.png?width=200&height=78&name=CH%20Diligence%20(thicker%20line).png "CH Diligence (thicker line).png")
Brief: KKR & Co. deployed a record amount of capital in the third quarter, taking advantage of turmoil spurred by the Covid-19 pandemic. The firm invested about $6.2 billion in markets across private equity, infrastructure and real estate, New York-based KKR said Friday in a statement. That figure surpassed its previous peak of $5.5 billion in the second quarter. This year “is on pace to be the most active deployment and fundraising year in our history,” co-Chief Executive Officers Henry Kravis and George Roberts said in the statement. KKR has been one of the industry’s busiest dealmakers during the pandemic and has said the crisis will be an inflection point for its business. In July, the firm agreed to buy retirement and life insurance provider Global Atlantic Financial Group in a deal that could be valued at more than $4 billion, giving it a major presence in the insurance industry and adding long-term capital.
Brief: Two Goldman Sachs Group Inc money-market funds, whipsawed in March by billions of dollars of investor withdrawals, have steadily amassed a liquidity cushion much larger than rivals, as the $4.35 trillion industry braces for the outcome of the U.S. presidential election and another global surge in coronavirus cases. The funds’ weekly liquidity - a barometer of how quickly investments can convert to cash in a week - rose to 85% of total assets this week, according to disclosures here by the bank. That is about double the level when Goldman Sachs in March injected nearly $2 billion of the bank’s own capital into the funds to prevent them from falling below the regulatory weekly liquidity threshold of 30%. “We actively manage liquidity in our funds as dictated by the market environment,” Goldman said in an email statement. Average weekly liquidity at about 111 U.S. prime institutional money-market funds, like the Goldman funds, was 66% at the end of September, up from 54% in the year-ago period, a Reuters analysis of U.S. regulatory filings show. Those 111 funds hold about $300 billion in assets, or 9% of the $4.35 trillion in money funds.
Brief: There’s a mismatch between what investors say they believe and what they actually do with their portfolios. A new study from the National Bureau of Economic Research serves up a rare real-time analysis of how the stock market crash in March shaped investors’ expectations about the market and their subsequent trading behavior. “There are many studies on investors’ beliefs and many studies on trading. But, there’s no study to link the two,” said Stefano Giglio, professor of finance at Yale School of Management and one of the authors of the paper, called “Inside the Mind of a Stock Market Crash.” “The main results were striking,” Giglio said in an interview with Institutional Investor. As one example, he noted that investors’ overall beliefs about the probability of a large stock market drop went up enormously from 4.5 percent to 8 percent between February and April, while the perceived likelihood of a GDP disaster went up from 5 percent to 8.5 percent. Researchers surveyed investors about their views of the market and economy in February, before the Covid-19 crash and near the market’s record high. They polled investors again in March near the low as the pandemic shut down global economies, and in April when markets had recovered much of the initial loss. The researchers then looked at investors’ actual trading behavior over the period.
Brief: Working from home is overrated and everyone will be back in the office before you know it. In today’s climate, with an election just days away, that could be a political statement. But for Bruce Flatt, chief executive officer of Brookfield Asset Management Inc., it’s his contrarian outlook on the pandemic, and a rationale for why he’s ready to spend billions of dollars on real estate in the next 18 months. He dismisses the flight of young families to the suburbs as an “anomaly” and the permanent work-from-home policies popular in Silicon Valley as impractical because “the efficiencies are not even close” to being in a shared workplace. If anything, he said, tech companies are leasing or buying more downtown space, not less. Flatt -- who oversees some US$200 billion of commercial property, including dozens of office towers -- argues big cities are resilient: London survived the Blitz during World War II, and New York bounced back from the 1918 Spanish Flu, the terrorist attacks in 2001 and Hurricane Sandy in 2012. “People like to associate with other people, they like to be the ‘in’ thing, there are jobs and employment, they can walk to work, they can do all the things that come along with it, and this is not stopping it,” Flatt said in a Bloomberg Front Row interview. “These cities are not going away.”
Brief: European shares have been pounded in recent days because of the tightening of lockdown restrictions in places such as France and Germany. The latter has suffered especially badly in the markets. The last eight trading sessions have wiped more than 10% off German equities. Understandably, investors are banking profits after a stellar run for the Dax index. It has been the best performer in Europe this year — up more than 50% since the March lows of the first Covid wave — driven by a resumption of exports to a resurgent China. But there is another contributor to the recent dip in European stock markets. While things do indeed look bleak again for the region’s leading economies, this drop is also being driven by a global de-risking by investors ahead of next Tuesday’s U.S. election. European bond markets aren’t reacting with quite the same concern. The havens of German and French bonds are barely changed in yield despite Wednesday’s announcement of effectively a second lockdown in both countries.
Brief: The Covid-19 pandemic produced some obvious winners and losers for equity portfolio managers: Amazon and Zoom surged, while airlines and hotels tanked. But some enterprising fund managers have wound up picking winners that, at first blush, wouldn’t seem like safe bets in the middle of a raging viral outbreak. To wit: boating stocks. An environment in which 12.6 million people are unemployed and the Standard & Poor’s 500 stock index is up just 1.5 percent may not seem like a natural time for people to run out and buy boats, a particularly expensive hobby. (An old joke posits that “boat” actually stands for Break Out Another Thousand.) But Yaron Naymark, portfolio manager of New York based, value-focused hedge fund 1 Main Capital, was early to spot the potential for growth in anything related to outdoor activities as a result of the pandemic. With restaurants and movie theaters closed in many places, he reasoned, people would look for things to do outside — and away from crowds. Sure enough, sporting goods of all stripes have been booming this year. That’s anecdotally obvious to anyone who has tried to buy a bicycle in the past few months, but it’s also borne out by the numbers: Naymark cites Walmart earnings calls in which management reported big growth in sales of all-terrain vehicles, among other outdoor-centric items.
Brief: Credit Suisse Group AG is closing down funds and laying off employees at its alternative asset management business after several of the strategies struggled to perform in the volatility caused by the Covid-19 pandemic. The bank’s actions include shuttering a quantitative fund and taking a 24 million Swiss franc ($26 million) charge on seed capital in a U.S. real estate fund in the third quarter, Chief Financial Officer David Mathers said in an interview, declining to name the funds or detail the extent of the layoffs. Asset managers are facing challenging market conditions amid the pandemic, with hundreds shuttering or in the process of closing down, including AJO Partners, a $10 billion quantitative fund manager, and macro hedge fund firm Tse Capital Management. Credit Suisse earlier this month said that Aventicum Capital Management, a joint venture with the Qatar Investment Authority, will close two groups of funds and return capital to investors. “We have seen some of these funds struggling in this environment -- their strategies have not succeeded in the volatility that has happened with Covid-19,” Mathers said Thursday. “The credit business is doing fine, it’s some of the smaller ones.”
Brief: At a time when governments around the world are burning through billions attempting to rescue citizens from the financial pain of coronavirus, which has created severe crises in healthcare and employment, Big Society Capital says there is a crucial opportunity to use private money to fund social causes.Big Society Capital was one of the first institutions to champion impact investing in the UK. It was established in April 2012 as a private company with the purpose of building the social impact investment market, under a pledge made by former Prime Minister David Cameron. “There's no doubt that the Covid crisis has really reinforced the momentum that was already there,” says its chairman, Sir Harvey McGrath, adding that there has been a “fairly strong flow” of recent inbound inquiries from investors. Some of this interest is “directly a function of the crisis”, but McGrath also considers this to be part of a broader paradigm shift taking place in the finance industry at large, as generational change boosts demand for value-aligned money management.
Brief: U.S. high-yield bond funds suffered the biggest outflows since the end of September, as investors sought to limit their risk exposure amid growing coronavirus infections across the world and ahead of the upcoming U.S. election. High-yield investors pulled $2.5 billion out of retail funds during the week ended Oct. 28, according to data compiled by Refinitiv Lipper. It’s the first withdrawal since the $3.59 billion yanked in the reporting period ended Sept. 30, and follows an inflow of $150.9 million last week. Investors fleeing the asset class to seek safety elsewhere are also taking out cash from high-yield exchange-traded funds. Two junk-bond sales were pulled from the primary market this week, and other borrowers are sweetening terms to get deals done. High-yield spreads had widened 47 basis points this week through Wednesday, the most since the week ended Sept. 25, according to Bloomberg Barclays index data. Junk bonds sold off alongside stocks and oil, which both fell to new lows this week.
Brief: ServiceNow CEO Bill McDermott told CNBC on Thursday that business leaders are making preparations for their employees to work remotely through next year due to the coronavirus pandemic. McDermott, whose company provides cloud-based software that automates IT and employee workflow, was responding to a question about his conversations with fellow chief executives as they seek to navigate a world upended by Covid-19. There will undoubtedly be a long-term shift with a larger percentage of employees who can work remotely doing so, McDermott said on “Squawk on the Street.” He predicated a “hybrid world,” where employees routinely split time between working in the office and at home. But more near term, he said, “the other thing I’m hearing is people are already preparing for working from home or working from anywhere through 2021, because even if you do get a vaccine, it’s obviously not going to get through the global population for somewhere upwards of a year, probably a year and a half from now.”
Brief: Few things divide opinion on Wall Street like the outlook for small-cap stocks or the fate of the value strategy. Yet most market players would probably agree it’s a tough time to launch a product combining the two. That’s exactly what BlackRock Inc. is doing with a new exchange-traded fund. The iShares Factors US Small Cap Value ETF began trading on the New York Stock Exchange under the ticker SVAL on Thursday. The fund screens for value-oriented stocks in the Russell 2000 Index based on liquidity, volatility, leverage and analyst sentiment and then weights securities equally. It’s an eye-catching arrival given the backdrop. Small-cap shares and value strategies have been battered anew this year as the coronavirus sparked an economic crisis. U.S. equities endured yet another bout of volatility this week, a broad selloff that has spared few sectors. Even after those declines, the S&P 500 Index has still gained 1.2 per cent year-to-date. The Russell 2000 Index, by contrast, is roughly 7.5 per cent lower and value stocks -- those that look cheap relative to fundamentals -- are down more than 15 per cent.
Brief: Wells Fargo Securities’ Michael Schumacher has a message for investors: Buckle up. The firm’s head of macro strategy warns Wednesday’s market turbulence may just be a preview of what’s ahead. “When you think about the U.S. elections, Covid worsening [and] all sorts of other news items coming out in the next couple of weeks, it could be a fairly scary time,” Schumacher told CNBC’s “Trading Nation.” On Wednesday, the S&P 500 and Dow had their worst days since June 11 due to growing fears over rising coronavirus cases across the nation. There’s speculation they could spark new containment measures and closures. While jitters over rising virus cases drove the latest sell-off, Schumacher warns election uncertainty has the potential to pummel stocks even more. “One thing we pointed to for a while at Wells Fargo is the chance the election results are delayed. In that case, it’s almost certainly risk-off. So, a lot of reasons to be concerned over the next week to ten days,” he said. “Right now, it seems the virus has the upper hand, but it’s a very close call. And, frankly, these things are intertwined.”
Brief: Blackstone Group LP said on Wednesday its third-quarter distributable earnings rose 9% year-on-year, as the world’s largest manager of alternative assets such as private equity and real estate took advantage of a rise in corporate valuations to cash out on some of its leverage buyout investments. Distributable earnings - cash available for paying dividends to shareholders - totaled $772 million, up from $710 million a year earlier. This translated into distributable earnings per share of 63 cents, surpassing analysts’ average estimate of 57 cents, according to data compiled by Refinitiv. Blackstone said its private equity portfolio appreciated 12.2% in the quarter, compared with an 8.5% rise in the benchmark S&P 500 stock index over the same period. Opportunistic and core real estate funds rose 6.4% and 3.5% respectively. Blackstone’s shares were down 2.9% in afternoon trading, in line with the broader market.
Brief: Europe’s race to contain the pandemic is raising alarm bells across financial markets. Moves from stocks to the euro and Italian bonds show investors are grappling with the economic fallout from lockdown restrictions that are now some of the toughest in the world. While markets globally have taken a dip this week, the hit was most severe in Europe. The Stoxx Europe 600 Index sank as much as 2.7% on Wednesday, reaching the lowest level since May. In contrast, U.S. equities are only at a three-week low and Asian markets have barely budged. “A second lockdown could well be the death knell for a lot of businesses who just about survived the first lockdown,” said Michael Hewson, chief market analyst at CMC Markets. The selloff on Wednesday was sparked by news that German Chancellor Angela Merkel will propose closing bars, restaurants and leisure facilities for a month. France is also expected to announce new curbs after coronavirus deaths reached the highest since April. In Italy, Prime Minister Giuseppe Conte approved a plan to limit opening hours for restaurants and shut gyms. In Spain, the government has imposed a national curfew.
Brief: Real estate debt investors are stockpiling cash, searching for opportunities to lend to commercial-property owners hurt by the pandemic. Property debt funds, including at Blackstone Group Inc., raised $14.1 billion from April through September, compared with $15.7 billion a year earlier, according to research firm Preqin Ltd. Yet the expected flood of deals has so far been just a trickle. Now there are signs of a thaw. On one side, competition is building to put that cash to work, motivating some lenders to take on higher risks. On the other, borrowers are growing desperate as loan extensions start to expire on malls, hotels and even some offices that are still struggling as Covid-19 continues to ravage the U.S. economy. “If you’re willing to do it, you’ll get a lot of deals, but you have to be willing to play in those sectors and take some risks,” said Mark Fogel, chief executive officer of Acres Capital LLC, a New York-based commercial property lender. He said he’s getting almost twice as many calls from borrowers looking to refinance their debt or get bridge loans to stay afloat than just a few months ago.
Brief: Fee pressures, growing costs, and a desire for scale are signs that the fragmented asset management industry is ripe for more mergers and acquisitions, according to Morgan Stanley. The top 10 asset management companies hold just a 35 percent share of the $90 trillion market, Morgan Stanley said in a research report dated October 25. The only industry more fragmented, the bank said, is the capital goods sector. Although strong financial markets have helped assets under management swell, this growth has masked problems like outflows, fee pressures, and lower revenue growth, the report said. The market downturn and investor exodus in March revealed some of these problems, but after the market bounced back, they stabilized. Still, Morgan Stanley expects that the market crisis will accelerate these existing trends, motivating some asset managers to make M&A decisions more quickly.
Brief: Japanese life insurers, among country’s largest institutional investors, are returning to the domestic bond market after many years of forays into foreign debt as the yield gaps between them have shrunk following the COVID-19 pandemic. Many of them plan to increase their holdings of domestic fixed income assets while planning to reduce those of foreign debt in the second half of the current financial year to March, officials said at news conferences or in interviews with Reuters. “We have long been investing primarily in U.S. dollar bonds but now that their yields have fallen to so low, we are not in a position to buy them aggressively anymore,” said Koichi Nakano, general manager for investment planning at Meiji Yasuda Life. Foreign bonds have been a major source of income for Japanese institutional investors who had been deprived of interest income at home due to the Bank of Japan’s hyper-easy monetary policy. The coronavirus outbreak and subsequent monetary easing around the world to shore up battered economies, however, knocked down bond yields in the United States and elsewhere, shrinking the yield gaps between Japan and the rest of the world.
Brief: Value managers have underperformed for over a decade — a trend that has only intensified during the coronavirus pandemic and run up to the U.S. presidential election. But they can count on at least one group of asset owners to stay committed to value strategies: private-sector pensions. Corporate and health care retirement plan investors surveyed by consulting firm NEPC have largely reported that they would maintain their current exposures to value stocks. The poll took place in September, a month when the Standard & Poor’s 500 value index fell almost 4 percent. Just under three-quarters of corporate pension investors said they would not reduce or increase allocations to value managers, as did 80 percent of healthcare plan respondents. Of the 19 percent of investors who were considering changes to their value exposure, just 7 percent planned on cutting allocations to value managers. Nearly twice as many — 12 percent — wanted to rebalance from growth managers into value strategies.
Brief: Private equity relies heavily on manager skill (alpha) with a large divergence between the strongest and weakest performers in a cohort. Studies have shown that it is possible for some investors to effectively navigate this disparate market and consistently add value, through careful fund selection. Robust due diligence processes, both investment and operational, are a critical part of successful fund/manager selection, but how has this changed during the pandemic? The most obvious impact is from travel restrictions preventing on-site, in-person due diligence meetings. Investors are aware that reviewing track records and strategy can only provide a certain amount of comfort. A large part of the investment consideration is around the people, team dynamics and culture. There is a lot that can be gained from seeing how a team interacts with each other, when visiting a private equity firm’s office - it is often the smaller clues or comments before and after the formal meeting that provide the most insight. Forming a view over a conference call with the team in multiple locations is hard: there is a lack of “vibe” and nuance that can only be gleaned when in-person.
Brief: President Jair Bolsonaro’s stimulus spending spree won praise far and wide for saving Brazilians from the worst of the pandemic’s economic pain. But now, as the worst of the health crisis eases, anxiety is mounting in financial circles about how he’s going to pay for it. Investors have been unloading the currency and stocks, sparking routs that are almost unparalleled in the world this year, and they’re increasingly refusing to buy anything but the shortest of short-term government bonds. At $107 billion, Bolsonaro’s relief program looks more like the massive stimulus packages engineered by the world’s wealthiest nations than those cobbled together by Brazil’s junk-rated peers in emerging markets. Equal to 8.4% of the country’s annual economic output, it’s even proportionally bigger than the plans enacted by the U.K. and New Zealand. All of which turns Brazil into something of a Covid-19 economic case study: Can a mid-tier developing nation emulate the fiscal and monetary response of the world’s most credit-worthy countries and get away with it? Or will it sink into financial crisis?
Brief: In the 12 years since the 2008 financial crisis, many large institutional investors have adopted Dedicated Managed Account (DMA) structures in order to address the challenges in commingled hedge funds that were exposed during the crisis (click here for a brief refresher). These investors were well-prepared to more effectively manage their portfolios through the market volatility which has resulted from the Covid-19 pandemic while eliminating many of the structural risks that can be exacerbated during a crisis scenario. Let’s look at some of the ways that allocators in 2020 have been able to use the benefits of DMAs to more effectively manage through the market impact of Covid-19.
Brief: According to the research data analysed and published by ComprarAcciones.com, merger and acquisition (M&A) deal activity in the pharmaceutical sector rose by 17 per cent in H1 2020, disregarding the economic toll of the global pandemic. It saw a total of 41 deals during the period, but the Q2 2020 deal value total of USD3.3 billion was the lowest quarterly total since Q1 2018. According to PwC, the pharma sub-sector posted a drop of 56 per cent in deal value from H2 2019 to H1 2020. For the PLS sector as a whole (pharma, biotech and medical devices), the decline in deal value was a massive 87.2 per cent during the same period. Pharma and Life Sciences (PLS) M&A Total Deal Value Sank from USD272.9 billion to USD35 billion YoY. The total deal value for the pharmaceutical sub-sector in H1 2019 was USD100.1 billion. In contrast, its total deal value in H1 2020 was valued at USD7.7 billion.
Brief: More than 60% of listed companies sponsoring defined benefit plans issued a profit warning in the first three quarters of the year as they worked to balance cash flows with meeting pension obligations. Of the 524 profit warnings from U.K. companies, 228, or 44%, came from firms that sponsor a DB plan. Many of the warnings cited the impact of the COVID-19 pandemic as a reason, showed analysis by Ernst & Young. Also, 48 sponsors of U.K. DB funds issued more than one warning in the nine-month period. The sectors with the highest number of warnings were travel and leisure, industrial support services, construction and materials, retailers and household goods and home construction. While these sectors were the hardest hit, a third of all listed companies issued profit warnings in the nine months to Sept. 30. However, in the third quarter, listed companies that sponsor a DB plan issued 32, largely COVID-19 related, profit warnings, down 25% from the same period in 2019.
Brief: The biggest private equity and alternative asset manager in the Middle East is on the lookout for deals after the economic fallout of the pandemic made companies cheaper to buy and scandals thinned out the competition. Investcorp Holding BSC, which manages about $34 billion, is looking to do more in the region across the health-care, transport, logistics and industrial sectors, said Walid Majdalani, the firm’s head of private equity for the Middle East and North Africa. The firm, which has channeled $1.4 billion into the region over the past decade and made a return of about 1.8 times on invested capital, is also facing less competition from other private equity investors, he said. Over the past four years, Investcorp helped sell three family-controlled companies in which it held stakes on the Saudi stock exchange. “We see a lot of opportunity to replicate what we have done already in Saudi Arabia -- the difference is now business owners are a lot more realistic about valuations,” Majdalani said. “Also, in terms of other people who do what we do and have teams on the ground, today we don’t see a lot of competition.”
Brief: Investors have thronged the largest hedge funds since the last financial crisis as they sought safety in size. Now, they’re paying a hefty price. Supersized funds are failing their clients during a period of market upheaval that in theory should pose an unprecedented chance to make money. Instead of profiting, though, some of the world’s biggest hedge funds have barely managed to protect their investors from losses. A Hedge Fund Research gauge that gives more weight to larger players was down 4.4% this year through September, while all hedge funds on average managed to eke out a small profit. Gold-plated names that have slumped include Bridgewater Associates, quant powerhouses Renaissance Technologies and Winton, Michael Hintze’s CQS and Lansdowne Partners. The losses are largely hurting influential institutional investors -- pension funds, insurers and endowments -- that contribute most to the industry’s assets and back the biggest funds. A reckoning looms as clients accelerate their flight. Investors pulled $89 billion from hedge funds in the first nine months of the year, mainly from large firms, according to Eurekahedge data. “A very large portion of the assets invested in large hedge funds have not performed all that well and so it’s causing investors to reassess their objectives,” said Chris Walvoord, global head of hedge fund research at investment consultant Aon Plc. They’re asking, “Why am I invested in this? What’s the purpose?”
Brief: U.S. stocks decline picked pace on Monday afternoon, setting the Dow for its worst day in more than seven weeks, as soaring coronavirus cases and a political deadlock over the fiscal relief bill raised doubts about the fate of the economy recovery. New infections have touched record levels in the United States, with El Paso in Texas asking citizens to stay at home for the next two weeks. In Europe, Italy and Spain imposed new restrictions. Travel-related stocks, vulnerable to COVID-19 related curbs, dropped. The S&P 1500 airlines index fell 5% and cruise line operators Carnival Corp and Royal Caribbean Cruises Ltd shed more than 9.5% each. “People are nervous about the expansion in cases,” said Christopher C. Grisanti, chief equity strategist, MAI Capital Management, Cleveland, Ohio. “The administration has said it does not want to slow down the economy yet as cases rise they may not have a choice.” Energy index tracked a more than 3% fall in oil prices. Other economically-sensitive industrials and financials sectors posted the steepest percentage declines among S&P sectors.
Brief: The coronavirus pandemic has dealt a body blow to the quantitative model-based style of investing, with a majority of the firms using such strategies negatively impacted, a study by Refinitiv has found. In a report, financial data provider Refinitiv said 72% of such investors were hurt by the pandemic. Some 12% declared their models obsolete and 15% were building new ones. Machine-learning refers to the use of complicated mathematical models and algorithms based on historical data in order to make predictions without being explicitly programmed to do so. While such machine-driven models had success in the past as historical correlations among different asset classes held firm, they have suffered in the wake of the pandemic as these linkages have broken down. These quantitative models have also suffered in 2020 as the amount and complexity of the inputs that go into such algorithms to generate trading signals have exploded in recent years. “COVID-19 presented a large shift in many of the market dynamics and many institutions would have had to revisit a large portion of the models that they had in order to make them cope with what has been extreme market events,” said Amanda West, global head of Refinitiv Labs at Refinitiv.
Brief: Bob Prince, co-chief investment officer of the world’s biggest hedge fund at Bridgewater Associates, said an unusual combination of low interest rates and rising debt during the pandemic will “severely” limit potential growth rates in the aftermath of the pandemic. Fiscal policy will remain the primary source of stimulus, fueling the risk that government debts become too high and leading to pressure on exchange rates, he said. These problems will be more acute outside of Asia. “Global investors tend to be very Western-centric,” Prince said on Bloomberg TV. “The East is nothing like that. It’s not just China. A number of countries have done a much better job managing the virus without ballooning their fiscal deficits and printing money.” Bridgewater’s Prince Says Bonds Are Risky in Zero-Rate World Prince said his colleagues in China meet at the office without masks, whereas Bridgewater’s U.S. employees still work from home. “That economy is much closer to normal and the pricing of assets is much closer to normal,” he said. “There’s a substantial divergence occurring economically between East and West. As investors, you shouldn’t let yourself get completely locked into the West.”
Brief: It takes a high degree of due diligence for investor capitalists to rifle through the mass number of investment opportunities to find that next big initial public offering (IPO). Just like how Microsoft was started in a garage, a lot these new generation IPOs will probably start in someone’s bedroom given the way Covid-19 has changed the world. According to a CNBC MakeIt article: “Another change toward a work-from-home world courtesy of Covid-19: Bill Gurley, who has invested in the likes of Uber and Zillow, says he’s now investing in start-ups that do not have a traditional office.” “We are now backing start-ups without offices, which isn’t something we had done before,” Gurley, who was a long-time investor with Silicon Valley venture capital Benchmark, said in the article. Furthermore, the article pointed out that “in a June survey by venture capital firm NFX, ‘60% of VCs said they were less likely to invest in start-ups that had the majority or all of its employees working remotely,’ the San Francisco Business Times reported.” “Remote companies are seen as more fragile, because employees can easily leave for the next remote job, NFX managing partner James Currier told the publication,” the article added. “And according to Trulia co-founder and NFX managing partner Pete Flint, being nimble and creative, as start-ups need to, is more easily accomplished when people are together in the same physical space.”
Brief: The COVID-19 pandemic has changed the opportunity set and risks to which institutional investors are paying attention, with credit and potential bankruptcies high on the agenda. One challenge has been finding the right combination of the "least-worst" performing asset classes, said Troy Rieck, CIO of the A$13 billion ($9.2 billion) LGIAsuper, Brisbane, Australia, on a panel discussion Friday at the Pensions & Investments WorldPensionSummit conference. Mr. Rieck added that the super fund's executives do not try to second-guess forecasts related to political risks arising from elections or geopolitics when building the portfolio. Executives are trying to build portfolios with a focus on credit rather than equity, he said. Mr. Rieck added he is excited about infrastructure debt, real estate debt, regulatory capital arbitrage, high-yield and bank loans. "If it is credit-related, I want to own it," he said, adding that investors get "zero for cash and nothing for bonds. Besides those assets, "there is not much out there we like," he said. It could be a challenging decade if inflation does turn up, he said.
Brief: Asset managers plan to outsource functions such as data management and middle and back office operations in order to cut costs and focus on their core job of generating investment returns for clients, according to a survey by US manager Northern Trust. The poll found that 45% of respondents consider data management as the function most likely to be outsourced within the next two years. Some 40% are looking to outsource back room operations, and 38% at middle office functions. The survey of 300 asset managers, including 40% in Asia, was conducted in the first quarter of 2020. Respondents’ assets under management range between US$10 billion and $500 billion. According to Ryan Burns, head of global fund services at Northern Trust, asset managers are facing rising cost pressures, including those related to regulations and technology.
Brief: Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Goldman Sachs (GS) are all fresh off earnings with the highly disruptive COVID-19 backdrop still festering. The headline numbers were fantastic with beats on both the top and bottom line for Citigroup, JPMorgan, and Goldman Sachs, with Back of America missing on top-line revenue but beating on bottom-line profit. Big banks are evolving to the COVID-19 landscape domestically and abroad despite the possibility of widespread loan defaults, liquidity issues, ballooning credit card debt, and stressed mortgages. To exacerbate these COVID-19 impacts, interest rates, Federal Reserve actions, yield curve inversion, and liquidity are critical elements. The business's customer side continues to be problematic as the pandemic's duration continues to drag on with no signs of slowing. A segment of the consumer base is faced with lost wages and the real possibility of not meeting their financial obligations, which will unquestionably have a negative impact on revenue and earnings.
Brief: In a Thursday morning appearance on CNBC's Squawk Box, billionaire hedge fund manager Paul Tudor Jones said he believes the next six to 12 months could be the most volatile period for markets he's seen in more than 40 years of trading, as a result of a blue wave election outcome that could pump trillions into the American economy. Tudor Jones, who founded Stamford, Conn.-based Tudor Investment Corporation in 1980, said he believes the U.S. presidential election will result in a victory for former Vice President Joe Biden and a blue wave in which Democrats gain control of the Senate and retain a majority of the House. That would allow for a "massive" $1.7 trillion stimulus in the next six to 12 weeks that would "undoubtedly benefit Main Street America," with an estimated $700 billion going toward another round of stimulus checks, the 66-year-old said.
Brief: Goldman Sachs has sent some employees at its Plumtree Court headquarters home after two staff on its London trading floors tested positive for Covid-19, as banks in the City keep some key workers in the office amid a spike in virus infections across the UK. In a memo to staff sent on 15 October, seen by Financial News, the bank said that one employee on the fourth floor of its London office and another on the fifth floor were self-isolating after testing positive with Covid-19. Equities trading is on the fourth floor, and its fixed income currencies and commodities unit is on the fifth, according to a person familiar with the matter. "If you have been identified as a close contact of these individuals, the Wellness team has already reached out to you to share guidance," the memo said.
Brief: Investors are losing trust in the Land of Lincoln. Illinois, the fifth largest state economy in the United States, is being forced to pay sky-high interest rates on its general obligation municipal bonds to compensate investors for the risk of lending the state money. The three largest credit rating agencies have not only classified Illinois debt as on the brink of junk, but they’ve also issued negative outlooks to boot. The Prairie State has plenty of company in this regard. Moody’s recently lowered the credit ratings of both New York State and New York City. New Jersey, despite being known as the state with the most millionaires per capita in the U.S., is considered a problematic bet—two credit rating agencies have it on negative outlook.
Brief: The percentage of workers around the world that is permanently working from home is expected to double in 2021 as productivity has increased during the coronavirus pandemic, according to a survey from U.S.-based Enterprise Technology Research (ETR). ETR in September surveyed about 1,200 chief information officers from around the world across different industries. The CIOs also expressed increased optimism about business prospects in 2021, as they see an increase in tech budgets by 2.1%, compared with a 4.1% decline this year due to the lockdowns triggered by the pandemic. The survey said information technology decision-makers expect permanent remote work to double to 34.4% of their companies’ workforces in 2021, compared with 16.4% before the coronavirus outbreak, a result of positive productivity trends.
Brief: The next month or two has the potential to wreak havoc in the health-care sector and the market as a barrage of Covid-19 vaccine test results roll in at the tail end of the U.S. presidential election. “The vaccine outlook will ultimately dwarf the election in terms of market impact,” Goldman Sachs’ strategists said. An earlier-than-expected vaccine would send equity values higher while a delay could send the market lower no matter what the election’s outcome, the bank’s analysis shows. With an emergency use authorization now expected around year end, the U.S. Food and Drug Administration is convening a meeting Thursday to set the stage. Mostly it will be the agency looking to get a public endorsement on their stance on Covid-19 vaccine safety guidance and to ease concerns over the politicization of an approval, SVB Leerink analyst Geoffrey Porges said in an interview. Results from vaccine front-runners, Pfizer Inc. and German partner BioNTech SE, are expected within the next few weeks. Moderna Inc. may follow closely behind in November. And the first late-stage data from a single-shot regimen, Johnson & Johnson’s vaccine, could have results before the end of the year. The study however, is currently paused.
Brief: Harvard University posted a $10 million operating loss in fiscal 2020 and said it’s likely revenue will decline for a second straight year due to the Covid-19 crisis. That would be a first for the school since the 1930s, Harvard said in its annual financial report Thursday, adding that measures including coronavirus testing and tracing and reconfiguring classrooms and dorms have driven up costs. “The financial effects on Harvard from the onset of the pandemic in March of this year were significant and sudden,” Thomas Hollister, vice president for finance, and Treasurer Paul Finnegan said in the report. “The hardest part likely lies ahead with ongoing challenges” from the virus, they said. Higher education has been hit hard by Covid’s economic fallout as schools have been forced to empty campuses, offer courses remotely and close facilities. That has led to a sharp drop in enrollment across the U.S., especially among first year students. Yet even with the bleak outlook, Harvard said its net assets increased by $893 million to $50.2 billion as of June 30 due to the strong performance of the endowment under N.P. “Narv” Narvekar. The endowment, valued at $41.9 billion, returned 7.3% in the last fiscal year and distributed $2 billion of revenue for university operations, according to the report.
Brief: Established Asian hedge funds have attracted the lion’s share of new money this year, while startups have been hamstrung by global travel curbs that have made it impossible for face-to-face meetings with European and U.S. asset allocators. Well-known firms including Tribeca Investment Partners Pty, Pleiad Investment Advisors Ltd., Dymon Asia Capital (Singapore) Pte. and Sylebra Capital have drawn more than $3 billion of new money among them this year. That contrasts with the net $3.1 billion that flowed out of regional funds in the first eight months of 2020, according to Eurekahedge Pte. Meantime, the median raising for new Asia funds this year is just $20 million. “Asset raising has been possible this year, but it has been materially more challenging,” said Matthew Whitehead, chief operating officer of Hong Kong-based Sylebra… With a shortage of local institutional allocators to hedge funds, Asian managers rely on U.S. and Europe sovereign wealth funds, university endowments, charitable foundations and pensions for stickier money. That makes them particularly vulnerable to the Covid-19 travel restrictions.
Brief: A new study of financial crime compliance costs found spending by American and Canadian financial institutions is up sharply in 2020, driven in part by the coronavirus pandemic. The True Cost of Financial Crime Compliance Study, released Wednesday and compiled by LexisNexis Risk Solutions, projected the cost of financial crime compliance at $42 billion across U.S. and Canadian financial firms this year. The costs break down to $35.2 billion for U.S. firms and $6.8 billion for Canadian firms. Total costs are up 33 percent over 2019, the report said. Survey respondents included 150 financial crime decision makers (120 American, 30 Canadian) polled via telephone during August. The individuals worked in financial crime compliance at banks, insurance companies, investment firms, and asset management firms. The total annual cost of compliance across firms was calculated using survey data on financial crime costs as a percent of total assets and secondary data that provides the total assets for all financial institutions in the United States and Canada. The spend amount was generated by multiplying the average percent allocated to financial crime costs by the reported total asset amount, according to the survey’s methodology.
Brief: Earlier this year DWS announced it would donate EUR1 million (GBP905,000) to charitable organisations in countries around the world where DWS is active, and which have been particularly hard hit by the pandemic. In order to show commitment as a firm and to achieve the greatest possible impact, DWS also encouraged employees to make their own donations to these organisations. Nominated by DWS employees, GBP370,000 (EUR400,000) of this total has now been donated to three UK-based charities that provide services for socially disadvantaged people – especially the homeless and children, and a UK-based social enterprise to support research efforts to combat Covid-19 as well as other global epidemics and disease. “The Akshaya Patra Foundation UK” strives to tackle the issues of hunger, malnutrition and education by providing freshly cooked and nourishing meals to children in India and the UK. With the help of DWS, 170,000 meals and 5,250 dry grocery kits were distributed to vulnerable families, providing a total of 390,500 meals since the pandemic lockdown in India.
Brief: Asset managers are at a crossroads. Having faced the COVID-19 pandemic on top of years of pressure from shrinking fees and shifting investor preferences toward the industry's giants, money managers are debating whether to stick it out on their own or enter the deal market in search of scale or complementary products, Wall Street investment bankers, analysts and other experts say. All the while, the likes of BlackRock Inc. and Vanguard Group Inc. keep gobbling up assets. "The stars seem to be lining up for more [deals]," said Mark Timperman, a managing director and head of asset management investment banking at Hovde Group who recently joined the Chicago-based company from Wells Fargo Securities LLC, in an interview. "After having been through a real scare with the COVID cycle, when there was another big market correction, people realized that it's time to think about where the industry ends up in five years." M&A has played a critical role in the investment management industry's evolution in recent years. Inexpensive passive investment vehicles and exchange-traded funds have driven down fees for the entire industry, with the race to the bottom going so far that some ETFs dabbled in paying investors, not the other way around. Asset managers have been buying up their peers in an effort to expand their offerings and asset bases so they can more competitively price their products.
Brief: Federal Reserve Governor Lael Brainard said a failure by Congress to reach an agreement on further support for the economy is the biggest risk to the outlook aside from the coronavirus itself. “Premature withdrawal of fiscal support would risk allowing recessionary dynamics to become entrenched, holding back employment and spending,” said Brainard, viewed as a possible pick for Treasury secretary if Democratic presidential nominee Joe Biden defeats President Donald Trump next month. “Apart from the course of the virus itself, the most significant downside risk to my outlook would be the failure of additional fiscal support to materialize,” she told the Society of Professional Economists in an online speech Wednesday. U.S. central bankers next meet Nov. 4-5, immediately after election day. The U.S. economy is recovering from the severe recession triggered by the coronavirus pandemic, but the pace is showing signs of slowing and recent data has been mixed. Retail sales have picked up and sales of homes and autos also rebounded from the second-quarter lows. Still, the economy has recovered only about half of the 22 million jobs lost and non-farm payroll gains have slowed for three consecutive months.
Brief: Banks that facilitated the U.S. government’s Paycheck Protection Program at first saw the effort as a small revenue booster with a patriotic bonus, shepherding $525 billion in loans to businesses slammed by the fallout of the COVID-19 pandemic. But as taxpayers begin to take on the cost of forgiving those loans, lenders like JPMorgan Chase & Co, Wells Fargo & Co and Bank of America Corp, are girding for what is likely to be years of regulatory scrutiny for their role in doling out the money, according to industry insiders, securities filings and government watchdogs. “The sense of anxiety is high,” said Vivian Merker, a management consultant to financial services firms at Oliver Wyman in New York. “They are gearing up for years of requests from regulators and there’s still reputational risk from PPP fraud even if they did all the right things to follow program rules.” Banks participating in the Paycheck Protection Program (PPP) issued more than 5.2 million loans, to be repaid by the government as long as borrowers demonstrated financial need and used most of the cash to make payroll.
Brief: Sixty-four per cent of organizations failed to report cyber breaches this year, over fears of reputational damage at a time when more customers are seeking service online, a cybersecurity expert explains. According to a recent Canadian Internet Registration Authority (CIRA) survey on cybersecurity measures within companies, only 36 per cent of organizations that experienced a data breach reported it, a decline from the 58 per cent in 2019. Spencer Callaghan, a spokesperson at CIRA, said in an interview that some organizations don’t have to report breaches because of how the rules are framed in the Personal Information Protection and Electronic Documents Act (PIPEDA). “Some rules don’t apply evenly to all organizations, therefore there could be some variance in the data based on certain organizations that aren’t required to report,” he said. Sumit Bhatia, director of communications and knowledge mobilization with Ryerson's Cybersecure Catalyst, said in an interview that these numbers were a “reflection of how COVID-19 is truly impacting organizations.”
Brief: Investor confidence in hedge funds appears to be on the rise, with allocators pouring in some USD13 billion between July and September, the first quarterly net inflow into the industry in two-and-a-half years. New data published by Hedge Fund Research shows the industry on the whole drew positive net inflows for the first time since Q1 2018, with third quarter allocations – dominated by macro and relative value strategies – bringing the total amount of industry capital globally to some USD3.31 trillion. HFR president Kenneth Heinz said the pick-up in inflows was driven both by defensive outperformance by hedge funds through the coronavirus-driven volatility in early 2020, as well as opportunistic gains through the uneven financial market recovery in the second and third quarters. Uncorrelated macro-focused hedge fund strategies led the pack in the three months between July and September as investors, keenly aware of continued macroeconomic uncertainty and growing trends across global markets, pledged some USD7.2 billion across a range of strategy types. That brought total macro assets to USD579.1 billion, with inflows split almost equally between CTA strategies and uncorrelated currency strategies, HFR said. Quantitative, trend-following systematic diversified CTA strategies drew USD3.2 billion of investor money, while currency-focused funds grew by USD3.1 billion.
Brief: China's super wealthy have earned a record $1.5 trillion in 2020, more than the past five years combined, as e-commerce and gaming boomed during pandemic lockdowns, an annual rich list said Tuesday. An extra 257 people also joined the billionaires club in the world's number-two economy by August, following two years of shrinking membership, according to the closely watched Hurun Report. The country now has a total of 878 billionaires. The US had 626 people in the top bracket at the start of the year, according to Hurun in its February global list. The report found that there were around 2,000 individuals with a net worth of more than 2 billion yuan ($300 million) in August, giving them a combined net worth of $4 trillion. Jack Ma, founder of e-commerce titan Alibaba, once again topped the list after his wealth surged a whopping 45 percent to $58.8 billion as online shopping firms saw a surge in business owing to people being shut indoors for months during strict lockdowns to contain the virus.
Brief: The opportunity set for many hedge fund strategies is the best it has been for a number of years. In response to the most challenging market environment since 2008, unprecedented fiscal and monetary responses from governments and central banks have created dislocations and distortions in many asset classes. Volatility has returned to equities, bond yields have fallen dramatically, and inflation fears have stoked demand for precious metals. That said, identifying hedge funds that will be successful is incredibly challenging in an industry with over 4,000 funds managing over $2.92 trillion of assets1. Furthermore, given the unconstrained nature of most hedge funds, dispersion within each broad-based hedge fund strategy is much higher when compared to the long-only world, where different strategies are typically benchmarked to an appropriate index. Manager selection is an increasingly important component when deciding which hedge funds are best placed to capitalise in a post-COVID world.
Brief: Goldman Sachs GS.N has sent some staff home from its London office after two employees tested positive for COVID-19. The U.S. investment bank sent a memo to staff at its Plumtree Court site in central London on Oct. 15 informing them of the positive tests and saying that people who had been in close contact with the staff members had been contacted by the bank’s “Wellness team”. “These two colleagues last worked in the office on Tuesday, 13 October and Wednesday, 14 October, respectively. They will remain in self-isolation as per firm guidelines,” the memo seen by Reuters said. Goldman Sachs is one of several banks that has encouraged groups of employees back into its London offices. London is currently categorised under the “high risk” level in the British government’s coronavirus alert system.
Brief: Bad news for central bankers trying just about everything to stoke inflation: Citigroup Inc. reckons companies’ pricing power is severely damaged. Catherine Mann, the U.S. bank’s global chief economist, fears the pandemic has left so much slack in the economy that firms won’t be in a position to demand higher prices for some time. That, not just rising wages, is ultimately necessary for generating inflation. In the euro area, consumer prices are falling, while a key measure of U.S. inflation rose in September at the slowest pace in four months. “We get back to a trajectory for growth, but we do not return to the trajectory of global GDP that we had in place in January, pre Covid,” Mann said during a panel discussion hosted by the World Economic Forum on Tuesday. Officials across major economies responded to the virus outbreak with record fiscal and monetary stimulus in a bid to prevent corporate insolvencies and ruinous levels of unemployment. The outlook is still bleak, however, and the International Monetary Fund this month warned of a tough recovery path ahead. “The implications of that for workers, and for different age-group demographics, and for convergence of growth rates in emerging markets are all very dire,” Mann said.
Brief: UBS UBSG.S is giving lower-ranking employees an extra week's pay this year in light of the COVID-19 pandemic and adding a financial softener for employees looking to exit finance, the world's largest wealth manager said on Tuesday. “As a sign of appreciation for their contribution throughout this challenging year, and acknowledging that the pandemic may have resulted in unexpected financial impact, the Group Executive Board has decided to award UBS’s employees at less senior ranks with a one-time cash payment equivalent to one week’s salary,” the Swiss bank said in a statement announcing its third-quarter results, adding the measure would add roughly $30 million in expenses in the fourth quarter. The bank also said it had modified its bonus policy so that eligible employees who wanted to make a career change under the strains and uncertainty of COVID-19, would be able to retain more deferred compensation than previously.
Brief: BlackRock Inc. says that the scale of restructuring needs globally could exceed the previous peak that followed the 2008 global financial crisis. “One big reason is the significant growth in sub-investment grade debt,” the company’s research arm, BlackRock Investment Institute, said in a note dated Oct. 19. The amount of outstanding debt with ratings below investment grade, including loans and private credit, has more than doubled to $5.3 trillion since 2007, according to the asset manager. As the overall cost of borrowing fell, companies loaded up on debt. This has left many vulnerable as their revenues came under pressure from Covid-19 related disruptions. BlackRock isn’t the only one warning of the risks of company failures. Despite low rates, U.S. corporate bankruptcies posted their worst third quarter ever. While supportive fiscal and monetary policies have helped companies raise capital and lower borrowing costs, “not all borrowers have benefited equally” and smaller firms have lacked access to the public markets, BlackRock said in the note.
Brief: Biotech investor Dale Chappell was looking to start Humanigen Inc. with a clean slate when his hedge fund assumed control in 2016, but things took longer than expected. The stock has swelled over 500% this year after positive early results from an experimental treatment for a potentially lethal side-effect of Covid-19. The shares have been volatile since July when it reached a more-than four-year high, though results expected this quarter from a late-stage study may be the ticket to keep Humanigen on track after a roller coaster ride. Chappell, who has a medical degree from Dartmouth College and served a fellowship with the National Cancer Institute, saw promise in the pipeline of Humanigen, then known as KaloBios, when he first took a stake in 2016. Investors may remember KaloBios as a company teetering on the edge of bankruptcy before the now disgraced and jailed Martin Shkreli swept in and took it over in 2015. Shkreli’s one-month stint as CEO left the company badly scarred before it fell into insolvency. That’s when Chappell and the fund he founded, Black Horse Capital LP, stepped in to provide financing to get the company back on its feet.
Brief: Investors are rethinking the roles of certain asset classes in their portfolios due to the coronavirus pandemic and its impacts on markets. The pandemic has created the need for resilient investing, with new assumptions and new asset allocations, panellists at the Pensions and Investments WorldPensionSummit said, Monday. For some, that may mean moving away from assets that are traditionally seen as safe havens. As a result of aggressive monetary policy by central banks, the pandemic has led to the need to reframe the relationship that the State of Wisconsin Investment Board, Madison, should have with U.S. Treasury bonds, at the time when rates and yields are low, said Brian Hellmer, managing director, global public market strategies. The board manages $126.3 billion in assets. Bonds had provided hedging qualities and return generation before the pandemic but now only have one of those features. He said bonds are an insurance policy that have a cost without producing an ongoing, real return. “That’s a structural immediate to long-term challenge for us,” he said. Mr. Hellmer said his fund has to consider exposure to the asset class at a time when it may seem counterintuitive to walk away from what some may perceive as being the safest asset class, because pricing has created an expectation of these assets giving no real return.
Brief: Assets under management at the largest global asset managers have piled up to a record USD104.4 trillion, rising almost 15 per cent from the previous year, according to new research from the Thinking Ahead Institute. The money managed by the largest 500 asset managers has risen almost three-fold since 2000, when assets totalled USD35.2 trillion. The market has been consolidating, with the 20 largest asset managers now accounting for 43 per cent of total assets. This has risen from 38 per cent in 2000, and 29 per cent in 1995. The four largest players in the market by amount of assets are US fund managers BlackRock, Vanguard, State Street, and Fidelity, with German insurance fund Allianz coming in fifth. In the last decade, 232 asset manager names have dropped out of the ranking. Meanwhile, there has been news in October of further consolidation to come, with 19th largest fund management firm Morgan Stanley planning to acquire Eaton Vance.
Brief: Brookfield Asset Management will buy an Indian developer’s commercial properties for $2 billion, the biggest real estate deal in the South Asian nation. The Canadian asset manager is acquiring 12.5 million square feet of rent-yielding offices and co-working spaces from RMZ Corp., the privately held developer said in a statement on Monday. The Indian firm said it will have zero debt after the transaction and will use the money to expand its portfolio. Large foreign investors are buying into the Indian office market in recent years. Since 2011, the segment has garnered $15.4 billion of equity investments, according to property research firm Knight Frank. Blackstone last week signed a non-binding agreement to buy some assets, a deal Bloomberg News previously reported could be worth $2 billion. RMZ said it plans to expand its real asset portfolio to 85 million square feet over the next six years from 67 million square feet. Some of the clients in RMZ’s technology and business parks include Accenture, Google and HSBC. It is selling properties in the southern Indian cities of Bengaluru and Chennai. A representative for Brookfield confirmed the contents of RMZ’s statement. The alternative asset manager, which says it owns and operates 22 million square feet of office properties in India, has picked banks for an initial public offering of its India real estate investment trust that could raise at least $500 million, Bloomberg reported in July.
Brief: Private equity firms are writing a new chapter in their playbook to favor business models incorporating data utilization and technology. The have accelerated trends already in motion. In the new normal, every company — no matter the sector — will collect and use data to its advantage. All companies will replace existing business models with technology-enabled models that own few assets, making these companies higher priced and more nimble, industry executives said. The digital transformation is a huge benefit in the COVID-19 world in which private equity and venture capital firms are trying to sell or take public as many portfolio companies as possible before the potential double whammy of a second wave of the virus and increased market volatility around the U.S. presidential election. "There will not be a reversion to a pre-pandemic economy," said Jason Thomas, Washington-based managing director and head of global research at The Carlyle Group LP.
Brief: Institutional investors and outsourced CIOs are adopting conservative, cautious stances in portfolios for the final quarter of what has been a difficult year, partly due to fears that supportive policies may be pulled back too quickly. Before the end of the year, investors will also have to deal with political events — the U.S. presidential election and the end of the Brexit transition period — and the potential resurgence of the coronavirus and associated lockdowns in Western economies. These fears are leading some investors to pare back on risk assets, while others are adding protection into portfolios in order to try to eke out gains from equity exposures while also hedging downsides. "We have adopted a conservative stance as we move into the final quarter of the year," said Mirko Cardinale, head of investment strategy and advice for USS Investment Management Ltd. in London. USS IM is the in-house manager for the Universities Superannuation Scheme, London, which had £67.6 billion ($83.8 billion) in assets as of March 31. "This is because, while the markets rebounded relatively quickly after the initial impact in March, there are many clouds on the horizon."
Brief: The European fund industry notched up net inflows of 297.1 billion euros ($347.6 billion) for the first nine months of 2020, according to a new report from Refinitiv Lipper, despite the coronavirus pandemic creating a “tough” environment for the industry. Money market funds — which usually invest in low-risk, liquid assets like short-term bonds — were the best-sellers over the year to date, with inflows of 211.3 billion euros, according to Refinitiv’s European Fund Industry Review. These types of funds yield some income, but are mainly used to park cash in times of high volatility. Meanwhile, funds focused on global equities were the most popular among long-term investors, with the sector seeing inflows of 62.8 billion euros. However, the data and research provider found that total assets under management across the region’s fund industry slipped from 12.3 trillion euros in Dec. 2019 to 12 trillion euros in Sept. 2020, which it attributed in large part to the performance of underlying markets, which saw a 531 billion euro decline. It comes after a volatile year-to-date for markets. After tanking in March when the full impact of the coronavirus started to be realized around the world, stocks have experienced a broad bullish period over recent months as investors bet on stimulus from governments and central banks, and the prospect of a coronavirus vaccine.
Brief: To quote one analyst, working in equity research has gotten “a lot more intense.” Top research providers in the U.S. and globally have reported a surge in demand for content and corporate access this year, as investors have tried to make sense of the rapid changes brought by the coronavirus pandemic. These changes have impacted not just the markets but the investment research industry itself. This includes changes in how institutional investors view some of their research providers, as the 2020 All-America Research Team will soon reveal. Ahead of that reveal on Tuesday, Institutional Investor asked a number of sell-side analysts to share how they’ve been required to adapt and evolve during the Covid-19 crisis. There are the obvious changes: One airline analyst noted with irony that he traveled a lot less this year. Some pointed to the ability to spend more time with their families. Almost everyone mentioned the increase in virtual communication with clients, corporates, and colleagues. But’s it’s not just the shift to working from home. This year has also seen an evolution in the kinds and quality of research insights demanded by investors, as numerous analysts pointed out.
Brief: Lawmakers must approve another round of fiscal stimulus to keep the U.S. economic recovery on track, executives from Goldman Sachs Group Inc. and Wells Fargo & Co. said Friday. Goldman President John Waldron applauded the federal government’s rapid financial response in the early months of the coronavirus pandemic, but said more needs to be done. The absence of additional stimulus could hamper the comeback, particularly in the U.S., he said during the Institute of International Finance annual membership meeting, held virtually this year. “We are going to see a much tougher road to recovery,” Waldron said. Coming back fully from the crisis will take longer, and “people will be laid on the side of the road, sadly.” House Speaker Nancy Pelosi told Democratic colleagues Thursday evening that “disagreements remain” with President Donald Trump’s administration over a number of components of the stimulus she’s attempting to negotiate, even as an agreement nears on a Covid-19 testing program. The establishment of a national testing strategy had been a roadblock cited by Pelosi and her aides this week during talks with Treasury Secretary Steven Mnuchin. Wells Fargo Chief Executive Officer Charlie Scharf said during a separate IIF panel discussion Friday that additional stimulus is needed with the U.S. “not out of the woods” yet.
Brief: As Wall Street banks reported quarterly results this week, investors wondered about the staying power of the trading bonanza that has floated profits, offsetting problems in traditional lending businesses that have been hurt by the pandemic. Trading revenue was up 4% to 29% at the five U.S. banks with major trading operations. Otherwise, lower interest rates hit lending income and prompted banks to add to loan-loss reserves. Goldman Sachs Group Inc and Morgan Stanley benefited most, because they do not have the lending operations of rivals like JPMorgan Chase & Co, Bank of America Corp or Citigroup Inc. Enthusiasm about trading revenue among bank shareholders has faded since the 2007-2009 financial crisis, when the businesses were shown to be black boxes of risk-taking that could generate huge losses. Later, banks’ trading revenue fell dramatically because of new regulations and clients avoiding profitable products they once peddled. Now, trading businesses tend to move in line with market trends or with a bank’s strengths rather than with taking home-run risks. It remained hard to tell why, exactly, Bank of America might experience a 2.5% gain in bond trading whereas Morgan Stanley saw a 35% increase.
Brief: Late Wednesday, the New York Times reported the story of how officials from the Donald Trump administration had privately expressed fear of a coronavirus outbreak while publicly expressing more positive views — and how that information had been sold onto at least one hedge fund by a “consultant. But who is William Callanan, the “outsourced strategy officer” at the center of the storm? Callanan is best known for his efforts as a portfolio manager, analyst, and investment strategist who worked at some of the most high-profile macro hedge funds in the business: Soros Fund Management, Fortress Investment Group, and Stanley Druckenmiller’s Duquesne Capital, according to published reports. In 2019, Callanan left another well-known hedge fund firm — Key Square Capital, started by former Soros investment chief Scott Bessent — to start London-based Syzygy Investment Advisory. Callanan, an astronomy buff, named the investment advisory firm after an astrological term for the alignment of three celestial bodies, according to a Financial Times report last year. Rather than make its own investments, Syzygy provides long-term investment themes “and aggressive ways of trading them” to hedge funds, pension funds, sovereign wealth funds, and other clients who implement the positions themselves, according to the FT report.
Brief: When it comes to trends in real estate investing, the coronavirus has exacted a toll, according to the annual Emerging Trends in Real Estate report. Densely populated metropolises, once viewed as preferred destinations for millennials, are now being challenged by smaller cities and suburbs. At the same time, co-living and co-working arrangements, for reasons due to human proximity, are being rethought, according to the report, the result of a survey and interviews with industry participants by PricewaterhouseCoopers and the Urban Land Institute. "My one take away is take nothing for granted ... I've seen many cycles but nothing like this," Mitchell Roschelle, managing partner of new strategy advisory firm Macro Trends Advisors, said Wednesday during a panel discussing the latest Emerging Trend's report. Behavior can change very quickly, said Christopher Lee, partner and head of Americas real estate at Kohlberg Kravis Roberts & Co., a speaker on the same panel. For real estate, Mr. Lee said, it means that behaviors of businesses and consumers can change "in ways we've never seen before and it is happening very rapidly."
Brief: A new survey of more than 250 alternative investment professionals finds that a strong majority expect a return to pre-pandemic levels of deal activity by the close of 2021. The survey, conducted during EisnerAmper’s Virtual 5th Annual Alternative Investment Summit, shows that 74% of industry professionals predict a return to pre-COVID-19 deal activity by the end of Q4 2021. Two in five (41%) respondents predicted an even swifter recovery, with a return to pre-pandemic deal activity by the end of Q2 2021. When asked to identify the industries that present the best chance for growth in Q4 2020, respondents pegged technology and health care/life sciences as the sectors with the greatest opportunities. This largely mirrored results from EisnerAmper’s 2019 survey, when technology, cannabis, and health care/life sciences were named as the strongest growth sectors. EisnerAmper’s survey also identified the major trends that will impact how the alternatives sector operates moving forward. Many dealmakers hit the pause button in March 2020 when COVID-19 caused a global economic crisis and dramatically shifted the ways in which deals get done. Despite the investment industry continuing to largely operate in a work-from-home setting, 80% of private equity executives agree that they have been able to satisfactorily conduct deal due diligence during the pandemic.
Brief: Watered-down shareholder participation at AGMs, due to virtual meetings during the pandemic, is sounding alarm bells at APG, the largest pension fund in Europe, where collaboration with other asset owners and organisations is the beating heart of its ESG strategy and a central tenet to its stewardship response to the pandemic. Virtual annual meetings may be the pandemic norm, but Dutch asset manager APG is concerned about the consequences of lost face-to-face engagement and the ability of investors to collaborate to put pressure on companies to change. “In our view, AGMs as they are now can only be an interim solution,” said Claudia Kruse, managing director, global responsible investment and governance, APG, Europe’s biggest pension fund in an interview with Top1000funds.com. The majority of AGMs that APG has attended since the shut down due to the pandemic are one-way webcams, simply speeches that don’t involve two-way dialogue. Nor is the advance voting process as effective according to Kruse. “We’ve participated in 10 webcast AGMs and sometimes put forward questions as part of a collective engagement, but of course the votes are cast in advance,” she said. In other cases, questions are not put forward as part of collective engagement, and interaction between the board and retail investors is also lost. Possible solutions include hybrid models where investors can participate virtually in conjunction with a smaller physical meeting, said Kruse.
Brief: Stocks are falling on Wall Street in afternoon trading Thursday, extending the market's pullback this week as optimism that Congress will deliver another round of stimulus for the economy wanes and new data show another weekly surge in the number of Americans seeking unemployment aid. The S&P 500 was down 0.7%. The benchmark index is now on track for its first weekly loss in three weeks. The selling was widespread, with technology, health care and companies that rely on consumer spending driving the decline. The pullback follows a broad sell-off in markets overseas as rising infections in Europe led governments in France and Britain to impose new measures to contain the coronavirus. Treasury yields were lower, while the price for U.S. crude oil also headed lower. The Dow Jones Industrial Average was down 141 points, or 0.5%, to 28,379 as of 12:15 p.m. Eastern time. The Nasdaq composite dropped 1.2%. The Russell 2000 index of small-cap stocks was off 1%. Stocks have been mostly climbing this month, but have pulled back this week as talks between Democrats and Republicans in Washington over another economic stimulus package drag on, dimming investors’ hopes for a deal that can deliver more aid for the U.S. economy in the near term.
Brief: Investment managers should come together to provide high-quality work placements for 16-24-year olds on Universal Credit, Investment20/20 says, following the launch of a new initiative in support of the Government’s GBP2 billion Kickstart scheme. Investment20/20, the Investment Association’s talent solution for the industry, is encouraging investment managers to join its new initiative aimed at facilitating Kickstart’s six-month work experience for 16-24-year-olds on Universal Credit and at risk of long-term unemployment. As part of the scheme, Investment20/20 will act as a conduit for the Department for Work and Pensions (DWP) to pay the National Minimum Wage to each participant for 25 hours a week of work. Investment20/20 is providing an industry solution for investment managers looking to participate in the Kickstart scheme, by providing resources and support to young people with no background knowledge of the industry, and enabling firms to offer work placements to fewer than 30 young people - a requirement to engage with DWP directly.
Brief: Working from home hasn’t slowed down Wall Street’s trading desks. The five biggest U.S. investment banks are on pace for their first $100 billion year for trading revenue in more than a decade. In just three quarters, they’ve already generated almost $84 billion, more than any full year since 2010. Sell-side traders have ridden a wave of activity as markets plunged at the start of pandemic-spurred lockdowns before embarking on dramatic rebounds. Trading gains since the start of the pandemic have helped offset weakness in consumer businesses at the nation’s biggest banks, where loan-loss provisions piled up in the first half of the year. Capital markets units have “really been the bright spot as far as revenues have gone since the pandemic started,” Jeff Harte, a bank analyst at Piper Sandler, said in a Bloomberg Television interview. “It’s been pretty good earnings, at least from the big banks.” JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley all saw trading revenue surge more than 20% for a third straight quarter. The totals weren’t as staggering as the second quarter, which was a record for modern Wall Street’s trading and dealmaking units, but they helped lift Goldman to record per-share earnings and Morgan Stanley to its second-highest profit ever.
Brief: New research from RBC Global Asset Management shows that three out of four (75%) institutional investors now incorporate ESG principles into their investment process, up from 70% last year. An increasing number of institutional investors believe ESG integrated portfolios are likely to perform as well or better than non-ESG integrated portfolios compared to 2019, going up from 90% to 97.5% in Canada, from 92% to 96% in Europe and from 78% to 93% in Asia. However, while most markets are embracing ESG, investors in the US appear more sceptical. Only 74% of US respondents believe ESG integrated portfolios perform as well or better, down from 78% in 2019, while a quarter believe they perform worse. The coronavirus pandemic has helped boost interest in ESG, with investors becoming more aware of environmental and social factors. More than a quarter of institutional investors (28%) said covid-19 has made them place more importance on ESG considerations. Meanwhile, more than half of institutional investors are looking for companies to disclose more details about worker safety, employee health benefits, workplace culture and other social factors due to the pandemic.
Brief: Quantitative fund manager AJO Partners, which manages $10 billion, said on Wednesday it will shut at the end of the year after “lingering viability concerns” from its clients. Performance data on the fund's website here showed a number of its funds were down sharply for the year to Sept. 30, with its Large Cap Absolute Value strategy, which has more than $5 billion, down 15% and Small Cap Absolute Value down 21%.“Our relative performance has suffered because our investment edge, our “secret sauce,” is at odds with many forces driving the market,” founder Ted Aronson said in a memo provided by a company representative to Reuters. “However, the drought in value — the longest on record — is at the heart of our challenge.” Aronson wrote the length and the severity of the headwinds “have led to lingering viability concerns among clients, consultants, and employees.” Value stocks or shares of economically sensitive companies have been among the laggards in the market’s rally from its lows in March. Related sectors such as retail have struggled as their business models get disrupted in a shift to a more tech-driven world.
Brief: Wells Fargo & Co WFC.N has fired about 100 to 125 employees for unethically availing themselves of coronavirus relief funds, according to a source familiar with the matter. The bank believes some of its staffers made “false representations in applying for coronavirus relief funds for themselves”, defrauding the U.S. Small Business Administration, David Galloreese, head of Human Resources, said in an internal memo seen by Reuters. The abuse was tied to the Economic Injury Disaster Loan program and outside the employees’ roles at the bank, the memo said, adding Wells Fargo will cooperate fully with law enforcement. “These wrongful actions were personal actions, and do not involve our customers.” Bloomberg first reported the news earlier in the day. Last month, JPMorgan Chase & Co JPM.N dismissed several employees who allegedly misused funds that were supposed to help businesses dealing with the COVID-19 pandemic, the Financial Times reported.
Brief: Goldman Sachs Group Inc on Wednesday posted its best quarterly performance in a decade by some measures, as trading moved back into the limelight and its lack of a big consumer business switched from a curse to a blessing. The Wall Street bank posted a quarterly return-on-equity of 17.5%, its highest since 2010. Investors closely track that figure because it shows how well a bank uses shareholder money to produce profits. Goldman also boasted record earnings per share, beating analyst expectations by a wide margin. Its performance was driven in large part by a 29% jump in trading revenue, as clients responded to news about the coronavirus pandemic by shifting their portfolios. While rivals including JPMorgan Chase & Co have also benefited from the markets boom this year, they are far more exposed to vulnerable consumers and businesses suffering from unemployment and pandemic lockdowns. Goldman’s consumer bank is relatively tiny. “Simply stunning results,” Credit Suisse analyst Susan Roth Katzke said in a report.
Brief: Fortress Investment Group delayed the pricing of $3.2 billion of municipal bonds to build a passenger railroad between southern California and Las Vegas, a sign that investors were hesitant to finance such a speculative project at a time of deep economic uncertainty. The company boosted the equity contribution to the project by $500 million, among other changes, according to updated documents released Wednesday. Lead underwriter Morgan Stanley had planned to price the deal Wednesday, according to a pricing wire viewed by Bloomberg. The offering has now been postponed with no new date set, according to people familiar with the matter who asked not to be identified because the discussions are private. The deal is listed as day-to-day. Samantha Kreloff, a spokesperson for Morgan Stanley, and Ben Porritt, a spokesperson for Fortress’s Brightline Holdings, declined to comment. The company has been holding investor calls since at least the last week of September, when offering documents were released. Investors were pitched last week on yields ranging from 7% to 7.5% depending on call date, with final maturity in 2050, for the largest offering of unrated municipal securities. Updated documents Wednesday estimated a 7.25% interest rate.
Brief: Nearly nine out of 10 workers want to be able to choose whether to work from home or the office once COVID-19 workplace restrictions ease, and have greater autonomy over their hours, according to research from Cisco Systems CSCO.O. The pandemic has rapidly shifted attitudes towards home working, the research showed, with two thirds of workers developing a greater appreciation of the benefits and challenges of doing their jobs remotely. Even though only 5% of those surveyed worked from home most of the time before the lockdown, now 87% of workers wanted the ability to choose where, how and when they worked - blending between being office-based and working remotely, Cisco said in a report issued on Wednesday. Cisco Vice President Gordon Thomson said companies would have to reconfigure how they operate to help meet the new demands of workers, who prioritised effective communication and collaboration above everything else. He said technology would also be used to ensure employees were safe and their data was secure in their working environment, whether in the home or the office.
Brief: Aviva Investors, the global asset management arm of Aviva, expects the economic recovery that began in May to continue in the rest of the year and into 2021. Although further waves of Covid-19 virus infections have emerged, they should be successfully countered by limited and targeted restrictions on activity, avoiding the need for the re-imposition of full national lockdowns. As a result, downside risks to activity have diminished since the summer, while the upside case would be further enhanced by the eventual development and distribution of effective vaccines in early 2021, alongside extensive monetary and fiscal policy support. While there is considerable uncertainty about timings, the contours of a post-Covid “new normal” should come into sharper focus in coming quarters. The ongoing economic revival will rely on continuing policy support in the form of loose monetary policy – conventional and otherwise – and generous fiscal support and stimulus for both businesses and workers. If sustained, the combination of loose monetary policy – which is increasingly geared to achieving higher inflation than in the past decade – and expansionary fiscal policy has the potential to bring long-lasting material changes for economies and global financial markets.
Brief: Bridgewater Associates founder Ray Dalio is giving US$50 million to New York-Presbyterian Hospital to fund a center dedicated to health equity and justice, at a time when the COVID pandemic has underlined the stark racial disparities in the U.S. The Dalio Center for Health Justice, a research and advocacy organization, will focus on reducing differences in access to quality health care that overwhelmingly affect communities of color, New York-Presbyterian and Dalio Philanthropies said in a statement. The hospitalization rate from COVID among Black and Hispanic individuals has outnumbered that of Whites and non-Hispanics by a factor of at least 4.6, according to data from the Centers for Disease Control and Prevention. The death rate of Blacks has been more than twice that of Whites. “Access to equal health care and equal education are fundamental requirements of a just society,” Dalio said in a Zoom interview. COVID emphasized the urgent need to address disparities in health outcomes between racial groups that are shaped by everything from differences in treatment protocols to data collection, he said. “There’s so much work to be done.” Julia Iyasere, an internist and Columbia Business School graduate, will head the center. As the child of immigrants with a multiethnic background, Iyasere said she witnessed firsthand various forms of health-care injustice and its consequences.
Brief: Private equity fund investors have been favoring established buyout firms over first-time managers in recent months, as the challenges of carrying out due diligence remotely during the COVID-19 pandemic reduce their appetite for risk. Out of the $127 billion raised by buyout firms between July and September, only $5.8 billion went to managers raising funds for the first time, the lowest level since 2013, according to industry data provider Preqin. Some private equity fund investors said curbs on business travel were limiting their ability to familiarize themselves with new fund managers, and pushed them toward the relative safety of established players. “It is definitely a higher bar in this environment because you can’t have in-person meetings, you can’t have a dinner with the manager, you can’t really get to know the person,” said Kelly Meldrum, head of primary investments at Adams Street Partners, a $41 billion “fund-of-funds” manager that invests in private equity funds on behalf of institutional investors. In the third quarter of the year, Blackstone Group Inc BX.N, the world's largest private equity firm, closed its fourth real estate debt fund after collecting $8 billion from investors. KKR & Co Inc KKR.N also raised $950 million for its second real estate credit fund. Few first-time managers achieved the same. Among them were Andros Capital Partners, which closed a $250 million fund focused on the energy sector, and Benford Capital Partners, which raised $130 million to buy small lower middle market businesses.
Brief: BlackRock, the owner of the wildly popular iShares family of exchange-traded funds and the world's largest asset manager, has gotten even bigger during the Covid-19 pandemic. BlackRock said Tuesday that it now has $7.8 trillion in assets under management, a 12% increase from last year. The continued allure of passively managed index funds is a big reason why BlackRock is thriving during these volatile times for the market. BlackRock said that iShares had a total of $2.3 trillion in assets during the third quarter — and nearly 70% of that total was for stock funds. BlackRock disclosed the numbers in its latest earnings report Tuesday. Revenue and profit easily surpassed Wall Street's forecasts. "As investors around the world navigate current uncertainty, including the pandemic and uneven economic recovery, BlackRock is serving clients' needs with global insights, strategic advice and whole-portfolio solutions," said BlackRock CEO Larry Fink in a press release. Shares of BlackRock (BLK) rose 3% on the news. BlackRock's stock has now surged more than 25% in 2020 thanks to its strong results. BlackRock, like most major Wall Street firms, has had to adapt during the coronavirus outbreak.
Brief: JPMorgan Chase & Co is forging ahead with plans to build a mammoth new headquarters in New York, Chief Executive Jamie Dimon said on Tuesday, despite the coronavirus pandemic casting serious doubt on the future of office buildings. “We’re building that headquarters for 50 years! It is not a short-term decision,” Dimon said during a call with reporters after posting quarterly results. Slated to open in 2024, for a price tag of as much as $3 billion, the building at 270 Park Avenue is to house about 14,000 employees. At 1,425 feet, it would be the second-tallest office building in Manhattan behind One World Trade Center, nearly 200 feet higher than the Empire State Building and more than 400 feet above the nearby Bank of America Tower, according to the Council on Tall Buildings and Urban Habitat. An illustration by Lewis Garrison, a 3-D architectural illustrator who likes to make video flyovers of skylines, here envisions JPMorgan's new headquarters towering over Midtown Manhattan, a T-Rex in what might seem like a field of dinosaurs. But since pandemic lockdowns happened in March, far fewer workers have been going into offices, making it unclear why such a big skyscraper is necessary.
Brief: Merger arbitrage and event driven hedge fund strategies can capitalise on the recent pick-up in M&A activity globally, and help cushion investors’ portfolios amid potential risk aversion as a result of the US election, Brexit and a fresh Covid-19 surge in Q4, industry strategists say. The volume of M&A deals plummeted to USD96 billion in April this year – the lowest level since August 2009 during the height of the global financial crisis – as a result of heightened concerns over the coronavirus pandemic, said Man Group in a market commentary on Tuesday. In recent weeks, though, activity has surged across a wide range of sectors globally as deals that had been put on ice because of Covid-19 began flowing back into the market. More than USD1 trillion of deals across the world reportedly came to market during the third quarter, and in a market commentary on Tuesday, London-listed global hedge fund giant Man said volumes bounced back “both in terms of volumes, but also as a proportion of market cap.” Against that backdrop, Lyxor Asset Management believes that merger arbitrage-focused hedge fund strategies will offer “diversification and protection” for investor portfolios during the fourth quarter of 2020…
Brief: History doesn't repeat itself, but it does tend to rhyme. Each crisis period in financial markets is unique with some aspects in common. In 2020, equity markets endured a devastating fall in the wake of concerns about the novel coronavirus followed by a miraculous recovery. To date, many investors are still asking: Was this recent period of turbulence a crisis that may continue or was this crisis a simple V-shaped correction, albeit rather painful? In a recent paper, we take a look at this spectacular market fall from the perspective of a trend-following strategy to determine what is similar and what is different from the crisis periods that came before. Trend-following strategies take long and short positions following prevailing market trends across a wide range of asset classes, e.g., equity indexes, bond index futures, rates, currencies and commodities. These strategies have often been some of the few known to sometimes capture ever-coveted "crisis alpha." A correction is a short-term loss that recovers relatively quickly. A crisis, on the other hand, is a prolonged period of market stress with sustained losses, which can occasionally come in waves. Using peak-to-trough losses in equity markets, we examined the speed (measured as total drawdown divided by time in a drawdown) for crisis periods since 1992. During this period, the tech crisis and (depending on how you look at it) the global financial crisis consist of several waves of drawdowns.
Brief: The coronavirus pandemic isn’t keeping investors from pouring billions into venture capital. As of September 30, U.S. venture capital funds closed this year had raised $56.6 billion, according to a report from PitchBook and the National Venture Capital Association that’s expected to be released Tuesday. This is more than $54.9 raised in all of 2019, and less than $12 billion shy of 2018’s record fundraising total of $68.1 billion. According to PitchBook, investors have continued to make “robust” commitments to venture capital funds this year despite the fundraising challenges and market uncertainty brought by the pandemic. This is in contrast to the slowdown seen in the larger private equity industry, with Preqin reporting last week that global fundraising had dropped to its lowest quarterly total since at least 2015. “Despite continued uncertainty throughout the year, the rebound in public markets has given investors confidence,” John Gabbert, founder and chief executive officer of PitchBook, said in a statement on the VC report. “As investors seek growth opportunities in a low-rate environment, the growth potential of the venture strategy continues to entice both traditional LPs and nontraditional investors.” Most of the fundraising has been driven by large funds, with the average fund size increasing to $257.2 million — nearly double the average last year.
Brief: The asset management industry has reached a critical period for nurturing gender diversity, industry experts have advised, as investment firms choose how they will adapt to new challenges caused by the coronavirus pandemic. Baroness Helena Morrissey says the investment industry has always been “slow to shift gears” in the face of problems, including gender diversity and transparency over fees. Baroness Morrissey founded the campaign group the 30% Club in 2010, which targeted a minimum 30 per cent female board members, in addition to being the former chief executive of Newton Investment Management and chair of the Investment Association. She now chairs the Diversity Project, which works to improve diversity in all dimensions in the investment and savings industry and serves as a peer in the House of Lords. Recent progress has been “very tentative”, with the share of women in fund management roles reaching 11 per cent in 2020. In 2016, women accounted for 10.3 per cent of fund managers. Citywire estimates that at the current rate of promoting women to senior roles, it will take two centuries before female fund managers achieve parity with their male colleagues. Baroness Morrissey believes that even the slow progress the industry has made to hire and promote more women could slide backwards, if firms fail to make positive efforts now. “It's too soon for it to withstand a body blow in the form of people just taking their eye off the ball at this point,” she says.
Brief: EQT AB, the European private equity firm, is considering a takeover of Dutch phone company Royal KPN NV in what would be its largest-ever acquisition, people with knowledge of the matter said. The buyout firm is in the early stages of discussing the feasibility of a deal with potential advisers, the people said, asking not to be identified because the information is private. Shares of KPN have fallen 15% in Amsterdam trading this year, giving the company a market value of about 9.4 billion euros ($11.1 billion). No final decisions have been made, and there’s no certainty that EQT’s deliberations will lead to an offer, the people said. Any suitor would want to win the backing of KPN management and the Dutch government after the former telecom monopoly previously fought off an unwanted takeover. Representatives for EQT and KPN declined to comment. KPN, which is valued at about 16 billion euros including debt, has reported declining revenue for more than a decade. Its shares are trading near an all-time low amid fierce competition from regional giants like Vodafone Group Plc. The company appointed Joost Farwerck as chief executive officer a year ago. He took over a business that was cost cutting and in search of new revenue streams to ease competitive pressures in its home market, where rivals have been merging.
Brief: Wall Street banks are on track for a record year of revenue from trading U.S. government-backed mortgage debt, industry sources told Reuters, amid a surge in demand - from the Federal Reserve in its battle against the pandemic, and from investors hunting yield. Revenue from trading bundles of home loans at the biggest global banks - including JPMorgan, Citi and Goldman Sachs among others - is expected to top $3 billion in 2020, one source with direct knowledge of the banks’ trading revenue said, besting last year’s peak of $2.5 billion. The source declined to be identified because the data isn’t publicly available. “Buying mortgages in March was one of the best trading opportunities in mortgages since the last financial crisis,” said Daniel Hyman, head of agency MBS portfolio management at Pacific Investment Management Company (PIMCO). The surge in demand and activity has also allowed new names to enter the space. Bank of Montreal, which acquired mortgage security broker-dealer KGS-Alpha Capital Markets in 2018, is now actively trading residential mortgage-backed securities or RMBS, according to the source.
Brief: The alternative investment data provider shows that a total of 237 private equity funds closed in the third quarter, which is the lowest quarterly total since at least 2015. Meanwhile, there are 3,968 in the market seeking capital, a record number of funds since 2015. The coronavirus pandemic has changed private equity fundraising dynamics significantly: Most meetings are now conducted virtually, and the public market correction may have stalled fresh capital commitments, according to Preqin. During the first three quarters of 2020, just 39 percent of funds closed in 12 months, according to the data. This is at least six percentage points lower than each of the previous five full-year periods. What’s more, 45 percent of funds took more than 18 months to close — the largest amount since 2015, per Preqin. There are, of course, anomalies. On October 1, for example, European private equity firm Nordic Capital announced that it had closed its tenth fund, which it raised fully remotely, with €6.1 billion (US$7.17 billion) to deploy. Likewise, on September 29, private equity firm Advent International closed a $2 billion fundraise for its seventh Latin American fund. These fund closes are indicative of another trend Preqin pointed out: Despite the pandemic, fundraise sizes grew slightly quarter-over-quarter, to $536 million.
Brief: Hedge funds have suffered their first monthly loss since March, as fears over the growing spread of coronavirus in Europe and the US – combined with the imminent presidential election and uncertainty over the US economy – weighed down on managers of all hues in a decidedly patchy September. New data published by Hedge Fund Research shows that only event driven strategies emerged from September in positive territory, as losses swept through the equity, macro and relative value sub-sectors. The flagship HFRI Fund Weighted Composite Index – an across-the-board snapshot of all strategies - dumped 1.2 per cent last month, its first monthly decline since March, when markets were sent spiralling by the Covid-19 outbreak. The index’s Q2 surge of 9.14 per cent was essentially halved during the following quarter, with the index gaining some 4.06 per cent between July and September. The end of its five-month positive run last month has left the index flat for the year, at 0.5 per cent. The HFRI Equity Hedge (Total) Index – which measures the performance of a broad range of equity-focused managers – gave back 1.53 per cent in September. Only healthcare-focused equity hedge funds were up last month, rising 1.94 per cent, with fundamental equity, multi-strategy, quantitative and energy/materials strategies all registering losses. Overall, HFR’s equity benchmark remains up 2.24 per cent since the start of 2020.
Brief: Two-and-a-half years ago Joseph Payne was ousted from Arcturus Therapeutics Holdings Inc., the biotech company he helped found, by what he calls a “dysfunctional board.” Four months later he was back at the helm and the now $1.2 billion firm is racing to push out a Covid-19 vaccine alongside the world’s leading contenders. The contentious transfer of power came after the previously private Arcturus gained access to the public markets in a reverse merger with Alcobra, a struggling biotech. Today, Arcturus’s goal is to develop a potent low-dose one-shot messenger RNA Covid-19 inoculation. Like other vaccine and drug developers chasing Covid medicines, Payne’s company has picked up steam since mid-March when U.S. states started shutting down. The shares have surged more than fivefold since then and climbed as much as 6.3% in Thursday trading. Hedge funds have taken notice, with actively managed firms making up 20% of the company’s holder base as of Oct. 4. Pure play health fund HealthCor Management LP has a 6.5% stake after adding almost 1.5 million shares in the third quarter, according to data compiled by Bloomberg. Arcturus kicked off a dose-finding study in Singapore in August and has clinched supply deals with the governments of Israel and Singapore. It wasn’t among the few companies singled out for the Trump administration’s Operation Warp Speed and it hasn’t signed any large-scale government contracts. But Payne, the company’s president and chief executive officer, sees this as an advantage.
Brief: The asset management industry has reached a critical period for nurturing gender diversity, industry experts have advised, as investment firms choose how they will adapt to new challenges caused by the coronavirus pandemic. Baroness Helena Morrissey says the investment industry has always been “slow to shift gears” in the face of problems, including gender diversity and transparency over fees. Baroness Morrissey founded the campaign group the 30% Club in 2010, which targeted a minimum 30 per cent female board members, in addition to being the former chief executive of Newton Investment Management and chair of the Investment Association. She now chairs the Diversity Project, which works to improve diversity in all dimensions in the investment and savings industry and serves as a peer in the House of Lords. Recent progress has been “very tentative”, with the share of women in fund management roles reaching 11 per cent in 2020. In 2016, women accounted for 10.3 per cent of fund managers. Citywire estimates that at the current rate of promoting women to senior roles, it will take two centuries before female fund managers achieve parity with their male colleagues. Baroness Morrissey believes that even the slow progress the industry has made to hire and promote more women could slide backwards, if firms fail to make positive efforts now. “It's too soon for it to withstand a body blow in the form of people just taking their eye off the ball at this point,” she says.
Brief: More than a decade into his tenure, James Gorman is busier than ever remaking his firm. The Morgan Stanley chief has carried out a dealmaking blitz that’s transformed the white-shoe firm, from a Wall Street specialist to a big player in the world of money management. If stealing away a wealth manager from Citigroup Inc. propelled the Melbourne-born banker to the top perch in 2010, his recent shopping spree guarantees that the 62-year-old executive’s mark will be left on Morgan Stanley long after he’s gone. Gorman’s two latest mega-deals -- the takeover of E*Trade Financial Corp., to go after millennials and other individual investors, and now the $7 billion purchase of asset manager Eaton Vance Corp., announced Thursday -- are the largest carried out by any of the big banks in Wall Street’s post-crisis reincarnation. And both were done in the span of just 10 months. The acquisitions guarantee Morgan Stanley’s wealth and asset-management group a standing that overshadows the bank’s core Wall Street operations, despite their dominance. And Gorman, who rose up through Morgan Stanley’s wealth business and has been bolstered by a stock price that’s outperformed major Wall Street rivals this year, said the 38% premium he’s paying to gain Eaton Vance’s roughly $500 billion in assets is worth it.
Brief: The head of the U.S. Securities and Exchange Commission (SEC) said on Thursday that the agency has brought 700 enforcement actions in the 2020 fiscal year, a ‘significant’ amount after March 15. In a virtual address kicking off “SEC Speaks 2020,” an annual SEC enforcement conference put on in conjunction with the Practicing Law Institute, Jay Clayton said the agency had also obtained financial remedies of more than $4 billion, up from a year prior. The SEC has also reviewed disclosures of more than 10,700 funds--including more than 1,200 new funds--in 2020, an increase of 7% over last year, Clayton added. “While the pandemic significantly impacted how we do our work, it did not negatively impact the work itself,” Clayton said. "At the same time, we added to our work load," the top market's watchdog added in reference to the agency's extended telework period that began here on March 10 after an employee at its Washington, D.C., headquarters was treated for coronavirus symptoms.
Brief: Mizuho Financial Group Inc. plans to introduce a system that would allow employees to work a three- or four-day week, according to informed sources. It aims to launch the system in December after holding talks with its labor union. Mizuho Financial will be the first among the nation's megabanks to implement a permanent system allowing employees to take three or more days off every week. The group is adopting diverse work styles in response to the pandemic. The new work system will cover some 45,000 employees of the holding company and such operating units as Mizuho Bank, Mizuho Trust & Banking Co. and Mizuho Securities Co., the sources said. Each employee will be allowed to choose to work three or four days. Basic salary will be reduced to 80 percent of the current level for employees who work four days a week and to 60 percent for those working three days, according to the sources. Mizuho Financial seeks to prevent talented workers from leaving the group by creating an environment in which employees, many of whom need to take care of older family members or raise their children, find it easy to work according to their own circumstances. The new system is also intended to help employees take time to brush up their skills in their respective areas of work, according to the sources.
Brief: ACA Compliance Group (ACA) has identified a global spike in financial services firms turning to RegTech, outsourcing, and operational resilience solutions for risk and compliance management in the age of Covid-19. The firm has seen a 25 per cent rise in demand for outsourced managed services when compared with pre-pandemic levels, with cybersecurity and regtech solutions also seeing an increase in demand. A key driver is that risk and compliance leaders are being asked to do more with less and reduce costs while enhancing operational resilience. The Covid-19 pandemic has forced financial services firms to abruptly change the way they work now – and in the future. As the global pandemic mutated into an economic crisis, it caused massive unemployment and social unrest. Fires and floods added additional environmental crises to the mix. All of these risks interacted and mutated to present firms with key risks and challenges, including business disruption, remote work, cyber threats, and ultimately risk and compliance monitoring challenges. At the same time, firms are seizing the chance to invest in new opportunities created by the disruption and to modernise their infrastructure to be more resilient, both of which will serve them well in the future. This is a phenomenon that ACA has termed RiskMutation.
Brief: The Alternative Investment Management Association (AIMA), the hedge fund industry trade body, has paired up with ITN Productions to produce a news-style programme which aims to push the case for hedge funds’ role in the economic recovery following the coronavirus crisis.Due to launch in summer 2021, ‘Holding Strong: Alternative Investments in a Volatile Market’ will explore the role played by alternative assets and hedge fund managers in the global economy and their value to investors and markets, and how they offer allocators a differentiated risk/return profile and provide alternative funding avenues for borrowers. The programme will also examine how the alternatives sector is utilising technology, ESG and socially responsible investing in its investment strategies, and the steps firms are taking to strengthen diversity and inclusion at firms. ITN Productions, a commercial communications unit of ITN, produces creative content for broadcasters, businesses, brands, rights holders and digital channels. Its Industry News arm offers bespoke material for industry associations and trade bodies produced in a broadcast news-style programme format.
Brief: U.S. Senator Elizabeth Warren is asking large U.S. banks to disclose how they performed under a recent Federal Reserve exam of their finances during the coronavirus pandemic. In a letter sent to 14 large firms Wednesday, Warren asked each to provide its results from a confidential Fed test, arguing the central bank’s “limited transparency” on whether banks could weather a severe economic downturn is insufficient. “The safety and soundness of the banking sector cannot be taken for granted, and the American people deserve full transparency regarding the health of the financial system,” the Democratic senator wrote in a letter seen by Reuters. Warren added that the recent collapse of negotiations for further economic stimulus makes the matter more pressing, as the Fed previously noted that some banks’ capital forecasts were “strongly dependent” on additional economic support. In June, the Fed announced that large banks could suffer as much as $700 billion in losses under a severe pandemic-driven recession. But the central bank only released those results in aggregate, citing the fact that the recent onset of the pandemic prevented it from conducting a full-blown stress test of each bank.
Brief: In spite of the rally in risk markets this year, Pacific Investment Management Company (PIMCO) expects low returns across asset classes in the coming three to five years as the global economy recovers from the coronavirus pandemic. Published on Wednesday, the investment giant’s outlook argues that given the current high valuations in credit and equity markets, and the likelihood that interest rates will be kept near zero, investors should expect a stagnation or decline in profit as a percentage of gross domestic product. Credit and equity markets have been bolstered this year by investors’ hunt for yield. With interest rates near zero, share prices have risen and borrowing costs have fallen for riskier companies. But the pandemic’s economic realities still mean that revenue - especially in sectors like travel, entertainment and hospitality - won’t quickly recover, and central banks are unlikely to intervene to prevent defaults from rising.
Brief: Activist investor Dan Loeb is urging Walt Disney Co. to permanently suspend its dividend and redirect those funds to its streaming service, saying the entertainment giant needs to lean in to a massive industry shift. Loeb sent a letter to Disney Chief Executive Officer Bob Chapek Wednesday saying he believes $3 billion in annual dividends would be better spent on its direct-to-consumer streaming service, Disney+. He said doing so could more than double Disney+’s budget for original content, bring in additional subscribers, lower churn and boost pricing power. Disney’s shares rose as much as 2% Wednesday after Bloomberg reported on the letter. The company, which has a market value of $222 billion, had seen its stock decline 16% this year through Tuesday’s close. Disney has been the dominant studio at movie-theater box offices in recent years. But with brick-and-mortar cinemas suffering during the pandemic, the company needs to focus on streaming with new urgency, Loeb said. He cited the decision by Regal to temporarily close its U.S. theaters as a sign that cinemas are going away. “While we all share a certain sadness and nostalgia for this eventuality, I am sure that people felt similar emotions about horse-drawn carriages when the automobile was first introduced,” Loeb said in the letter, a copy of which was obtained by Bloomberg.
Brief: Wells Fargo & Co WFC.N has started to cut jobs at its commercial banking unit as part of larger reductions that will impact nearly all of its functions and business lines, a company spokeswoman said on Wednesday. The bank resumed job cuts in early August after it paused layoffs in March because of the COVID-19 pandemic. Wells Fargo said in July it would launch a broad cost-cutting initiative this year as the bank braces for massive loan losses caused by the pandemic and continues to work through expensive regulatory and operational problems tied to a long-running sales scandal. “We are at the beginning of a multiyear effort to build a stronger, more efficient company for our customers, employees, communities, and shareholders,” a spokeswoman said via email on Wednesday. “The work will consist of a broad range of actions, including workforce reductions, to bring our expenses more in line with our peers,” she added, without specifying the number of job cuts. Wells Fargo has cut 700 jobs as part of workforce reductions that could ultimately impact “tens of thousands” of staff, Bloomberg News reported on Wednesday citing people with knowledge of the matter.
Brief: A famous Wall Street bear-turned-bull is urging clients to double down on V-shaped economic bets, even as talks on fresh stimulus collapse. Spurred by conviction on reflation, Andrew Sheets is bullish on small-cap stocks and recommends selling defensive trades from technology firms to long-dated Treasuries. With investors already hedged for election-related volatility, Morgan Stanley’s chief of cross-asset strategy says the market rally has legs and more policy stimulus is coming soon enough. “The glass half-full view of stimulus talks is if you don’t get it today you’ll get it tomorrow from whomever wins the election,” Sheets said in an interview. “This V-shaped recovery is still intact.” His conviction that growth will continue unabated is in contrast with other strategists who say the U.S. is facing a multitude of risks. Lawmakers have been deadlocked for weeks on the details of a stimulus package and President Donald Trump surprised allies with a unilateral call on Tuesday to halt talks on a deal. Sheets’s recommendations are mirrored in hedge funds positioned ever more aggressively for a steeper U.S. yield curve, often seen as a bet on reflation. The latest data shows speculative net short positions in long bond futures have hit a record, while net long positions on 10-year Treasuries have climbed to their highest since October 2017.
Brief: The Commons Project Foundation and the World Economic Forum today announced international trials starting this week for CommonPass, a digital health pass for travellers to securely document their certified COVID-19 test status while keeping their health data private. CommonPass is built on the CommonPass Framework that establishes standard methods for lab results and vaccination records to be certified and enables governments to set and verify their own health criteria for travellers. The purpose of CommonPass and the CommonPass Framework is to enable safer airline and cross border travel by giving both travellers and governments confidence in each traveller's verified COVID-19 status. At present, COVID-19 test results for travel are frequently shared on printed paper — or photos of the paper – from unknown labs, often written in languages foreign to those inspecting them. There is no standard format or certification system. “Travel and tourism has been down across the board due to the COVID pandemic,” said Diane Sabatino, Deputy Executive Director, Office of Field Operations, U.S. Customs and Border Protection (CBP). “CBP wants to be part of the solution to build confidence in air travel, and we are glad to help the aviation industry and our federal partners stand up a pilot like CommonPass.”
Brief: Public markets have largely recovered since their lows in March and April, but private equity funds wiped out six years of gains in the first half of the year, according to the most recent data available from eFront, the private markets software and research firm owned by BlackRock. One of the best measures of performance — the ratio of the current value of investments in the funds (plus any distributions already made to investors) relative to what allocators have invested in the fund — declined to 2014 levels, according to eFront. “Performance of active funds globally, measured by total value to paid-in (TVPI), slumped from a near-record of 1.45x in late 2019 to 1.36x in Q1,” according to eFront’s quarterly performance report on the first half of 2020. Private equity fund performance also declined in the second quarter. Buyout funds held on to companies slightly longer in the first and second quarters, as they focused on getting their businesses through the crisis, whether through layoffs and restructuring or by investing more cash. Although it has since recovered, the dealmaking environment cooled in the first half of the year as people worked remotely and financing proved scarce.
Brief: Goldman Sachs Group Inc. boosted the size of a new credit fund to $14 billion in what is shaping up to be one of the largest debut investment vehicles ever raised. The bank, which set out with a target of $5 billion to $10 billion, is now expecting to finish fundraising with a $14 billion war chest to pour into companies in need of fresh liquidity. A Goldman representative confirmed the goal for the first in a new family of funds, called West Street Strategic Solutions Fund I. The $14 billion mark is notable for the first iteration of a fund series new to investors. Such funds seldom crack $10 billion on their first go-round barring one exception: the $100 billion SoftBank Vision Fund, which is in a league of its own. The Goldman credit fund will provide a boost to the bank’s goal of raising $100 billion for investing in what’s known in the industry as alternatives. Instead of guiding client cash into plain-vanilla asset classes such as stocks and bonds, the funds are focused on seeking outsize returns in less-trafficked corners of the market including distressed credit, real estate and private equity. Fundraising success will also help cement Julian Salisbury’s profile as one of Goldman’s most powerful executives. The 48-year-old Brit has climbed rapidly, from running a secretive and successful group betting Goldman’s money inside its trading group, to now helping run a newly created division that rivals the firm’s dealmaking group in size and profitability, second only to the markets division.
Brief: Private equity firms TPG and Onex Corp. are preparing bids for bankrupt Hertz Global Holdings Inc.’s car leasing business Donlen, according to people with knowledge of the matter. TPG and Onex are working on offers that could value Donlen at about $1 billion, said the people, who asked not to be identified because they weren’t authorized to speak publicly. Rivals of Hertz are also considering bids, the people said. A representative for TPG declined to comment. Representatives for Onex and Hertz didn’t respond to requests for comment. Donlen performs fleet management functions such as vehicle leasing, maintenance and registration, according to its website. Hertz sees the business as non-core and is willing to sell it to help pay down debt, the people said. Hertz listed $24.4 billion in debt when it filed for bankruptcy in May. The company is negotiating with its creditors for financing after months of funding itself during bankruptcy, people with knowledge of the talks said last month. It’s considering two tentative loan offers of $1 billion to $1.5 billion, which could help bolster operations that have been hurt by the coronavirus pandemic and slump in travel, according to one of the people. Donlen made about $100 million in earnings before interest, taxes, depreciation and amortization last year, Bloomberg News has reported. Hertz bought the Bannockburn, Illinois-based business for $947 million including debt in 2011.
Brief: A research report commissioned by SDL, the intelligent language and content company, reveals that more than half (52 per cent) of European asset management firms have implemented client engagement, and digital marketing and communications technology, sooner than anticipated due to the Covid-19 pandemic. The pan-European research, conducted by WBR Insights, also discovered that almost a third (32 per cent) of firms admitted experiencing technical problems while implementing new digital technology during the pandemic. “There is no doubt that the pandemic focused hearts and minds on the protection of clients and their investments,” says Christophe Djaouani, EVP Regulated Industries, SDL. “It’s been a wake up moment for the industry, and they know they need to implement more robust client engagement and communications technology if they want to stay ahead of the increasing demands of anxious clients.” Asset management firms also plan to embrace digital marketing communications much more with nearly half (48 per cent) expecting to implement their initiatives across all their available digital channels this year, according to the research. Almost a third (27 per cent) admit that ROI is the key driver that led their firm to adopt digital communications to meet their clients’ needs.
Brief: More than half of companies plan to shrink their offices as working from home becomes a regular fixture after the Covid-19 pandemic ends, according to a survey by Cisco Systems Inc. Some 53% of larger organizations plan to reduce the size of their office space and more than three quarters will increase work flexibility. Almost all of the respondents were uncomfortable returning to work because they fear contracting the virus, the poll found. Cisco, the largest maker of networking equipment, recently surveyed 1,569 executives, knowledge workers and others who are responsible for employee environments in the post-Covid era. The findings suggest many of this year’s radical changes to work life will remain long after the pandemic subsides. The poll, conducted for Cisco by Dimensional Research, concluded that working from home is the “new normal.” More than 90% of respondents said they won’t return to the office full time. 12% plan to work from home all the time, 24% will work remotely more than 15 days of each month, while 22% will do that eight to 15 days every month. Cisco’s Webex video conferencing service has benefited from lockdowns that have kept millions of people working and studying from home. It’s also faces rising competition from Zoom Video Communications Inc.
Brief: When it comes to post-pandemic deal-making, blank-check companies and other alternatives are winning out over traditional mergers and acquisitions, according to a survey from consulting firm Deloitte published on Tuesday. A record number of special purpose acquisition companies (SPACs), which raise money in an initial public offering to be used for any type of acquisition, have gone public this year, with business titans including Bill Ackman and Reid Hoffman, co-founder of LinkedIn, creating huge pools of capital to be invested. Forty-five percent of U.S. corporate executives said they are most interested in pursuing SPACs, alliances, and joint ventures, while only 35 percent cited traditional acquisitions or merging with another company, according to Deloitte, which polled 1,000 executives at companies and private equity firms… Deloitte had seen the trend toward alternatives in M&A before the Covid-19 pandemic struck in March, but the economic impact of the virus has forced companies to consider every option given the low-growth environment, said Mark Purowitz, principal, Deloitte’s mergers and acquisitions consulting practice, and leader of the firm’s Future of M&A initiative, in an interview.
Brief: The Securities and Exchange Commission today published a staff report titled U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock, which focuses on the origination, distribution and secondary market flow of credit across U.S. credit markets. The staff report also addresses how the related interconnections in our credit markets operated as the effects of the COVID-19 pandemic took hold. In addition, staff will host a Roundtable on Interconnectedness and Risk in U.S. Credit Markets to discuss the issues raised in the report on the afternoon of Oct.14. In the U.S. credit markets, banking and non-banking entities and intermediaries are intricately and inextricably interconnected. These interconnections are essential for the functioning of the markets, the provision of credit and the distribution of risk. These interconnections can also transmit and amplify risks in times of stress. The report identifies these interconnections and, with that framework, discusses how the COVID-19 economic shock reverberated through the credit markets in March and April 2020. The principal purpose of the report is to identify and place in context key structural- and flow-related interdependencies in the U.S. credit markets as well as areas of stress revealed by the COVID-19 shock, with an eye toward informing policymakers as they seek to improve the functioning and resilience of our financial markets. The report does not make policy recommendations. The report is accompanied by a cover letter from SEC Chairman Jay Clayton and SEC Chief Economist S.P. Kothari and will be discussed at the roundtable, which includes policymakers and market participants, on Oct. 14.
Brief: Alternative money managers are finding it harder to attract investments from new clients in the era of virtual meetings despite strong interest in their strategies as asset owners resume investing during the pandemic. The problem, sources said, is the reluctance in most cases for institutional investors and managers to meet face-to-face given the global COVID-19 restrictions. Despite a much-improved facility by managers in presenting their investment strategies and providing information for due diligence checks via remote communication channels, industry observers said many asset owners still are not comfortable with a digital-only acquaintance. "There's an abyss that asset owners have to jump over when it comes to getting to know potential investment managers for your fund via a Zoom meeting. There's a natural human-comfort factor that comes from meeting in person," said James Neumann, a New York-based partner and CIO of investment consultant Sussex Partners U.K. Ltd., London. "There's a bias toward expanding relationships with existing managers because it's much harder to go from an initial call to hiring a new manager, especially in this environment," Mr. Neumann added.
Brief: JPMorgan chief executive Jamie Dimon said that up to 30% of employees could work from home permanently. Dimon, who has been vocal in the past few weeks about the need to bring more staff back to the office in a bid to restore corporate culture and spur creativity, told the Sibos conference that the Covid-19 crisis is likely to lead to a proportion of JPMorgan’s staff to remain working from home on rotation. “There will be some permanent work from home, people who work from home or permanently rotate, or have a schedule of three days in and two days out, something like that,” he said during a virtual interview with Takis Georgakopoulos, global head of wholesale payments. “I don’t think it will be 100% of the population, I think it will be 20-30% ... and it’s got to work for the company and the clients. It’s not just whether we like it as employees,” he said. JPMorgan had 256,710 employees at the end of the second quarter. Daniel Pinto, the chief executive of its corporate and investment bank, told CNBC in August that staff could rotate between home and the office, but did not put a figure on his prediction. Dimon’s comments echo those of outgoing UBS chief executive Sergio Ermotti, who said in July that up to a third of the Swiss bank’s staff could stay home permanently.
Brief: The coronavirus pandemic has shown that policymakers will sacrifice business activity if it’s necessary for public safety. Climate activists have warned for years that society’s quest for growth threatens our planet, and some economists encourage using different metrics to judge an economy’s success. So we asked an array of economic policy experts whether anything has really changed. This pandemic forces us to rethink economic growth and, in many respects, the way our economies and societies function. Artificial intelligence and major structural changes have to be taken into account, including working from home and relocalization of activities. Sustainability, mobility, resilience, fairness, and inclusiveness are key policy aims with enormous challenges in the years to come. But the logic of economic growth cannot simply be dismissed. Debts, public and private, have continued to grow in the past decade. The financial crisis has not reduced the propensity to borrow around the world. The pandemic has forced governments to increase their budget deficits and, consequently, public debts. I would add that the stock of debt will not be less of an obsession. The new context for monetary policy, due to substantially lower natural rates, should not make us complacent about the size of debts. Countries need to manage their debts over the long run. Moreover, markets discriminate among economies. And one cannot take low inflation as a given forever. Especially if monetizing debts will be resorted to, increasingly.
Brief: Despite an economic downturn as a result of the pandemic, money managers are committed to their long-term technology investment plans, migrating client and investment data to the cloud, enhancing remote work capabilities and automating more business operations for better efficiency, sources said. While some firms have attempted to wring out savings by renegotiating contracts with third-party service providers offering investment market data, research and cloud-sourcing arrangements, most global money managers are ultimately spending more on technology as they strive to meet new remote work demands, said Tyler Cloherty, senior manager and head of the knowledge center for Casey Quirk, a practice of Deloitte Consulting LLP, New York. "There's been increased costs for laptops and collaborative software, like Zoom and Microsoft Teams," Mr. Cloherty said. Additionally, costs have increased as money managers continue to make longer-term investments in migrating company data to the cloud and on research portals for investment team data sharing, he added. "I think during the initial downturn in March and April, there was a hesitation to embark on substantial new investments. Since the market has bounced back … third-quarter margin numbers are going to look much better," Mr. Cloherty said.
Brief: Goldman Sachs Group Inc. foresees the European Central Bank boosting its pandemic bond-buying program by 400 billion euros ($470 billion) in December, after euro-zone inflation weakened further. The ECB is also likely to extend the emergency asset-purchase operation, known as PEPP, by six months through the end of 2021, analysts at the U.S. bank wrote in a note to investors Monday. Reinvestments of maturing assets under the plan should continue to the end of 2023, they wrote, adding that the central bank may also target high-yield bonds for purchase. “A PEPP expansion is likely to be more powerful in supporting the recovery of the euro-area economy -- particularly in southern Europe, where it is most needed -- than a rate cut or an expansion of the regular asset-purchase program,” Goldman analysts including Soeren Radde wrote. That’s because PEPP “would be more powerful in compressing credit spreads.” Speculation of further monetary easing has grown for a host of reasons -- from the recent uptick in coronavirus infection rates in Spain and France to a decline in euro-area core inflation to a record-low 0.2% in September. The latter prompted ECB officials to comment that they were uncomfortable with almost nil price growth. Goldman previously expected the PEPP -- with a current limit of 1.35 trillion euros -- to end in mid-2021 and for the ECB to provide additional support through its regular asset-purchase program launched in 2015.
Brief: The frozen mergers & acquisitions market of just a few months ago has turned into a frenzy as sellers look to lock in capital gains before year-end. Company founders and CEOs are hedging their bets against any tax law changes, including the treatment of capital gains and carried interest, that could come in 2021 if former V.P. Joe Biden, the Democratic nominee, defeats President Trump in the November election. “It’s going to be a busy three months here before year-end,” said Art Penn, founder and managing partner of PennantPark Investment Advisers, which focuses exclusively on middle market lending. “It’s a combination of good asset values for sellers and concern about potential tax law changes next year if there’s a change in administration.” Not all companies will get sold. Companies that have been hard hit by the quarantine and slowdown caused by Covid-19 likely won’t have buyers right now, even if their sector is expected to improve once the economy returns to normal. A lawyer involved in a number of M&A transactions that haven’t yet closed said there’s too much uncertainty about a potential vaccine, government aid, and companies’ future growth projections. “There’s a real unease about what will be permanently changed by the coronavirus,” she said.
Brief: Investors, already skittish ahead of U.S elections in November, now have another thing to worry about: the president’s health. President Donald Trump’s COVID-19 diagnosis triggered a sell-off in stocks and oil as investors moved away from risk assets on Friday. “The president of the United States has got a disease which kills people. People are de-risking because of that,” said Chris Weston, head of research at brokerage Pepperstone Group in Melbourne. But where investors go from here depends, to a large degree, on how Trump copes with a disease which has killed more than a million people around the world… Aside from the Trump news, investors were digesting a jobs report showing U.S. employment growth slowed more than expected in September and back-and-forth negotiations over a U.S. coronavirus relief plan. If Trump’s symptoms turn out to be mild and he recovers quickly, markets could stabilize and the Republican president could use the experience to project his image as a fighter in the campaign against Democratic challenger Joe Biden. But if the 74-year-old gets very sick and has to be hospitalized, as British Prime Minister Boris Johnson was earlier in the year, or the virus spreads to other members of his administration, investors will be alarmed.
Brief: The primary role of a traditional bank providing financing and capital is set to be challenged further in a post Covid-19 world by non-banks, according to a PwC report, “Securing your tomorrow, today – The future of financial services,” which predicts that alternative providers of capital are set to become an even more important part of the global financial system. In the last 10 years, aggregate lending in USD by non-banks has outstripped the pace of growth of traditional lenders, with non-banks seeing a compound annual growth rate (CAGR) of lending 2.3 per cent, compared to 0.6 per cent CAGR to banks. This trend is likely to accelerate as declining core capital ratios – caused by asset impairments resulting from the Covid-19 pandemic - will limit the lending capacity of banks, particularly in Europe. Non-traditional sources of finance such as private equity, sovereign wealth funds, credit funds and governments themselves will need to step into the breach to finance the recovery and its aftermath. In 2019, non-banks – including private equity funds and sovereign wealth funds – lent 41 trillion dollars compared to the 38 trillion dollars lent by traditional lenders. In particular, the analysis by PwC shows that private debt has seen substantial growth, which is set to propel the asset class into a significant category of non-bank lending.
Brief: Institutional investors are increasingly favoring the biggest, most established alternative managers as they make allocations during a global pandemic. Alternative investment fund clients surveyed by SS&C Intralinks reported an increased preference for $1 billion-plus and $5 billion-plus fund managers in the investment technology firm’s global poll of around 200 limited partners. For example, 15 percent of surveyed LPs said they were favoring general partners with more than $5 billion in assets under management, compared with just 5 percent last year. Meanwhile, the proportion of respondents prioritizing mid-sized managers — those with between $100 million and $500 million in assets — fell from 53 percent to 41 percent. “It suggests that LPs are looking to back the most trusted names in the industry to guard against reputation risk, as well as appease investment committees who might be cautiously minded in the current market,” SS&C Intralinks said in a report on the findings. “Another factor could be that large-cap managers are more likely to have experienced a market downturn, such as in ’08, and considered a safe pair of hands.”
Brief: Investment banks might be hesitant about hiring too much experienced talent right now, but junior recruitment is proceeding as normal. Hirevue interviews have been underway since late July and virtual super days and Zoom interviews abound. For the most part, the interview questions being asked are the same as usual: if you're applying for a markets role you'll almost certainly need an opinion on how to invest $1m+; if you're applying for a corporate finance role you'll need to know how to explain a DCF to your 80 year-old grandmother. Peppered in among the questions students say they're being asked at banking interviews this year, however, are questions specifically related to the pandemic. As we noted in May, you'll also need a good story about how you've handled the pandemic personally and have used it as a chance to 'grow' etc etc. You might also want to prepare answers to the questions below, which recent interviewees claim to have been asked in postings on Wall Street Oasis and Glassdoor. As ever, some of wildest/most philosophical questions are being asked at hedge fund Bridgewater, where some people have been working in the woods since the pandemic began...
Brief: Private credit fundraising slumped globally to US$8.3 billion in the third quarter, down 68 per cent from the same period a year ago, as investors took a wait-and-see approach amid uncertainty caused by the pandemic. The last quarter’s figures compare to US$37.6 billion brought in for the asset class in the second quarter, according to London-based research firm Preqin Ltd. In North America -- the biggest hub for alternative lending -- fundraising fell to $7.8 billion in the third quarter, down from US$24.6 billion the prior quarter and compared to $8.6 billion in the same period in 2019. “What we’ve seen in the third quarter is a real reduction in the number of funds closed and the amount of capital raised, because investors have already allocated the capital potentially or it could just be the fact that Covid has not disappeared like some hoped,” David Lowery, Preqin’s head of research insights, said in a Wednesday interview. In the U.S., investors keeping an eye on the Nov. 3 president election could also lead to them taking a “wait-and-see approach,” Lowery said. Raising capital in the wake of a pandemic has undoubtedly been a challenge -- particularly when a credit manager is connecting with new investors, according to Theresa Shutt, chief investment officer at Canada-based Fiera Private Debt.
Brief: Brian Bell, chief executive of Split Software, was in a meeting pitching investors when California announced the shelter-in-place policy to prevent the spread of the coronavirus in March. In the days that followed all of his meetings were delayed or canceled as venture capital investments froze. But since then things haven’t just thawed, they are boiling over. According to previously unreleased data from PitchBook, in the first nine months of 2020, U.S. venture capital firms invested $88.1 billion in tech startups, up from $82.3 billion in the first nine months of 2019. Tech investments represented 78% of venture capital investments last year and 74% in 2018. Venture capitalists say $3 trillion in stimulus funding has investors looking to put cash to work, and top venture capital firms continue to launch massive funds. Greylock Partners, an early investor in Airbnb, started raising money for its latest fund during the pandemic and announced a billion-dollar fund in September. Lightspeed Venture Partners, the first outside investor in Snap, in April announced it raised more than $4 billion for three new funds to support early- and growth-stage startups. Investors say they are betting the pandemic will have the lasting effect of pushing more economic activity online, making up for the businesses boarding up on Main Street. And they are investing in startups that aim to enable the further digitization of sectors like banking, retail and healthcare.
Brief: Private equity firms are betting that the rise in online shopping is here to stay, with some of the world’s biggest investment funds eyeing deals for everything from warehouses to delivery companies. Clipper Logistics Plc, which supports the e-commerce operations of retailers from Asos Plc to Superdry, is attracting interest from buyout firms, people with knowledge of the matter said. Cinven is among potential suitors that have been evaluating the 496 million-pound ($638 million) company, while CVC Capital Partners has also looked in the past, according to the people, who asked not to be identified because the information is private. Silver Lake recently participated in a $650 million funding round for Klarna AB, which lets shoppers pay for online purchases in installments. In August, Advent International acquired a controlling stake in the U.K. operations of package delivery service Hermes. The coronavirus crisis has created rising e-commerce demand, with customers stuck indoors ordering everything from food delivery to clothing and items for home improvement. That’s attracted private equity firms, which are eager to spend the record piles of capital they’ve amassed even as they grapple with the effects of Covid-19 on the companies they already own. Permira led a $300 million funding round last month for Mirakl, the French startup behind a platform used to create digital marketplaces, while Warburg Pincus invested in Boston-based Salsify Inc., which helps brands manage their online presence.
Brief: The global cull of banking jobs continues with Goldman Sachs Group Inc. joining the growing list of lenders resuming cuts paused during the coronavirus pandemic. The Wall Street firm is embarking on a plan to eliminate about one per cent of its workforce, or roughly 400 positions, according to people with knowledge of the matter, who asked not to be identified as the information isn’t public. Adding that to disclosures this week by other banks would take the total announced this year to 67,844, according to figures compiled by Bloomberg. More than 30 lenders -- from Europe, North America, Asia and Africa -- are behind the planned reductions. The actual total is probably higher because many banks eliminate staff without disclosing their plans. The banks cited a need to reduce expenses to offset the cost of credit souring during the pandemic as well as spending to comply with stricter regulation and invest in digital technology. Goldman’s plans suggest that the pandemic is outlasting the financial industry’s resolve to offer jittery employees stability through the economic downturn. They add to a bad week for banking jobs. Italy’s Intesa Sanpaolo SpA said on Wednesday that it agreed with trade unions on at least 5,000 voluntary job reductions. Banco de Sabadell SA’s U.K. unit said this week it will eliminate more than 900 roles.
Brief: As big U.S. commercial banks close their books on the third quarter, analysts expect them to report a 30% to 60% plunge in profits on the year-ago period due to the pandemic-induced recession and near record low interest rates. That slump in third quarter net income comes even though lenders are not going to make outsized provisions for expected loan losses as they did in the first and second quarters. And, while capital markets and investment banking revenue is expected to be up from 5% to 20%, that won’t be enough to make up for the decline in interest income from loans and securities. “You have soft loan growth and you’re still feeling the impact from aggressive Fed actions earlier this year,” said analyst Jason Goldberg of Barclays. Citigroup IncC.N and Wells Fargo & CoWFC.N, the third- and fourth-biggest U.S. banks by assets respectively, will report net income down by about 60%, according to I/B/E/S analyst survey data from Refinitiv.
Brief: Private equity and venture capital fund managers are anticipating the economy will improve in 2021 but are actively preparing for the impact of a second wave of the pandemic, according to BDO’s Private Capital Pulse Survey. Three-quarters (74.5%) of all fund managers surveyed expect the economy to improve next year—28% expect it to be “much better” and 46.5% “slightly better.” Only 15.5% of PE and VC fund managers surveyed said they expect the economy to perform worse in 2021, and the remainder, 10%, said the economy would fare about the same. At the same time, PE and VC fund managers are preparing for a potential second wave of the coronavirus in various ways: by conducting a business continuity risk assessment (55%), by making changes in forward-looking valuation metrics (47%), by activating a crisis response task force (39.5%), by considering applying for a government loan (36.5%), and by assessing EBITDA for asset impairments (32%). Just 4.5% of respondents say they are not doing anything to prepare for a second wave.
Brief: As markets tumbled this year, Mary Ann Tsao faced a tough choice. Her fourth-generation family office in Singapore had adopted sustainable investing principles, but the coronavirus was trashing the global economy. Relatives suggested a return to the old ways. "They'd say 'don't lose any money - never mind about the ESG (environmental, social and corporate governance)','" she said. "But we have to ask: what is the purpose of investing money in the first place?" In a sign of how Asia's ultra-rich family offices are slowly embracing the sustainability trend, the Tsao Family Office has tried to stay the course, buying into the Brown Advisory US Sustainable Growth Fund and adding to its investment in the Robeco Sustainable European Stars Fund after the pandemic began. For sustainable investing to take hold in Asia as it's started to in Europe and North America, family offices like Tsao's are key. Families run 85 per cent of the businesses in Asia, according to Ernst & Young estimates, a much higher proportion than the rest of the world. As fortunes get passed on to next generations, the push to do well by doing good is gathering steam.
Brief: BlackRock BLK.N said on Wednesday it had lifted the suspension of its 3.1 billion pound ($4 billion) British property fund, one of several to resume dealings after a six-month freeze due to uncertainty about valuations. Much of Britain’s 70-billion-pound ($90 billion) property fund sector was frozen in March as a result of the COVID-19 pandemic, but surveyors lifted an uncertainty warning earlier this month. Dealing in the BlackRock fund, which was suspended on March 20, will start again on Oct. 30, the U.S. asset manager said in a statement emailed to Reuters, as the fund’s assets were no longer subject to “material uncertainty”. “The fund has sufficient liquidity to meet the current level of redemption requests,” the statement said. Legal & General LGEN.L, Royal London, St James's Place SJP.L and Columbia Threadneedle have also lifted the suspension of their funds. Aegon AEGN.AS, Aviva AV.L, Janus Henderson JHG.N and Standard Life Aberdeen SLA.L said on Wednesday theirs remained suspended. Some funds have said they are checking market activity, redemption queues and cash levels before reopening.
Castle Hall helps investors build comprehensive due diligence programs across hedge fund, private equity and long only portfolios More →
Montreal
1080 Côte du Beaver Hall, Suite 904
Montreal, QC
Canada, H2Z 1S8
+1-450-465-8880
Halifax
84 Chain Lake Drive, Suite 501
Halifax, NS
Canada, B3S 1A2
+1-902-429-8880
Manila
Ground Floor, Three E-com Center
Mall of Asia Complex
Pasay City, Metro Manila
Philippines 1300
Sydney
Level 36 Governor Phillip Tower
1 Farrer Place Sydney 2000
Australia
+61 (2) 8823 3370
Abu Dhabi
Floor No.15 Al Sarab Tower,
Adgm Square,
Al Maryah Island, Abu Dhabi, UAE
Tel: +971 (2) 694 8510
Copyright © 2021 Entreprise Castle Hall Alternatives, Inc. All Rights Reserved.
Terms of Service and Privacy Policy