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Brief: JPMorgan Chase welcomed employees back from a long holiday weekend with a troubling message in their inboxes: Some of them may have been involved in potentially illegal activity. The bank’s operating committee, led by CEO Jamie Dimon, sent an email Tuesday morning to 256,710 employees saying that while the pandemic has brought out the best in many workers, there have been instances where customers abused the government’s coronavirus relief programs. “Unfortunately, we’ve also seen conduct that does not live up to our business and ethical principles — and may even be illegal,” the bank’s committee said. “This includes instances of customers misusing Paycheck Protection Program loans, unemployment benefits and other government programs. Some employees have fallen short, too.” The government’s mammoth $2.2 trillion coronavirus relief package included the Paycheck Protection Program for small businesses, enhanced unemployment benefits for individuals and support for larger companies.
Brief: The U.S. stock market’s two-day tech-led fall last week has revived investor worries about a spiral of selling that could crash the broader market, but Rick Rieder, head of the BlackRock Global Allocation team, does not see stocks going off a cliff. Indeed, the $23.2 billion BlackRock Global Allocation Fund (MALOX.O) that Rieder runs currently has options trades that would benefit from a rebound in stocks. Last week’s pullback in U.S. stocks from record highs came after investors piled into big tech names such as Apple - particularly buying bullish call options. That has caused debate about whether shares are over-extended as investors, buoyed by central bank support, try to look beyond the coronavirus pandemic. “I think the market is going to keep going higher,” Rieder, said in a Reuters interview. The Global Allocation Fund has been selling calls against existing long positions in large-cap, high-flying tech stocks to benefit from gains if they shake off recent weakness. Rieder says investors’ concern that stock markets are overpriced is misplaced. While some stocks are grossly over-valued, the generic market is not, he said.
Brief: After months working from home, employees of global private equity firms are now being encouraged to get back to the office. Blackstone has told staff worldwide to avoid public transportation in their commute and is offering to pay for its workers’ taxi fare, a person familiar with the matter confirmed to Private Equity News. Despite the push, “returning to the office remains purely voluntary”, the person said. Similarly, Advent International, which employs around 100 people in its London office, has introduced a new commute policy, which forbids the use of public transportation. And although the firm will pay employees’ taxi fares to attend business meetings or events, it refuses to pay for workers’ everyday commuting, a second person told PEN. Both firms are also implementing a new Covid-19 testing policy. Blackstone is asking its London office workforce to register on an app that they have no symptoms before any return. Advent is sending a testing kit to the homes of UK staff every 14 days so that they can be cleared to access the office…
Brief: Before the pandemic, everyone wanted to invest in the largest coastal cities that were thriving, thanks to easy access to work and play — but things have changed. The open question that managers and investors are having to answer now, without the benefit of transaction data or across-the-board write-downs, is how to position real estate portfolios for the long term. At the moment, few real estate managers want a high rise in a big coastal city. Some are following millennials to the suburbs from the cities or grabbing smaller buildings, such as garden-style apartments and low-rise office buildings located adjacent to cities. The once-hot cities of San Francisco and New York are being replaced by less expensive cities such as Phoenix, Boston, Denver and Austin, Texas, where people and companies can get more space for their money as telework becomes normalized and social distancing, air filtration and other health requirements are incorporated into office design. These trends are driving investors to reconsider their core real estate portfolios.
Brief: Asset managers in most of the Gulf will face moderate-to-high pressure on their profitability over the next year to 18 months as a result of low oil prices and the coronavirus pandemic, rating agency Moody's said on Monday. The twin shocks of the oil price crash earlier this year coinciding with the spread of the coronavirus in the region have put pressure on the six-member Gulf Cooperation Council's (GCC) economies, leading most governments to cut spending and raise debt. "Current weak oil prices will hold back economic growth and public spending across the region, with negative consequences for asset managers," Moody's said. "Oil is also a key source of revenue for the sector's investor base, which consists largely of local high net worth individuals, family offices and government-related institutions, including sovereign wealth funds." But the ratings agency said GCC countries' plans to reduce their dependence on hydrocarbons, as well as privatisation efforts, "should contribute to medium-to-long-term growth, and encourage the development of capital markets". Though Moody's expects diversification to take time, it will eventually spur private investment, attract international investors and therefore support the asset management industry's growth.
Brief: Distressed-assets specialist Alp Ercil went on a billion-dollar buying spree in March and April, bargain-hunting amid the indiscriminate selloff in credit markets, a person familiar with the matter said. Ercil’s Hong Kong-based Asia Research & Capital Management Ltd. deployed almost 80% of the $1.6 billion raised for his latest fund in the two months, having sat on the sidelines for most of 2019 waiting for more attractive opportunities, the person said. Most of the capital was channeled into dollar-denominated developed-market credit with a duration of 10 years or more, said the person, who asked not to be identified because the information is private. ARCM purchased mostly investment-grade names in the latest upheaval, the person said. The spree paid off, with the fund up 36% in the first eight months of the year, the person said. Most of the gains came between April and August when credit spreads tightened after blowing out during the March rout. Yusuf Haque, ARCM’s chief operating officer, declined to comment. ARCM raised its fourth and largest fund early last year, but deployed only 20% of the capital during 2019 as it waited for more favorable markets. Those materialized in March when the Covid-19 pandemic and Russia-Saudi Arabia oil price war sparked panic selling across all assets, including debt of fundamentally sound companies. Spreads have since tightened as central banks unleashed unprecedented stimulus to shore up their economies and investors chase yields amid low and negative rates.
Brief: Fund managers have suffered heavy outflows since the onset of the Covid crisis, haemorrhaging tens of billions of dollars as the pandemic wreaks havoc on markets. But there are bright spots. Equity funds that make so-called "thematic" bets pulled in a net $22bn across Europe during the first six months of the year, according to data from Broadridge. Non-thematic funds posted outflows of $57bn in the first six months of the year across the region. Thematic funds invest around a specific theme or niche area of the market — think emerging technology, sustainability, healthy living or changing consumption. The Broadridge figures demonstrate how investors have been on the hunt for trends that will emerge stronger from the pandemic. “European investors are making this long-term bet,” said Kieran Kothari, a consultant in the global insights team at Broadridge. He said he's seen an acceleration in demand. “In an uncertain world, they have homed in on thematics for their potential to outperform global equities.”
Brief: After global stock markets suffered their steepest sell-off since June, Hedgeweek rounds up a range of perspectives from across the hedge fund spectrum, gauging the broader impact of this week’s unexpected reversal and the potential for renewed market volatility up ahead. The sustained momentum in global equities that yielded positive returns for an assortment of hedge fund strategies in recent months came to an abrupt halt this week, with major US technology companies first in the firing line during the rapid reversal. The tech-dominated Nasdaq 100 took its biggest tumble since the historic Covid-19-driven crash back in March, slumping almost 5 per cent on Thursday. The S&P 500 slipped 3.5 per cent – its worst day in three months – and the Dow Jones fell 2.8 per cent, with the FTSE 100 meanwhile dropping 1.4 per cent. Stephen Crewe, a director at multi-strategy manager Fulcrum Asset Management in London, believes the sell-off appears to be predominantly US-centric, and likely to be short-lived. Observing the correlation between US growth and value indices, Crewe said the short-term correlation between returns had turned negative, a rare development which last happened back in 2000.
Brief: Billionaire hedge fund titan Daniel Loeb is prepping clients for a potential coronavirus vaccine as soon as the end of 2020. "We have spent significant time with scientific experts to better understand evolving treatments and vaccines, and have confidence that several will be effective and available later this year," the hedge fund manager said in a 6 August investor letter seen by Financial News. Loeb said in the letter that a vaccine or medicine for Covid-19 "should lead to the next phase of market recovery in coronavirus‐affected companies." "Our equity portfolio is balanced between companies that are doing well now, and later-stage recovery names in aerospace, entertainment, and retail, which are still trading near their March lows and should benefit when there is a move back into these sectors." Loeb's comments came on 6 August, before the US government told states to prepare for a coronavirus vaccine to be ready to distribute by 1 November. The timing of the potential treatment raised concerns about the White House playing politics with the pandemic — the US presidential election is scheduled to be held two days later. After a rocky start to the year, Third Point has made smart bets in the last few months. The hedge fund swung to gains after the billionaire overhauled the portfolio, with the Third Point Offshore Fund posting gains of 4.4% for the year, after a jump of 8.4% last month, according to a performance update sent to clients on 31 August and seen by FN.
Brief: Despite the devastating impact of the pandemic on economies around the globe, the real estate markets of Japan, Germany and South Korea showed resilience in the first half of this year as they leant on deep domestic pools of capital. As widespread lockdowns and travel restrictions stalled investors’ short-term capital deployment plans, commercial real estate investment fell 29 percent globally to US$321 billion in the first six months of 2020 compared to the year-earlier period, according to data from JLL. Yet, despite the widespread drop in investment, Japan, Germany and South Korea all outperformed the broader market in the first half of the year. In Japan, deal volume climbed seven percent to reach US$24 billion. Germany dropped a mere 1 percent, and, despite sliding 15 percent, South Korea outperformed its long-term, first-half average. “Countries that acted quickly and effectively to contain the spread thus far have generally been more resilient both in terms of domestic commerce and commercial real estate investment,” says Sean Coghlan, Head of Global Capital Markets Research, JLL. “Aside from rigorous efforts to contain the spread of the virus, these countries also benefitted from relatively high levels of market transparency, deep pools of domestic capital and strong government stimulus.”
Brief: After a dip in transactions in 2019, the coronavirus pandemic could see private equity companies target European telecom operators, experts told S&P Global Market Intelligence. As demand for telecom services increased during the pandemic, the industry offers cash flow visibility, as well as some potential bargains, the experts said. "Fixed networks gained importance as a utility during COVID-19," Hendrik Wiersma, a senior credit analyst who covers tech, media and telecoms at ING, said. "Private equity tends to target sectors with predictable cash flow generation with high margins." The rollout of fiber broadband in the region is also expected to encourage deals between carriers and private equity, they said. "These [fiber] deployment programs act as a lever for investment as they deploy a certain amount of capital with a relatively stable return — and if you get government funds that subsidize that, that is even better," Markus Muhs, a Clifford Chance partner specializing in cross-border M&A, said. In April, the German government announced two low-interest loans from its state-owned bank to support private and municipal companies building out fiber internet.
Brief: Investors in a hedge fund that lost nearly $1 billion during the coronavirus-induced market crash earlier this year say "extreme risk taking" by fund manager Allianz Global Investors caused the fund to collapse in a proposed class action in New York federal court. A Teamsters Union retirement plan filed the suit Wednesday against AllianzGI, the investment management division of German financial services giant Allianz SE, alleging it abandoned its risk controls and meaningful downside hedging strategies for a fund purportedly designed to weather extreme market volatility. When U.S. equity markets experienced a crushing downturn in late February and March amid the COVID-19 pandemic, AllianzGI failed to take any meaningful steps to reduce the fund's risk and protect its investors, the complaint alleges. "AllianzGI's reckless throw of the dice in the late winter of 2020 — and its abject failure to meaningfully 're-balance' its 'market neutral' positions or acquire more than token hedge positions (despite having had plenty of time to do so) — proved to be a fool's bet and resulted in catastrophic losses of over 75% for the fund's investors," the suit claims. The complaint echoes claims made in other lawsuits filed over the summer related to losses from AllianzGI's "Structured Alpha" funds during market downturns related to COVID-19. Wednesday's suit deals with losses in Structured Alpha US Equity 500 LLC, an AllianzGI-managed hedge fund with the stated goal of outperforming the S&P 500 Index by 5% each year, net of fees and expenses.
Brief: New academic research by Plato Investment Management’s Head of Long Short Strategies, Dr David Allen, has highlighted the need for investors to move beyond the traditional “bell-shaped” normal distribution assumption that underpins much of industry practice. Dr Allen’s research paper, titled A comparison of non-Guassian VaR estimation and portfolio construction techniques, has recently been published in the Journal of Empirical Finance. “It is widely accepted by academics that asset returns do not follow the well behaved bell-shaped normal distribution of economic textbooks, and that extreme returns occur much more frequently than one would expect,” says Allen. “For example, if stock returns really were ‘normally’ distributed as practitioners tend to assume, the 12 per cent fall in the S&P 500 that occurred on 16 March as Covid-19 fears gripped the world would not have occurred even if the stock market had been open every day since the Big Bang. The 20 per cent drop in the S&P 500 that occurred on Black Monday, 19 October, 1987, would not have occurred even if the history of the universe was repeated one billion times. “Using the normal distribution in a non-normal world is to court disaster. Nevertheless, the normal distribution forms the bedrock of modern financial practice, primarily because it is mathematically tractable and easy to use.
Brief: The course of the economic recovery in the U.S. will “critically depend on receiving substantial additional support from fiscal policy,” Federal Reserve Bank of Chicago President Charles Evans said. “Partisan politics threatens to endanger additional fiscal relief,” Evans said Thursday in remarks prepared for a virtual event hosted by the Lakeshore Chamber of Commerce in northwest Indiana. “A lack of action or an inadequate one presents a very significant downside risk to the economy today.” Senate Majority Leader Mitch McConnell expressed doubts Wednesday as to whether lawmakers would be able to reach a deal on additional pandemic relief in the next few weeks. The Chicago Fed chief gave a downbeat view of the road ahead for the economy even assuming a deal, suggesting that periodic coronavirus outbreaks around the country would damp consumer spending until a vaccine becomes available. “Even with steady progress in controlling the virus and additional fiscal support, I expect it will be some time before the economy recovers from the hit it took,” he said, predicting the unemployment rate would still be somewhere in the range of 5% to 5.5% at the end of 2022.
Brief: Major airlines want the U.S. and British governments to launch a passenger testing trial for the coronavirus for flights between London and New York to pave the way for a resumption of more international travel. In a letter to government transportation officials seen by Reuters, the chief executives of Airlines for America, Airlines UK, Heathrow Airport and Virgin Atlantic Airways said both governments should “establish passenger testing solutions in air travel. “We believe that in the immediate absence of a vaccine, testing of passengers in aviation provides the best and most effective frontline defense.” They urged the governments to establish a testing trial between New York and London by month’s end “to gather real world evidence and data.” Sharon Pinkerton, senior vice president at Airlines for America, which represents American Airlines Co (AAL.O), Delta Air Lines (DAL.N), United Airlines (UAL.O) and others, told reporters on Thursday the industry wanted a pilot program to help boost international travel. U.S. international travel has fallen by 87% during the coronavirus pandemic, which has battered the airline industry.
Brief: In May, we published "How COVID-19 Changed The European CLO Market In 60 Days," which discussed how the first two months of COVID-19 had altered the market for European collateralized loan obligations (CLOs). Following six months of heightened rating actions on nonfinancial corporates spurred by the economic fallout from the pandemic, data for CLOs show how the market has continued to evolve. New CLOs have priced during this period, but at a slower pace and at lower levels compared from those in 2019. The focus is on monitoring the performance of loans underlying existing transactions, as well as challenges that existed before and persisted during COVID-19, including high leverage ratios, EBITDA add-backs, and covenant-lite loans. S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic…
Brief: The Covid-19 crisis has wreaked havoc on the economy; in a matter of weeks, once-safe assumptions about the markets have been upended, placing severe pressure on businesses across all sectors. We will likely feel the impact of the damage this pandemic has caused to global markets for months to come. In time, it is hoped the virus will be addressed and normal economic life can be restored. But by whom? Many companies are now struggling with liquidity or funding issues, despite billions of dollars in government stimulus, and few entities have the kind of dollars—and appetite—to help restart company growth, make vital investments, rehire workers, and restructure debt. Enter private equity firms. Although the industry is perhaps best known for buy outs—and the political fire such deals inspire—these shops can have the unique skills, experience, and risk appetite to invest when others do not, and can create far more value than others through their work during challenging economic times. Leading private equity firms are already envisioning a post-Covid outcome; what’s more, they have roughly $1.5 trillion of dry powder at their disposal to support existing portfolio companies, invest in newly distressed firms, and pursue other growth and value-creating strategies.
Brief: Socially conscious investing continues to gain momentum as Covid-19 and the destruction left in its wake spark interest in stakeholder capitalism — the idea that a public company’s focus shouldn’t only be generating profits to reward shareholders without taking the bigger picture into account. With investors increasingly favoring ESG stock selection — when a company’s environmental, social and governance policies are considered alongside more traditional financial metrics — more impact investing funds are launching to keep pace with demand. Both the number of sustainability-focused index funds, and their assets, have doubled over the past three years, according to a report from Morningstar released Wednesday. The financial research firm said that as of the end of the second quarter 2020, there were 534 index funds focused on sustainability, overseeing a combined $250 billion. In the U.S., which has lagged Europe in ESG investing, assets in sustainable index funds have quadrupled in the last three years and now represent 20% of the total.
Brief: Germany’s financial regulator expects the worst of the coronavirus crisis is still to come, although there was no immediate threat to financial stability from the pandemic. But as many countries in Europe and beyond see rising coronavirus infection rates and governments grapple with how to respond, BaFin president Felix Hufeld said he was concerned about the weakest 20% or 30% of institutions he monitors. We will not get out of this thing painlessly. That much is for sure. The hard part is still to come,” Hufeld said on Wednesday at a banking conference at which he and other panelists were separated on stage by plastic screens. Earlier, Deutsche Bank (DBKGn.DE) Chief Executive Christian Sewing forecast that the economy would not return to normal this year or next, and that many sectors will be running at 70%-90% capacity, with “serious consequences”. “Many companies will have to adjust to this and manage to be profitable with longer-term lower revenues,” Sewing said.
Brief: Pensions entered the Covid-19 pandemic significantly exposed to corporate credit risk, relying on a traditional investment strategy that may be heading for failure, according to JPMorgan Chase & Co.’s asset management group. They’ve been hedging the volatility of their pension liabilities by taking on “a very concentrated exposure to corporate credit,” Jared Gross, the head of institutional portfolio strategy at J.P. Morgan Asset Management, said in a phone interview. Largely holding corporate bonds at risk of being downgraded to junk in the downturn, plus Treasuries with historically low yields, won’t work well for ensuring workers receive the pension benefits they’re owed, according to Gross. “If a classic fixed-income portfolio is yielding 2 percent, that’s not going to get the job done,” he said. “You have a concentrated exposure in investment-grade corporate credit, which is both relatively low-yielding today and likely to be exposed to higher than normal levels of credit volatility.”
Brief: Australia’s sovereign wealth fund has posted its first annual loss since the global financial crisis, and is holding more cash in preparation for further market volatility. The Future Fund lost 0.9% in the 12 months ended June 30, the first annual decline since 2009, it said in a statement Wednesday. It’s cash allocation increased to the highest in almost three years in preparation for "what will be a challenging and volatile environment in the future, ” Chairman Peter Costello said. "The factors that have fueled strong performance in the past may not be there any longer, ” Costello said in the statement. "We will need to be ever more strategic in how we pursue long-term returns in the future.” The Future Fund echoed Norway’s sovereign wealth fund, which is expecting more volatility given the coronavirus pandemic isn’t under control. The world’s biggest wealth fund lost 3.5% in the first half of 2020 as the rebound in stock markets wasn’t enough to erase the record decline earlier this year. The Future Fund’s cash holdings rose to 17% of the portfolio in June, the most since the third quarter of 2017 as it reduced exposure to private equity firms and sold its stake in Gatwick Airport. It made bets in "new infrastructure” such as fiber and data centers, Chief Executive Raphael Arndt said.
Brief: The co-CIO of the world’s largest hedge fund told CNBC on Tuesday that the U.S. economy continues to need significant fiscal support in order to sustain its recovery from the coronavirus-induced devastation. Greg Jensen of Bridgewater Associates said the firm estimates that the price tag for another coronavirus relief bill is between $1.3 trillion and $1.7 trillion in order for the U.S. economy to continue “in the way that it’s been going.” “And it depends what it’s used for. ... The policy that gets directly spent in the economy is much more effective per dollar than the dollar that’s preventing more bad things from happening,” Jensen said in a “Squawk on the Street” interview. “The money for states is going to prevent negatives. The stimulus checks will be direct positives.” Jensen’s comments come as Republicans and Democrats in Washington continue to squabble over the size and scope of another piece of Covid-19 stimulus legislation while millions of Americans remain out of work and businesses grapple with continued disruption.
Brief: Steve Cohen’s Point72 Ventures is getting into the health care game. The venture firm announced Tuesday that it has created a new investment team focused specifically on health care. The firm hired Scott Barclay, previously a partner at Data Collective Venture Capital, to lead the group. Hedge fund firms like Deerfield Management and Renaissance Capital have been raking in returns after investing in health care companies, Institutional Investor has previously reported. There are major profits to be made in the health care industry, particularly during the pandemic, but Point72 Ventures is positioning this launch as an altruistic one. “The current health care system is broken, particularly in the United States,” said Matthew Granade, managing partner at Point72 Ventures, in a statement. “We believe that these problems will be solved by technical founders who are dedicated to reimagining how the health care system should function at scale.” According to a spokesperson for the company, Point72 Ventures plans to invest across the health care space, without specifically focusing on biotech or pharmaceuticals. Early on, the venture fund will focus on investing in better models of paying for care and improving health care access. Point72 Ventures will specifically look to invest in technology and data-driven products as solutions to these problems, the spokesperson said.
Brief: A broad survey of institutional investors found that 40% of the universe will increase their allocations to alternative investment strategies over the next three to five years, said CoreData Research in a report on its findings released Tuesday. The research firm surveyed 459 asset owners in North America, Europe and Asia in June and July and found that European investors have the largest appetite for alternatives with 46% of those surveyed responding that they intend to ramp up their commitments in this area. In contrast, 30% of Asia-based asset owners said they will increase their exposure to strategies including private equity, private credit and real estate over the three- to five-year period vs. 35% of North American institutional investors. "Our findings indicate that institutional investors have looked to weather the COVID-19 storm by seeking shelter in alternatives, which can enhance diversification and risk-adjusted returns," said Andrew Inwood, founder and principal of CoreData Research, in the report. Allocations to alternative investment strategies in institutional portfolios overall now average 26% of plan assets compared with 24% in 2019, CoreData's survey data showed.
Brief: Rhode Island’s $8 billion public pension fund so far is standing alone in its boycott of Leonard Green & Partners LP over the private equity firm’s management of a hospital company it owns. Seth Magaziner, Rhode Island’s treasurer, last month sent a letter to the firm saying he would not invest with Leonard Green in the future over its handling of Prospect Medical Holdings Inc., which owns 17 hospitals in five states, including Rhode Island. Magaziner said the firm has siphoned money out of the hospitals while cutting back on pensions and capital improvements and has allowed patient care for the poor to slip. Once committed, investors in a private equity fund that disagree with its management or investments have few options. They can either engage the firm, publicly or behind the scenes, or they can decline to do business with the firm in the future, said Eileen Appelbaum, co-director of the Center for Economic and Policy Research, a non-profit public policy organization. “You can’t get out of anything that’s happening in a fund you’re already in,” Appelbaum said. “Your only leverage is to say ‘we’re not going in again.’” A Leonard Green fund purchased Prospect Medical Holdings in 2010 for $363 million, including debt. Since then, Prospect has borrowed to pay out more than half a billion dollars in dividends to shareholders including Leonard Green. It has also sold and leased back some of its properties to pay down its debts.
Brief: Investors should position for the rising odds of President Donald Trump winning re-election, according to JPMorgan Chase & Co. Betting odds that earlier had Trump well behind challenger Joe Biden are now nearly even -- largely due to the impact on public opinion of violence around protests, as well as potential bias in polls, said strategist Marko Kolanovic. Based on past research, there could be a shift of five to 10 points in polls from Democrats to Republicans if the perception of protests turns from peaceful to violent, he said. People giving inaccurate answers could artificially skew polls in favor of Biden by 5%-6%, he added. “Certainly a lot can happen in the next ~60 days to change the odds, but we currently believe that momentum in favor of Trump will continue, while most investors are still positioned for a Biden win,” Kolanovic wrote Monday. “Implications could be significant for the performance of factors, sectors, COVID-19 winners/losers, as well as ESG.” Biden’s narrowing advantage in polls evokes memories of the 2016 election, when such tallies seemed to favor Hillary Clinton strongly. While Clinton won the popular vote by several million, the Electoral College, a state-by-state count that determines the election outcome, ended decisively in Trump’s favor. Kolanovic, who has been accurate on calls including the stock rally after Trump’s election and the rebound from Covid-19-fueled lows earlier this year, said important drivers of the election in coming weeks include developments on the Covid-19 pandemic, which looks like it might subside as the vote nears.
Brief: Global trade is on course to recover more quickly from the coronavirus pandemic than after the 2008 financial crisis, according to Germany’s Kiel Institute for the World Economy. Shipping volumes are already back at levels that took more than a year to reach following the collapse of Lehman Brothers Holdings Inc., hinting at a V-shaped recovery, the institution’s President Gabriel Felbermayr said. Trade has seen a “deep slump and a quick rebound,” he said. “The current situation is significantly better” than a decade ago. The pandemic has pushed the global economy into what may be its deepest slump since the Great Depression. The initial rebound reflects the lifting of severe restrictions to contain the virus, and policy makers have warned against premature optimism that the worst has passed. The World Trade Organization said earlier this month that projections for a strong, V-shaped trade rebound in 2021 might be “overly optimistic.”
Brief: The Federal Reserve will need to roll out new efforts “in coming months” to help the economy overcome the impact of the coronavirus pandemic and live up to the U.S. central bank’s new promise of stronger job growth and higher inflation, Fed Governor Lael Brainard said on Tuesday. “It will be important to provide the requisite accommodation to achieve maximum employment and average inflation of 2% over time,” Brainard said in prepared remarks in an online discussion organized by the Brookings Institution. Brainard, among the architects of the new long-term strategy the central bank adopted last week, is the first Fed official to tie that new approach directly to the need for further monetary stimulus, likely in the form of more aggressive bond-buying or more ambitious promises about returning the country to low unemployment. Some analysts have argued the Fed’s new “framework” is incomplete without more details on what it intends to do to implement it, and Brainard in prepared remarks suggested that needs to be addressed. “With the recovery likely to face COVID-19-related headwinds for some time, in coming months, it will be important for monetary policy to pivot from stabilization to accommodation,” Brainard said. That decision “will be guided” by the new strategy which trades risks of higher inflation with efforts to promote further job growth.
Brief: According to S&P Global Market Intelligence and Financial Times reports, the UK government has been evaluating ways to extend state-backed loans to private equity investee companies in difficulties, without violating European Union rules on state aid. These rules state that enterprises with losses over 50% of their share capital cannot receive state loans under programmes such as the UK’s Coronavirus Large Business Interruption Loan Scheme. Many private equity-backed firms, with substantial leverage debt on their balance sheets, cannot meet the associated “undertakings in difficulty” qualifications. The arguments against state aid for private equity-backed businesses have already been rehashed in the US. The fundamental point at issue in both cases is the same: why should state capital bail out businesses ultimately owned by big pools of private capital? Governments may be prepared to do whatever it takes to save jobs during a difficult period like the ongoing coronavirus crisis, but it won’t take long for questions about the allocation of state aid to take front seat. Pension funds and other institutional backers of private equity aren’t much of a justification for advancing state aid. If an investee company collapses, their returns suffer. If a private equity firm decides to deploy more fund capital to support an ailing investee, that may drive down returns too. And if state loans are made, taxpayers may be the ultimate losers where the money is diverted to keeping portfolio companies afloat. There’s also the argument that private equity-backed firms take on such large debt burdens partly to lower their tax exposure, which is hardly likely to endear them or their owners to the taxpaying public.
Brief: Investment bank employees in the City are facing pressure to return to the office, as senior executives take the lead in shifting from remote working arrangements. Junior and mid-ranking employees at some of the largest banks in the City have told Financial News that recent moves by senior staff to come back to the office have increased the urgency to unwind working from home arrangements, even if any return remains entirely voluntary. Bankers and traders said they fear being overlooked for promotions or having bonus payments reduced if they did not return to the office as more people trickle back to the City. “The senior guys don’t particularly want to go back, but they’re coming because the top says so, and that will create pressure for the people under them,” said one director at a US investment bank who requested anonymity. Generally, investment banks have been slow to unwind their remote working arrangements, which have seen tens of thousands of employees working from home. However, the government is preparing to launch a campaign next week to coax workers back to offices. The strategy, dubbed “All in, all together”, will inform the public of how to return safely to work with the right health and safety measures in place.
Brief: Warren Buffett, with more than $146 billion of cash on hand, has been struggling to find attractively priced assets at home in the U.S. Now, he’s looking abroad. The announcement late Sunday by Buffett’s Berkshire Hathaway Inc. that it bought stakes in five of Japan’s biggest trading companies marks one of his largest-ever forays into Asia’s second-largest economy. The wagers show that Berkshire’s chief executive officer, who turned 90 over the weekend, is willing to expand the company’s horizons in his search for ways to supercharge the Omaha, Nebraska-based conglomerate’s growth. “I think this is a definite signal that Berkshire is more likely to examine and pursue potential investments internationally,” David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business, said. “This could be the beginning of the tip of an iceberg. There could be many more investments such as this.” The investments into commodity-centric Japanese conglomerates known as “sogo shosha,” disclosed in a statement from Berkshire, underscore Buffett’s willingness to bet on economically sensitive companies despite the pandemic. The five Japanese companies also have interests in businesses ranging from home-shopping networks to convenience-store chains, offering Berkshire exposure to a wide swath of the Japanese economy.
Brief: Mutual funds managed by women are outperforming those managed by men this year as higher relative exposure to technology names drives performance, according to new research from Goldman Sachs. The firm found that 43% of women-managed funds — as defined by those with at least one third of portfolio manager positions held by women — have outperformed their benchmark this year, compared with just 41% of those managed by men. Adjusting for volatility, the median fund with all women portfolio managers has returned more than double that of the typical all-male managed fund. “Female-managed funds withstood many of the market swings, with the median fund outperforming its benchmark by 50 [basis points] from the start of the year to March 23rd. On the other hand, the typical fund with no women managers lagged its benchmark by 20 [basis points] during that period,” Goldman strategists led by David Kostin wrote in a note to clients. “Since the market trough, 48% of female-managed funds have generated alpha, compared with only 37% of all-male funds.”
Brief: Exclusivity is like fiat currency: It only works if everyone believes it’s real. For decades that wasn’t a problem for Seth Klarman’s $29.5 billion Baupost Group. The only way to get money into its famed hedge funds was to already have some invested, and everyone knew it. Even for that coterie, Klarman would periodically slide some of their capital back, a potent reminder that Baupost didn’t need more — or your — money. But doubts have begun to percolate within the elite investor class, an investigation by Institutional Investor reveals. “We’re walking away,” says one capital allocator. It’s not clear whether or not Baupost knows this yet. The firm declined to comment for the story. “Seth is running Baupost more like a wealthy person might run their personal money than like the aggressive hedge fund manager that he’s been over the years,” the investor says. “He has pretty considerable net worth and all of his money invested in that firm. Other people’s fees are paying for him to run his personal money. If you want to come along, come along.” But that allocator won’t. “Even though we have terribly high regard for Seth,” the investor went on, “this isn’t what we want. Performance is slipping; the strategy changed. It’s not the consistent, thoughtful type of process and results that they had for a couple of decades.” Baupost’s best days have passed — at least for the firm’s clients, the investor asserts.
Brief: The coronavirus pandemic has truly been a watershed event — not just for the financial industry but for the world at large. Many had plans and goals that they wanted to achieve before the year ran out but had to stop. Companies had to file for bankruptcy, and people lost their jobs. Like every sector of the global economy, the financial sector has also suffered significantly from the effect of the pandemic. Countries have been scrambling to keep their economies afloat, while people have been looking for means to stay solvent. It goes without saying that stock markets and financial institutions across the world are uniquely vulnerable at this point. This is a level of danger that the world has never seen before. Even the global financial crisis of 2008 wasn’t able to prepare us for the impact COVID-19 would have on the world economy. However, one aspect that has so far managed to weather the storm has been the crypto market. While Bitcoin (BTC) dropped to $3,800 in March, the top cryptocurrency’s value managed to surge and consolidate faster than any other investment vehicle in the world. The stock market has just begun to rebound, and alternative assets are still in their everlasting state of volatility. Cryptocurrencies, however, have been going strong.
Brief: GTCR is seeking to raise $6.75 billion for a buyout fund that would be its biggest yet, according to a person with knowledge of the matter. The firm has begun preliminary discussions with prospective investors, said the person, who requested anonymity because the talks are private. A spokeswoman for GTCR declined to comment. The Chicago-based firm raised $5.25 billion for its 12th buyout fund, which closed in October 2017 and marked GTCR's largest fundraising to date. "We have the organizational capacity to pursue more and potentially larger-scale investment opportunities," Craig Bondy, a managing director, said at the time. The firm has traditionally focused on five sectors: technology, business services, media and telecommunications, health care and financial services and technology. It announced this month an agreement to acquire Xermelo, an oral therapy for carcinoid syndrome diarrhea. In July, GTCR agreed to sell Optimal Blue, a digital marketplace for mortgages, and in June announced the purchase of software maker Citra Health Solutions.
Brief: Warburg Pincus is seeking to raise $2.5 billion for its second fund dedicated to financial sector deals, according to a person with knowledge of the matter. The private equity firm has begun preliminary discussions with investors about the WP Financial Sector II fund, which will invest alongside its flagship vehicle in areas such as payments and financial technology, said the person, who asked not to be named because the information isn’t public. It plans to formally launch capital-raising efforts in November, with a first close targeted for mid-2021, the person said. Former Treasury Secretary Tim Geithner, Warburg Pincus’s president, will oversee the fund, the person said. The firm gathered $2.3 billion for its first financial sector fund, which closed in December 2017. A spokeswoman for New York-based Warburg Pincus declined to comment. Warburg Pincus, which has more than $53 billion in assets under management, made a $400 million investment in financial technology service provider Wex Inc. in June, and last year acquired an 80% equity stake in Indian education finance company Avanse Financial Services Ltd.
Brief: Hedge funds and other short sellers are beginning to set their sights on a U.S. credit-derivatives index with outsized exposure to hotel debt as the pandemic sinks the hospitality industry into distress. The firms are starting to build up wagers against the synthetic index, known as CMBX 9, shifting attention from a high-profile bet against America’s challenged malls. The shift, which market participants say is beginning to show up in some trading flows, comes as delinquencies on hospitality property loans surge and even begin to exceed those in retail. “In the last month there has been more selling pressure on the CMBX 9 than any of the other CMBS indices,” said Dan McNamara, a principal at MP Securitized Credit Partners, a hedge fund focused on shorting commercial mortgage bonds. “That’s because some hedge funds are actively looking to play the short side on the Series 9 index due to its significant hotel exposure.” Retail debt has been a lucrative bearish bet this year as people stayed home amid lockdowns and shopped online, exacerbating an existing threat to brick-and-mortar stores. Traders have been taking positions on retail through a 2012 version of the commercial mortgage index called CMBX 6, which has a high concentration of debt tied to shopping malls.
Brief: At the height of the coronavirus pandemic last spring, the heads of U.S. banks including Morgan Stanley, Bank of America Corp and others pledged not to cut any jobs in 2020 because it was the wrong thing to do. However, as executives prepare for an extended recession and loan losses that come with it, layoffs are back on the table, said consultants, industry insiders and compensation analysts. Compared with April projections, bank economists and executives expect the U.S. economy to take longer to recover, with high unemployment into 2021 and interest rates staying near zero for the foreseeable future. On top of that, working from home has shown some managers that they need fewer employees to do the same amount of work. “No question, layoffs (will) come across the board for all the banks,” said Barry Schwartz, chief investment officer at Toronto-based Baskin Wealth Management, which invests in JPMorgan Chase and other large Canadian banks. Banks have to cut costs because of expected credit issues, as well as low interest rates and regulatory pressure to trim dividends, he said.
Brief: Funds recommended equity holdings be trimmed to the lowest in over four years in August, despite record-breaking gains by world stocks, as the pandemic drags on and new data suggest the nascent economic rebound is stalling, Reuters polls found. The August 17-27 poll of 35 fund managers and chief investment officers in the U.S., Europe, Britain and Japan was largely taken before Federal Reserve Chairman Jerome Powell announced a new policy framework promoting higher inflation to spur economic recovery and job creation on Thursday. The Fed’s new strategy sent U.S. Treasury yields higher, which gave a lift to interest rate-sensitive financials and in turn boosted the S&P 500 index to a new record high and pushed the MSCI’s all-country world index to surge past its pre-COVID-19 high reached in February. While world stocks have risen as much as nearly 60% since March troughs, the poll showed average recommended exposure for equities in August in the model global portfolio was the lowest since July 2016, down to 43.1% from 43.9% the previous month. Overall equity exposure is down 6.6 percentage points from the beginning of the year, down from 49.7% in January.
Brief: Active managers have long claimed that they needed volatility to beat the market. Yet many of them still failed to outperform the average passive fund during the “once-in-a-decade” volatility at the beginning of the Covid-19 pandemic. According to research from Morningstar, only about half of active stock funds and one third of active fixed-income funds bested their average passive peer during the first six months of 2020. The twice-yearly Morningstar Active/Passive Barometer measures the performance of Europe-domiciled active funds against their passive peers. It covers almost 22,600 funds managing €3.7tn of assets. Morningstar’s research is unusual because it compares the performance of stock pickers with fee-charging passive funds, instead of against a cost-free index. It found that 35% of UK large-cap managers have beaten their passive counterparts over the last 10 years. However, Europe-based US large-cap, Japan large-cap, France large-cap, Germany large-cap and Switzerland large-cap have done less well. Between 5.6% and 28.3% of managers in those sectors have outperformed the average passive fund.
Brief: Hedge funds seeking to take advantage of turbulence in the global aviation industry have lost almost EUR800 million in August, according to data from Ortex Analytics. Analysis of short positions against the world's 10 largest airlines throughout 2020 shows hedge funds lost EUR791.6 million in August. The losses reduced total returns YTD from the group by over a third, however hedge funds remain EUR1.4 billion in profit. A large proportion of this (EUR1.2 billion) came from short positions in March as international travel restrictions came into effect as a result of the Covid-19 pandemic. Peter Hillerberg, co-founder of Ortex Analytics, says: “This year has no doubt been the most difficult on record for the aviation industry. Hedge funds were quick to capitalise on the impact of travel restrictions and made significant profit as a result. However, what we’ve seen in recent months is a reversal of fortunes as short sellers made substantial losses in June and August. Although there is still much uncertainty about the reopening of international travel, when it comes to short profits, hedge funds should remember something airline pilots know for certain, what goes up must come down.”
Brief: Private-equity giant The Blackstone Group is gearing up for US employees to return to the office after Labor Day, according to memos seen by Business Insider.
Blackstone is partnering with Vault Health to provide COVID home testing kits to US employees before they return to the office, according to the memo written by HR director Paige Ross. All investment professionals and asset managers will have a test sent to their home by Aug. 31. One person with direct knowledge of the return-to-office plans said calls within the firm were strongly encouraging investment teams to come to the office, unless they had a “valid reason” to remain remote. A Blackstone spokesman said in a statement that the health and safety of employees is the firm’s top priority.
Brief: Izzy Englander’s Millennium Management plans to return at least $5 billion to investors at year-end as part of an effort to create a more stable capital base. The money will come from a share class that can be redeemed in full after a year, people familiar with the matter said. The share class represents about $37 billion of the firm’s $45.4 billion in assets. In a new twist, any additional money raised will now be deemed committed capital, with the firm having three years to call the pledged money from investors, who learned of the change in a letter Wednesday. Once that happens, clients will be able to withdraw only 5% each quarter, meaning it would take five years to cash out completely. A spokesman for New York-based Millennium declined to comment. Englander’s firm has sought to lock up capital for longer ever since the 2008 financial crisis, when investors in need of cash pulled money, cutting Millennium’s assets in half. Other hedge funds had halted redemptions. Millennium, which climbed 12% this year through July, has produced steady returns over its three-decade history, making the new structure an easier sell. Two years ago, the firm started a 5%-a-quarter share class that now accounts for about $8.5 billion of assets.
Brief: Blackstone Group Inc., which led Wall Street’s initial foray into the single-family rental business, is making a new investment in suburban houses at a time when the Covid-19 pandemic is pressuring traditional commercial real estate. The private equity giant, which exited its stake in landlord Invitation Homes Inc. last year, is leading a group of investors in a $300 million minority investment in Tricon Residential Inc., which owns and manages more than 30,000 single-family rental homes and multifamily units in North America… The suburbs are in high demand as city-dwellers seek quarantine comforts such as backyards and room for home offices. At the same time, with more than 16 million Americans out of work, many renters have said they lack confidence in their ability to pay for housing, and experts are warning that the country is headed for a massive wave of evictions. Shares of single-family landlords have been rewarded during the pandemic as their rent collections have held up better than those of multifamily landlords. Tricon’s stock has surged 91% since March 23, compared with a 24% gain for a Bloomberg index of apartment REITs.
Brief: Emerging Markets and Asian hedge funds surged in Q2 2020, recovering from steep losses experienced in late 1Q, with many indices posting gains for YTD 2020 through July. The HFRI China Index gained 6.8 per cent in July, which followed a 14.5 per cent gain in Q2, the best quarterly performance since Q1 2019, to bring YTD performance to +13.1 per cent, as reported in the HFR Asian Hedge Fund Industry Report and the HFR Emerging Markets Hedge Fund Industry Report. Hedge fund capital invested in Emerging Markets also surged concurrent with the record performance gains, ending Q2 at USD244.4 billion (CNY1.55 trillion, BRL1.24 trillion, INR16.6 trillion, RUB16.9 trillion, SAR842 billion), an increase of nearly USD13 billion from the prior quarter. Hedge fund capital invested in Asian markets also increased to USD115.5 billion (CNY798 billion, INR8.57 trillion, JPY12.28 trillion, KRW1.09 trillion).
Brief: Even before Covid-19 crushed the economy, the Fed was worried about low inflation and was working on ways to let it run slightly hotter temporarily in order avoid the trap of long-term sluggish growth and weak pricing power. Chairman Jerome Powell, in a much-anticipated speech Thursday, is expected to discuss the Fed’s policy framework and specifically how it will alter its posture on inflation. The Fed has had a 2% inflation target, but in the decade since the financial crisis it has more often than not seen inflation fall below its target… The Fed has taken extraordinary actions to fight the impact of the coronavirus. It has vowed to keep rates at zero for a long time; it also has provided more liquidity, purchased assets and inserted itself in different markets to assure they run smoothly. The Fed already had been reviewing its policy framework, and inflation was part of it. Even before the virus, Fed officials had said they would allow inflation to overshoot their 2% target but they didn’t formalize it. “This is longer running than just Covid. If they had wrapped this up last year, Powell would have to signal this policy shift with rates above zero, ” said Jon Hill, senior fixed income strategist at BMO. “Since we’re already at zero, it means we’ll be at zero even longer and the central bank is going to be even more aggressive about trying to meet its inflation mandate. In the past they pre-emptively hiked to get ahead of inflation pressures. What they’ve shifted to is actually waiting until they get sustained inflation.”
Brief: The email, formal and foreboding, landed at 9:38 a.m. on Monday, March 2. “Can you please call me when you have a second to talk?” the Bridgewater Associates employee asked. The call, the email’s recipient knew, would not be good: Karen Karniol-Tambour, the hedge fund’s head of investment research, was scheduled to be a lunchtime speaker at an investment conference at Washington, D.C.’s Watergate Hotel just over 24 hours later. But at that moment, on March 2, a man in Westchester County — a mere 30 miles from Bridgewater’s two main campuses in Westport, Connecticut — was undergoing treatment as the first Eastern Seaboard case of Covid-19 with an unknown origin. Karniol-Tambour wasn’t going to make it, the conference organizer feared. Bridgewater had been on high alert all weekend. The firm’s health security “posture” was the subject of ongoing discussions. Already, anyone who had traveled to certain areas — including the West Coast of the U.S., where Covid-19 had already killed individuals in Washington state — or lived with someone who had traveled, was barred from the offices.
Brief: Sixty-three percent of investors in alternatives do not anticipate changes to their investment plans in response to the COVID-19 crisis, the results of a Preqin survey show. And 29% expect to invest more in alternative investments in the long term than they would have prior to the pandemic, the survey indicated. Meanwhile, 72% of private equity investors surveyed indicated that returns have met their expectations. Seventy-four percent of private debt investors, 72% of infrastructure investors and 66% of real estate investors said that returns have met their expectations. Forty-seven percent of hedge fund and 58% of natural resources investors said that returns are below expectations, according to the survey. However, 42% expect returns to decline due to the COVID-19 crisis, the survey indicated.
Brief: The World Economic Forum announced Wednesday that it decided to postpone its upcoming annual meeting in Davos, Switzerland, due to safety concerns and in an effort to slow the spread of Covid-19. The meeting, originally scheduled for January, will be rescheduled to “early next summer,” according to Adrian Monck, managing director of public engagement at the Forum. “The decision was not taken easily, since the need for global leaders to come together to design a common recovery path and shape the ‘Great Reset’ in the post-COVID-19 era is so urgent,” Monck said in a statement. “However, the advice from experts is that we cannot do so safely in January.” The World Economic Forum’s annual summit in Davos is routinely one of the globe’s largest collections of world leaders and corporate executives. This year’s gathering, which took place over four days starting Jan. 21, featured commentary from President Donald Trump, European Central Bank President Christine Lagarde and climate activist Greta Thunberg. The 2020 conference also included Wall Street and finance bigwigs, and counted among its ranks billionaire George Soros, hedge-fund manager Paul Tudor Jones, JPMorgan Chase CEO Jamie Dimon, and Bridgewater Associates founder Ray Dalio.
Brief: Global equities climbed to a record high on Wednesday, as progress in U.S.-China trade talks and hopes for the development of a vaccine against the novel coronavirus fueled investor appetite for stocks. The MSCI All-Country World Index, which includes both emerging and developed world markets, climbed 0.4% to 581.11, topping a previous high from February. While tensions between the U.S. and China have been rising recently, risk assets rallied after the two countries this week reiterated their commitment to a phase-one trade deal in a biannual review. Massive stimulus injections to boost pandemic-ravaged economies in the U.S., Europe and other major regions are fueling a rally as stocks rebound from the global sell-off through March. Covid-19 cases are rising in some parts of Europe and the U.S. and U.S.-China trade tensions persist, but investors in search of returns have few alternatives to equities. With investors focused on vaccine progress, Moderna Inc. said it’s near a deal to supply at least 80 million vaccine doses to the European Union.
Brief: While private equity firms’ fundraising activities have been hit by the economic fallout of Covid-19, those in the industry say the pandemic has created opportunities for companies with deep pockets – particularly in Southeast Asia. Singapore-based Ascent Capital Partners has its sights set on Myanmar, where it is looking for investments in tech, education and health care start-ups. The country of 53.7 million has gone from SIM cards costing more than US$2,000 on the black market during the military dictatorship’s rule until 2011, to 80 per cent of the population owning smartphones as of 2018. Having worked with partners to invest a combined US$26 million in local internet service provider Frontiir in June, Ascent Capital has another US$70 million in its pockets. Founder and managing partner Lim Chong Chong said that as the adoption of technology in Myanmar was likely to accelerate, the company wanted to make another investment this year, and two to three more in the next 18 to 24 months – each of at least US$10 million. “Education and health care … are the sectors where our discussions are the most advanced,” Lim said. Private equity firms’ Asia-focused fundraising slumped 44 per cent year on year to US$13 billion in the first quarter of 2020 due to the pandemic, the lowest since the third quarter of 2013, according to a recent Reuters report referencing data from Preqin.
Brief: Private equity and credit are set to outperform publicly-traded assets in the aftermath of the Covid-19 pandemic as investors looking to take advantage of market dislocations pile in, according to $68 billion alternative investment manager Hamilton Lane. “Investors have recognized that the greatest periods of outperformance in the private markets relative to public markets are as you’re going through and coming out of a downturn,” Andrew Schardt, the firm’s head of direct credit, said in an interview. Private credit vehicles raised $57 billion in the first half of the year, buoyed by appetite for distressed strategies, according to research firm Preqin. Still, the opportunities has been limited thus far, in part due to the Federal Reserve’s unprecedented efforts to shore up liquidity. Second half earnings may shed light on whether there will be more deterioration that could lead to attractive investments, according to Schardt. “One of the challenges on the distressed side has been that if you’re too early, you’re wrong,” he said. “So it’s a fine line of balancing how you’re going to approach the market and the opportunity recognizing you need to have the capital ready to go, but be patient.” Uncertainty caused by the coronavirus outbreak may end up pushing private-debt dynamics in favor of lenders going forward, Schardt said. The asset class’s longer-term investment approach relative to public debt may also help boost returns as companies struggle to bounce back.
Brief: The coronavirus pandemic and ensuing capital markets volatility present a crisis of magnitude on par with prior historic events that have reshaped economies in lasting ways. As we begin to process the impact and reorient to the ongoing market turbulence, this uncertain period provides a valuable opportunity to evolve our ways of thinking and doing business. For investors and CIOs with exposure to venture capital, it means rethinking whether pre-COVID-19 allocation strategies continue to fit this precarious new environment. Heading into 2020, venture capital had never been better capitalized. The size of the industry quintupled in the last decade, according to Crunchbase projections, to $294.8 billion in 2019 from $53 billion of capital deployed into startups in 2008. For good reason, venture capital has provided access to investment opportunities in game-changing companies that have disrupted entire industries. Venture funds have distributed more capital to investors than called since 2012, breaking a prior 11-year streak. But with colossal market participants such as Softbank Group fueling an investment frenzy, capital oversupply led to inflated environments with significant pockets of dislocation supporting valuations that are often not based on a company's fundamentals or ability to drive true equity value.
Brief: York Capital Management is looking to cut about 40% of its Fifth Avenue office space as the pandemic prompts companies to rethink the need to occupy expensive skyscrapers. The hedge fund firm is seeking to sublet about 20,000 square feet of its space at the General Motors Building, according to people familiar with the matter. It currently rents about 50,000 square feet at the trophy property, which sits across from the Plaza Hotel and offers sweeping views of Central Park and beyond. A spokesman for York declined to comment. Wall Street banks and asset managers, among the largest employers in New York City, have been taking stock of their office space as it becomes clearer that many employees will work remotely for the foreseeable future. Commercial landlords, already hard hit by the economic impact of the coronavirus, have seen a slump in demand and lost revenue as some tenants have stopped paying rent. Many firms across industries are looking at reducing their occupancies. Sublease space in the city jumped to 13.6 million square feet in the second quarter, almost 40% higher than last year, according to Savills US. Financial services and insurance firms account for about 15% of new and expected sublets. York Capital, which runs about $18 billion, has about 150 employees over a few floors at the GM Building. The 50-story tower at 767 Fifth Ave. is owned by Boston Properties Inc. It has about 2 million square feet and its front plaza is occupied by an Apple store, adding to the skyscraper’s luster.
Brief: Spinning records on that sultry night in the Hamptons: DJ D-Sol, better known as David Solomon of Goldman Sachs. Among the thousands paying up to $25,000 to attend the outdoor concert: the Winklevoss twins, Cameron and Tyler, and the hedge fund mogul Kenneth Griffin. The payoff for the charities that were promised to benefit: all of $152,000. Safe & Sound, as the July event was called, has gone down as the most tone-deaf musical moment of the Hamptons’ Summer of Covid. State health officials launched an investigation after Governor Andrew Cuomo excoriated the organizers and well-heeled revelers for “egregious social-distancing violations.” But the night’s real surprise turns out to be the sums that were raised for charity. To some, $152,000 is very un-Hamptons-esque. This, after all, is where a beachfront estate originally built for the Ford family was recently listed for $145 million. “I never would have gone if I knew how little it would be,” said Daniel Tannebaum, one of the Manhattan residents who’s been spending more time at the beach since lockdown, working remotely for a management-consulting firm. Others find $152,000 a fair amount considering the expenses of putting on such an event, and the scrutiny that has created legal and crisis-management issues as well as potential government fines. “I feel a little sense of relief,” said Southampton Town Supervisor Jay Schneiderman, who was born in Montauk and has lived on the East End full-time for more than 30 years. “I had the fear it would be zero.”
Brief: With Wall Street preparing for more of its traders and bankers to return to offices next month, a shift underway at JPMorgan Chase may have lasting implications for the entire industry. Workers in the firm’s corporate and investment bank, an industry heavyweight with 60,950 employees, will cycle between days at the office and at home, keeping the ability to work remotely on a part-time basis, according to Daniel Pinto, head of the massive division and co-president of the banking giant. “We are going to start implementing the model that I believe will be more or less permanent, which is this rotational model,” Pinto told CNBC in a Zoom call from London, where he is based. “Depending on the type of business, you may be working one week a month from home, or two days a week from home, or two weeks a month.” The coronavirus pandemic forced Wall Street to send most of its employees home in March, and apart from skeleton crews that never left the trading floor, that is where most of them stayed. Now, banks are preparing for more people to return after Labor Day, according to executives at lenders and technology vendors. At Citigroup, some managers have begun sign-up sheets to gauge demand for a September return, according to people with knowledge of the situation.
Brief: U.S. bank profits were down 70% from a year prior in the second quarter of 2020 on continued economic uncertainty driven by the coronavirus pandemic, a regulator reported Tuesday. Bank profits remained small as firms build up cushions to guard against future losses and business and consumer activity dropped, according to the Federal Deposit Insurance Corporation. Bank deposits climbed by over $1 trillion for the second straight quarter, and the regulator said the industry has “very strong” capital and liquidity levels. Tuesday’s report marks the second straight quarter that banks have seen their profits reduced to a fraction of record levels they experienced in 2019. The FDIC similarly reported a 70% decline in profits in the first quarter of 2020, although industry profits were actually up slightly in the second quarter. Banks continued to set aside huge amounts of cash to guard against future loan losses — in the second quarter firms reported a 382% increase from a year prior in how much they had reserved for potential credit losses.
Brief: Mega alternative investment managers' ever-expanding roster of client types comes at a time when overall alternative investment fundraising has slowed as a result of the pandemic, but has not reduced the percentage of capital committed to the largest funds. Despite the slowdown, the largest managers continue to get bigger. The percentage of capital raised by the largest managers in the first half of 2020 increased. In real estate alone, megamanagers accumulated 75% of the total capital raised in the second quarter and 45% of the aggregate capital raised in the six months ended June 30, Preqin data shows. The pandemic is proving to benefit megamanagers' accumulation of assets at the risk of newer and smaller managers, said David Conrod, co-founder and CEO of placement agent firm FocusPoint International Inc. Managers with existing limited partner relationships are getting capital commitments, he said. It's harder to raise capital with new limited partners during the current pandemic, he said. "Creating new relationships without seeing people in person will take longer," Mr. Conrod said. Meanwhile, investors see their managers seeking capital from new sources.
Brief: Central Europe’s private equity (PE) firms’ confidence hits lowest level since the global financial crisis, as a result of the COVID-19 impact, but deal-doers are more optimistic than during the 2008 crisis, according to the latest Deloitte CE Private Equity Confidence Survey. The confidence index, which has been decreasing since the end of 2017, is now at 62, the second historical lowest after October 2008, when it reached 48. Seven in ten professionals in Central Europe private equity houses forecast a decline in market activity and worsening economic conditions, given that the regional economies, which are largely consumer-driven, are expecting significant GDP contraction in 2020 amid demand shrink caused by unemployment rise. The survey results also indicate a noteworthy proportion of believers in a quick economic recovery, as 13% of respondents actually expect conditions to improve.
Brief: Having been cast as the chief villains of the global financial crisis, the banks have so far avoided serious further damage to their reputations during the pandemic. Instead it is private equity firms that are in danger of sinking lower in the public’s estimation (if that were possible). The industry has scored a spectacular own goal over the issue of government-backed coronavirus bailout loans. Given the level of public suspicion of the industry you might think it was obvious that private equity firms should steer clear of anything that could be viewed as a taxpayer subsidy. It would be asking to be pilloried by the Daily Mail if firms that had piled debt onto their investments in order to minimise their tax bills and maximise their returns then came crying to the government when the going got tough. But that is just what some firms are doing. Worse, the industry is working with the government to find ways around EU state aid rules that would seem to disqualify some heavily-indebted companies from accessing the loans. The predictable result is an outcry in the media including a hostile editorial in the FT and a thundering commentary in the Daily Mail that concluded: “The idea that some morally bankrupt private equity companies — which have for so long made themselves rich at everyone else’s expense — should now benefit from that government largesse is abhorrent.”
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