by email. He said that data showed a big drop in a very early stage investment called seed stage, and expected some of those companies that stand out to see “insatiable investor demand” with fewer competitors for the money. The trend of big investments doesn’t look like it will slow in 2021 as there is a lot of capital chasing investments, say some venture capitalists.

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Commerzbank Takes Additional $2.6 Billion Hit From Pandemic

Brief: Commerzbank AG will take an additional 2.1 billion-euro ($2.6 billion) hit in the fourth quarter as the pandemic weighs on interest rates and drives up bad loans, pushing the lender deeper into the red as it readies a new turnaround plan. Commerzbank will write off 1.5 billion euros in goodwill on its books and set aside about 630 million euros for bad loans to reflect the impact of a second lockdown, according to a statement Friday. That’s on top of a 610 million-euro charge the Frankfurt-based bank announced last month to cover job cuts. Chief Executive Officer Manfred Knof, who took over this month, is preparing to unveil a radical restructuring after shareholders pushed out the previous leadership amid frustration with the slow pace of change. Knof and new Supervisory Board Chairman Hans-Joerg Vetter are now working on a more ambitious cost-cutting plan with about 10,000 jobs on the line, Bloomberg has reported. “After this balance sheet clean-up, we are well prepared for the road ahead of us,” Knof said in the statement. “Our goal is to make the bank more profitable in the long term.” Commerzbank shares fell as much as 4.1% after the announcement and were trading 3.1% lower at 12:56 p.m. in Frankfurt. They have fallen about 5% in the past 12 months.

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These Are The Trends Experts Are Seeing In Hedge Funds Right Now

Brief: The COVID-19 pandemic has changed the way hedge funds do business, from raising money to investing and more. Some trends are here to stay, while others will change as the pandemic continues and eventually comes to an end. Craig Bergstrom, chief investment officer at Corbin Capital Partners, said in an email that active management had returned in 2020, exceptionally fundamental stock selection. He said results across the industry are mixed, but dispersion has meant that careful portfolio construction has been precious. "Broad hedge fund performance has certainly been disappointing in recent years," Bergstrom said. "Very low interest rates are a big part of that problem, but clearly another key factor is fund fees, which have come down, but not fast enough, which means they are consuming too much of the gross returns." He adds that it's not fair to compare hedge fund returns to stock market returns because it is nearly three times as volatile. However, in recent months, investment managers have finally started to have an easier time generating alpha. "The right hedge fund portfolio, though, has been able to deliver solid alpha, and attractive risk adjusted returns, which we think remains very attractive in a world where prospective fixed income returns are very low," Bergstrom 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.

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