Corporate governance - Vigil

Norway’s $1.2 trillion wealth fund will publish all voting intentions ahead of shareholder meetings from 2021, which is at least one year earlier than previously indicated. The world’s biggest sovereign investor says it wants to be more transparent in how it exercises its ownership, in a bid to promote good corporate governance and similar goals, including environmental standards. The fund has already started explaining its reasoning when it votes against company boards. “Our intention is to provide more information to the market and to be fully transparent about how we use our voting rights,” Norges Bank Investment Management, said in a report on Friday, as part of a review of its work on responsible investment over the past 20 years. The fund also said it was “concerned that a lack of information makes the market for voting advice not fully efficient.” Norway’s wealth fund, which was built from the proceeds of the country’s oil and gas production and now owns about 1.5% of stocks worldwide, invests according to a broad set of ethical principles. These include a ban on some weapons, tobacco and most coal investments, in addition to rules on human rights and greenhouse gas emissions. [...] The fund has been cleared to venture into renewable energy infrastructure under these mandates, but has yet to make its first investment. The effort will be led by outgoing Chief Executive Officer Yngve Slyngstad, who is set to move to London after Nicolai Tangen succeeds him next week. “Over time, we expect our renewable investments to diversify the fund and generate higher returns than the assets we sell to finance their purchase,” the fund said.

[...] From hedge fund billionaire Bill Ackman to sports executive Billy Beane of Moneyball fame, some of the most high-profile investors have sought to raise cash in blank cheque companies, believing they have the special eye to find under-appreciated businesses which they can bring to the public markets. By using Spacs, they can skip over the expensive and time-consuming IPO process. [...] The boom in Spacs is taking place at a time when trillions of dollars sitting in private equity and venture capital funds and many promising companies feel less pressure to go through the costly and time-consuming process of listing on the stock market in order to raise new money. For retail investors, Spacs present a chance to buy into fast-growing companies that might otherwise remain private. Yet a Financial Times analysis of the US blank cheque companies that were organised between 2015 and 2019 shows that these cash shell structures remain a dicey bet for ordinary investors. The majority lie below $10 per share, the standard price where Spacs first sell their shares to the public. Such disappointments have beset even veteran investors such as private equity firm TPG, which has three Spacs, none of which trade higher than $10.20. The poor investment record of many Spacs is a reminder that when Wall Street pushes a new product, clever financiers invariably find a way to shift the most risk on to ordinary investors - even if a new generation of Spac founders believes they will avoid the problems of the past. “Overall, investing in a Spac is like flipping a coin, where only half of them are shown to be value creating,” says Milos Vulanovic, a finance professor at EDHEC Business School who has studied the structure for years.

[...] The tale is a cautionary one, given the high fashion for reverse listings these days. In the US, special purpose acquisition companies, or Spacs, last year accounted for a quarter of all IPOs. [...] Spac fans said it is a natural time for the sector to boom: many private companies are struggling following the coronavirus pandemic, and the lockdowns that accompanied it, and are seeking easy access to finance. Stock markets are booming, giving Spacs a straightforward route to market. But there is nervousness among investors towards more complicated corporate IPOs. Spacs, backed by big-name sponsors, provide investors with the comfort of a trusted intermediary. There are structural advantages too. In volatile times like these, it is attractive if a company can fix a price and execute a deal quickly, and avoid the delays and hassle inherent in filing an IPO prospectus and being scrutinised by regulators, before being able to list. Investment banks’ IPO fees, particularly hefty in the US, can also be mitigated. The downsides are obvious. In some jurisdictions at least, the level of information that investors get of a company that reverse-lists is scant, though US Spacs stress that the disclosures in their merger prospectuses are just as fulsome as a mainstream IPO would demand. Another negative is the dilution effect for company owners and investors, effected via complex warrant structures attached to the vehicles’ listed equity. And there is an inherent conflict of interest in the value of payback for sponsors being tied to the price paid for a merger. Deals also tend to be magnets for a “Spac mafia” of arbitrage hedge funds which buy up the warrants to exploit short-term pricing anomalies.

Active equity mutual funds are well known to have underperformed passive benchmarks net of fees. Even so, the active management industry continues to manage tens of trillions of dollars. The puzzling coexistence of a large underperforming active management industry and an accessible passive management industry raises an important question: why are investors willing to tolerate this underperformance? One popular hypothesis is that active funds outperform in market downturns, when investors value performance the most. The COVID-19 crisis is particularly suitable for testing this hypothesis, for two reasons. First, investors surely want to hedge against such an unprecedented output contraction and unemployment surge. Second, large price dislocations during this crisis provide opportunities for active managers to perform well. For example, the S&P 500 experienced its steepest descent in living memory, losing 34% of its value in the five weeks between February 19 and March 23 before bouncing back by over 30% in the following five weeks through the end of April.

[...] The robust recycling of the capital within the US economy can lead to innovation and growth that avoids the “trapped capital” syndrome of Europe and Japan. A higher level of profitability has enabled US companies to dedicate more capital to share repurchases (or buybacks). A key advantage of share repurchases is that they enable the recycling of capital throughout the economy, so capital may end up in the most innovative hands and not trapped inside of less efficient, more mature companies. We believe buybacks optimize capital allocation for companies unable to invest at a higher rate of return than their cost of capital, particularly when agency costs exist between corporate management and investors. While perhaps controversial to some, we disagree with those who argue that buybacks are shortsighted and lead to less innovation and investment, suppress job growth and exacerbate income equality. While the aftermath of the pandemic and subsequent recession will certainly lower activity, we expect share repurchase programs in the US will rise to their previous levels when conditions normalize. We agree companies should not assume irresponsible amounts of leverage to buy back stock. However, in reality, the aggregate amount of buybacks represents a small percentage of total capital returned to investors. Given the likely challenges associated with assuming additional leverage and corporate models that may shift to more commoditized, lower return businesses in the aftermath of the pandemic, we expect that the recycling of high-return capital to innovation and secular growth will simply sustain itself. While we acknowledge that companies with large buyback programs have tended to invest less in innovation, our findings suggest the US economy has done an efficient job of recycling the proceeds from share repurchases through venture capital and private equity firms. [...] Share repurchases have steadily increased in the US over the last 20 years and the gap in buybacks between the US and Europe has widened in the last 10 years, both in nominal and relative terms. In Europe, barely 20% of Stoxx 600 corporations have executed share buybacks versus more than 80% of its S&P 500 peers.

In Q2’20, US-based startups continued to pick up deals and dollars during the Covid-19 crisis. Venture capitalists didn’t let the global pandemic stunt dealmaking in the second quarter of the year. Though funding took a hit in Q2’20 both globally and in the US, deal activity recovered compared to Q1’20. However, the extent of Covid-19’s impact remained visible when compared to 2019 levels.  Deal activity in Asia rises 20% in Q2’20, compared to 9% in Europe and 3% in North America. Download the CB Insights and PwC MoneyTree Report to see all the data. We take a look at how the coronavirus pandemic has shaped venture capital financings in Q2’20.
1. VC deals to US-based startups in Q2’20 saw a quarterly increase but were down compared to last year [...]
2. The number of quarterly mega-rounds ($100M+) in the US hit a new record in Q2’20 [...]
3. Unicorn births declined for the fourth consecutive quarter
The number of new unicorns in the US steadily declined over the past year. [...]
4. In the US, IPO exits jumped while M&A activity fell amid the pandemic. [...]
5. Globally, deals recovered compared to Q1’20 while funding dropped [...]
6. Digital health dominated deal activity in the US 
Digital health and medical devices saw an increase in deals in Q2’20, as companies scrambled to develop solutions for the pandemic. 

The pandemic has had an emphatic impact on rewards for shareholders. A report this reveals that dividend payments in the UK were cut in the second quarter by a “dizzying” 57.2%, or £22bn. The statistics, compiled by Link Asset Services, show that 176 companies opted to hold on to cash during the lockdown by cancelling dividend payments. A further 30 reduced their dividends. In all, they amounted to three-quarters due to pay in Q2. Link says dividends paid in Q2 this year are the lowest since 2010 and “the decline itself is by far the biggest ever recorded”. Only the scale of the figures should come as a surprise. As lockdown took effect, many sectors saw business grind to a halt forcing them to seek state aid as well as take drastic measures. Many took government loans, making dividend payments—even if cash was available—a significant reputational and financial risk. [...] Resetting dividends is viewed as a healthy development by many market observers concerned that some big-name companies have paid out at record levels while also managing significant debt. In more stable times a dividend cut may have been viewed by the market as a red flag; in the current environment many regard it as good sense. Another consideration for boards mulling dividend payments is: are they legal?

Typically, when a company offers stock to the public, it emphasizes the positive. Fundamentally, the pitch is this: Buy us and prosper. Maybe even get rich. But Hertz Global Holdings put out a prospectus this week that projected a different outcome: Gamble on us and be prepared to end up with something worthless. Hertz, you see, is bankrupt. But it said it hoped to sell $500 million in shares, maybe even $1 billion, anyway. For sheer audacity, what Hertz was trying just takes my breath away. It caught the eye of the Securities and Exchange Commission, too. On Wednesday, Jay Clayton, the agency’s chairman, said on CNBC, “We have let the company know that we have comments on their disclosure,” and added, “In most cases, when you let a company know that the S.E.C. has comments on their disclosure, they do not go forward until those comments are resolved.” [...] Trading in the company’s shares stopped briefly at 11:44 a.m. and in a new filing, Hertz said it had suspended its new stock offering, while it discussed matters with the S.E.C. The S.E.C. declined to expand on Mr. Clayton’s statement, and Hertz did not respond to repeated requests for comment. What is unusual in the Hertz stock venture is that the company is still in the early stages of what are formally known as Chapter 11 bankruptcy proceedings. Companies in bankruptcy do not, as a rule, sell stock, precisely because creditors have a higher claim on assets than shareholders do. By the time the creditors have been paid a fraction of what they are owed, there may be nothing left for shareholders.

Despite recent challenges, venture capital firms are still seeking out investment opportunities across the country. Since our last analysis of most active VCs in January 2020, we've seen shake-ups across 10 states. Our graphic maps out the most active VC investor in every US state. Although startups based in California, New York, and Massachusetts have traditionally accounted for the majority of VC tech investment in the US, VCs are spurring other hotbeds of innovation across the country. The Covid-19 pandemic put a dent in VC deal activity during Q1’20, while investors cut fewer but larger checks, with funding up 14% quarter-over-quarter. Using CB Insights data, we analyzed the most active venture capital firms investing in tech startups in every US state.

Private equity (PE) firms are often said to use their industry expertise and operational know-how to identify attractive investments, to develop value creation plans for those investments, and to generate attractive investors returns by implementing their value creation plans. Although many studies refer to such value creation plans, there is no systematic evidence on what these plans typically look like or whether they help improve company operations or investor returns. In a recent paper, we open up the black box of value creation in private equity with the help of confidential information on value creation plans and their execution. We find that plans are tailored to each portfolio company’s needs and circumstances and have become more hands-on. Successful execution varies systematically across funds and is a key driver of investor returns. Company operations and profitability improve in ways consistent with successful execution, even beyond PE funds’ exit.

The U.S. Securities and Exchange Commission is easing restrictions that prevent most people from investing in hedge funds and hot startups. olders of professional certifications -- like Series 7 licenses that authorize individuals to sell securities -- will be eligible to invest in riskier assets under rule changes the regulator announced Wednesday. The revamp is focused on allowing those with financial expertise to put their money in private investments that don’t trade on public exchanges even if they fail to meet existing net worth and income restrictions. The SEC said in a statement that the changes are meant to make it easier for firms to raise capital and “more effectively identify institutional and individual investors that have the knowledge and expertise to participate” in those offerings. “Today’s amendments are the product of years of effort by the Commission and its staff to consider and analyze approaches to revising the accredited investor definition,” SEC Chairman Jay Clayton said in a statement. “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.” The changes, which were first proposed in December, adjust the SEC’s “accredited investor” standard. The policy has generally kept investors out of hedge funds, fast-growing technology companies that haven’t gone public and private equity funds unless they have a net worth of $1 million or higher and annual salaries of at least $200,000. The SEC’s two Democratic commissioners voted against the revamp, arguing that by failing to update the net worth and compensation requirements for inflation, the regulator missed an opportunity to protect many unsophisticated investors from putting their money in potentially dangerous assets. Commissioners Allison Lee and Caroline Crenshaw, in a joint statement, said the 38-year-old thresholds hardly mean the same thing in today’s dollars.

The coronavirus crisis will see the world’s biggest firms slash dividend payouts between 17%-23% this year or what could be as much $400 billion, a new report has shown, although sectors such as tech are fighting the trend. Global dividend payments plunged $108 billion to $382 billion in the second quarter of the year, fund manager Janus Henderson has calculated, equating to a 22% year-on-year drop which will be the worst since at least 2009. All regions saw lower payouts except North America, where Canadian payments proved to be resilient. Worldwide, 27% of firms cut their dividends, while worst affected Europe saw more than half do so and two thirds of those cancel them outright. “2020 will see the worst outcome for global dividends since the global financial crisis,” Janus Henderson said in a report published on Monday. “We now expect headline global dividends to fall 17% in a best-case scenario, paying $1.18 trillion... Our worst-case scenario could see payouts drop 23% to $1.10 trillion.” [...] “Dividend trends are reflecting the trends in society and the stock market at the moment,” said Janus Henderson’s head of global equity income, Ben Lofthouse. [...] The most obvious is the path of the coronavirus, but there is also what U.S. firms do later this year and whether Europe’s banks get the green light early next year to restart their payments. “The big question for the U.S. is what will happen in the fourth quarter. If many companies make significant cuts to their dividends, payouts will be fixed at a lower level until towards the end of 2021.”

Investors caught up in the frenzy of the stock market’s wild rebound this year have a new favorite spot for their money: pools of cash that hunt for acquisitions. Some will pocket huge gains and others will be saddled with deep losses from these so-called blank check companies, but one group -- Wall Street’s top banks -- is coming out a winner. Three of them -- Citigroup Inc., Credit Suisse Group AG, and Goldman Sachs Group Inc. -- now account for nearly half of underwriting revenue, meaning they stand to generate, according to Dealogic, at least $400 million in fees from blank check companies that have listed this year. That’s a record amount of cash from a market that at one time barely generated anything for the largest firms. [...] It’s a notable transformation for SPACs, which were once an obscure part of the market tainted by association with penny-stock scandals. [...] The products’ popularity has been pushed by yield-hungry investors, who see SPACs as safe bets that could offer better returns than Treasuries. The money earns interest until a deal is struck. If a manager can’t find a deal in a certain time or investors don’t like the planned merger, they can get their money back. If a merger is successful, then investors can share in those gains. Banks typically take a 2% cut of money raised from selling shares in a public listing. Once a SPAC completes a merger, the firms are then given 3.5% of initial public offering proceeds. And they can earn extra fees for every service provided along the way, for example by raising more funding for a merger or helping to find a company to purchase. [...] SPACs account for nearly 40% of the IPO market this year up from only 1.1% a decade ago, according to Dealogic data.

On June 29, 2020, the U.S. Department of Labor (DOL) announced a new proposed class exemption to certain prohibited transaction restrictions in the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code of 1986, as amended (the Code), entitled “Improving Investment Advice for Workers & Retirees.” The proposed exemption is intended to help workers and retirees by preserving the wide availability of investment advice arrangements and products for retirement investors. The proposed exemption is expected to be well-received by “investment advice fiduciaries,” because it is broader and more flexible than the DOL’s pre-existing prohibited transaction class exemptions which generally provide relief for more discrete transactions. Here are five things you should know about the proposed exemption.

When the Financial Times interviewed Warren Buffett last year, he predicted that future returns from his company Berkshire Hathaway and from the U.S. stock market as a whole would be “very close to the same.” Berkshire shareholders could be forgiven for thinking: if only. The famed stockpicker had his worst performance versus the S&P 500 in a decade in 2019, and 2020 is shaping up to be nearly as bad. Instead of taking advantage of the coronavirus crisis that hit markets in March, Buffett was a casualty. Instead of highlighting Berkshire’s balance sheet strength, the crisis exacerbated longstanding concerns over the company’s direction. Some longtime Buffett watchers argue that it is time to fundamentally rethink Berkshire’s mix of businesses and investments. The question comes more loudly now than at any time since Berkshire missed out on the dotcom boom: has Buffett lost his touch? Four things investors (even Warren Buffett) just have to accept they know nothing about — and one new thing
Costco should be Warren Buffett’s next bulk purchase
Investors sour on airline sector as Warren Buffett exits top U.S. carriers. Berkshire’s “chronic underperformance” requires answers, according to Cathy Seifert, an analyst who covers the company at CFRA Research, particularly in light of some questionable investment decisions in recent years.

While Trump’s U.S. Department of Labor recently opened the door for plan sponsors to add private equity funds to their 401k plans, only the most foolhardy sponsors will rush through. Despite any assurances Trump’s DOL is gratuitously offering, the risk of getting sued is monumental. Corporate sponsors of 401k retirement plans who opt to include private equity in their investment menus could, in my opinion, be sued. Here’s why: First, private equity investments are the highest cost, highest risk investments ever devised by Wall Street. 401k sponsors will be hard pressed to conclude the fees and risks are justified in the pursuit of promises of superior performance. Further, as a result of the weighty fees and other risks, PE investments will more-often-than-not underperform resulting in 401k losses. A decade-plus of private equity investing by so-called “well-managed” pensions has resulted in increasingly disappointing, not to mention inflated and unauditable performance results. A recent Working Paper by Professor Ludovic Phalippou of the University of Oxford concluded higher cost, higher risk PE funds have returned about the same as lower cost, lower risk public equity indices since at least 2006. And Warren Buffett, arguably the world’s most respected investor, recently escalated his criticism of private equity industry ethics and dubious performance claims.