Take-Aways from April 2 COVID-19 Web Conference

by Mark Sanor, CEO of 360 One Firm

(1) What’s most scary about COVID-19?

(2) What lessons learned in your country or industry are useful to share?

(3) Do you see any silver linings?

We asked these three questions to 35 panelists at our global web conference on the impact of C-19 across borders, industries and assets. We also invited doctors and those on the front lines of vaccination and logistics. Over 250 people joined over five hours, so it’s hard to summarize all the great insights. 

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But one clear takeaway is that we will know more in four weeks. So, on April 30, we will host a “C-19 Update Conference,” adding new keynotes and speakers. From our post-event Survey, we expect 500+ participants from 20+ countries to share updated perspectives in diverse panels and interactive roundtables. Register your interest to join at www.361firm.com/april30. Until then, per our Events page, we will host:

GLOBAL MACRO OUTLOOK PANEL. “Unprecedented size and speed of monetary and fiscal stimulus around the world,” noted Shawn Matthews, CIO of Hondius (former CEO of Cantor Fitzgerald). He showed data backing up higher inflation expectations, the aim of G20 governments.  

Eric Lindberg, CIO of the Knowlton Foundation investing across all asset classes, warned of massive disconnects between data and investor decision-making, discounting the reliability of media which is too focused on sales/ratings and too slow to keep pace with such a dynamic situation.     

Stephen Burke of ARS Investment Partners noted the historic opportunity to own quality businesses at discounts to intrinsic value, but advised to focus on earnings vs. earning power and expect significant changes in both consumer and corporate behavior. He stands by the firm’s Outlook, which has backed secular trends toward healthcare, tech, defense, and dividend growers, but now also seeks special situation investments into business models distinctly positioned to benefit from new trends, with emerging areas including education, home fitness, and remote work enablers. 

Bryan Turley of JonesTrading echoed how quickly governments pulled many levers, but said this time, the Fed isn’t supporting certain things like commercial real estate paper. Many later joined Bryan in questioning the need for so much expensive office space (in major cities) when more will continue to work remotely.  

ALL-CONTINENTS PERSPECTIVES PANEL. This panel provided perspectives from mainly family office principals: one with family in Wuhan, one in Hong Kong seeing students returning from US schools bringing a second wave of cases, one reporting on the experience of his native Italy, one sharing insights on Russia, one in Geneva focused on Africa, a fund manager in Brazil, and a US expat in Shanghai who thinks corporate America under-appreciates that Chinese consumers will weather this crisis better than most. There was also some skepticism as to whether CV-19 would meaningfully alter the structure of supply chains.  

Silver linings with tarnish? As China, Singapore, and South Korea begin to “return to normal”, they do so carefully, with an eye on potential virus resurgence, which has already happened to some degree.  

VIRUS PERSPECTIVES PANEL. One fear is that this pandemic could impact us until we have an effective vaccine, which would mean that we’d be in for social distancing much longer. 

Yet as a silver lining, this crisis might push many parts of the healthcare system to fix problems, including easing regulation on how drugs are developed and tested and forcing institutions and payers to dispense with outdated practices. 

Telemedicine to “have its moment?”  One aspect in focus was the “in-person doctor visit.” For decades, telemedicine has been a theoretical and little-deployed option, but this crisis is forcing care providers (institutions more than the practitioners) to make changes they have resisted.  Bill Hanson, Chief Medical Information Officer at UPenn Health System noted "We've had patients and providers learn how to conduct telemedical visits, and I think that will be the biggest upside to this going forward." Gene Huang of CapZone HealthCare LLC and in a subsequent roundtable, Amit Aysola of Wanxiang Healthcare Investments, also noted that one issue will be payers including insurance companies finding mechanisms to ensure physicians are reimbursed for virtual visits. 

There was some discussion of types of therapies in development. Given that one of our panelists was virologist Chris Hopkins, Chief Science Officer at InVivo Biosystems, the conversation focused on antivirals more than vaccine or testing (one panelist who had to pull was Gail Page of Chem Bio, which just received FDA approval and has “all hands on deck.”) We (or at least I) learned that antiviral drugs can work across many viruses; for example a drug used to treat HIV or even therapies used on cancer may be helpful to reduce the spread and ease symptoms of coronavirus. 

The panel expected a variety of social changes as a response to the pandemic. Victor Chapela, co-founder and CEO of Suggestic, and Dr. Robert Boova, Vice Chair of Cardiac Surgery at Temple University Hospital led a discussion of the new light being cast on the role of poverty in health as well as methods of rapidly deploying treatment, such as rapid-deployment, prefab modular hospital units. Other social changes anticipated were an accelerating shift to seniors being treated in homes rather than communal centers and at least short-term changes to how much philanthropic giving will be available and where it will be deployed.           

Q&A WITH THE LIEUTENANT GOVERNOR OF OHIO JON HUSTED. Ohio was ahead of the curve in shutting down events and schools. On March 4, I walked with the Lieutenant Governor in the basement of the Statehouse to Governor DeWine's office when they met to cancel the Arnold Schwarzenegger event with 200K attendees. Responding to a question from a family office with manufacturing plants in Ohio, Lt. Gov. Husted noted the JobsOhio program (funded by liquor sales tax) offers financing to businesses that create or save jobs in the state. He pointed out that Ohio's policies are driven by dialogue with the business community, including those with operations in China (to learn about practices for running or re-opening plants) as well as those who can keep hospitals supplied in Ohio and beyond, e.g. Battelle's mask sterilization technology and Cardinal Health's donation of 2 million hospital gowns.

ASSET CLASS PANEL. Struggling companies will disappear and great companies will be well funded because there is still a lot of capital in the venture ecosystem, said John Backus of Proof VC. He also noted that companies formed during crises tend to do better over the long term because they tend to be closer to their customers, make products that are important and they are cost-conscious. There is no “bottom” in the private market because companies are being revalued all the time, he said. 

The surge of stimulus leaves lots of uncertainty around restructuring and bankruptcy: “the traditional playbook of when a company defaults or breaches covenants” is gone, noted Chris Brown of Allstate Investments. He expects confusion based on the sentiment among regulators and the public of giving companies a break.  Chris said his biggest concern in this crisis is leverage exiting the system, hurting a large number of companies relying on leverage to make investments and hit targets.

In real estate, while the “unknown unknowns,” are keeping Derek Li of JD Paramount awake at night, he is also among those willing to be patient and look forward to the coming weeks and months when we will have a better vantage on what unique opportunities will certainly emerge. He agrees with the panels’ widely held sentiment that winners will take all. He sees market participants struggling with no liquidity and an inability to assess asset values in an unprecedented crisis.

Some companies, particularly in healthcare and global opportunities will experience exponential growth because of the crisis, Prairie Crest’s Barry Adams noted. His most important metric is whether his portfolio companies are continuing to hit milestones, more than gyrating external factors.

Bill Deuchler of Morgan Creek noted a potential silver lining in that his colleagues in China report increasing normalcy and they are now investing more into healthcare, health-tech and tech in general. The team is seeing good deal flow at more attractive valuations.  In some cases, mature funds stuck waiting for delayed IPOs are willing to do secondary deals at attractive prices, Bill has observed. His greatest fear is people focusing too much on the near-term, because there are great opportunities “coming out on the other side,” he said.  

Bill also deputy-moderated the VC/PE/Credit roundtable with moderator Chris Brown of Allstate Investments where they discussed:

  • Duration of the Medical Situation - The US may follow the China experience of approximately 8 to 10 weeks for the cycle to play out. China is authoritarian so it had a greater ability to impose restrictions so the US may have a slightly longer cycle.

  • Duration of Current Economic Situation – Difficult to call, but if resources can be effectively deployed to the medical community and health care workers remain effective, then the ability to handle COVID-19 cases may allow the economy to open up. 

  • Government relief could be viewed as a huge debt for equity swap.

  • Level of Debt – Will dramatically increase over that which was incurred in 2008.  How we work that off remains an open question, but all agreed that someday, sometime, the piper will have to be paid

  • Ability of Hourly Workers to Endure – Highly dependent on government support and the ability for the economy to get back in gear.  Will it be enough and will we be able to get commerce back soon enough to help the survival rate for small businesses are the questions.

  • Actions to Help Re-Open the Economy – Discussion on what we need to do to preserve natural lives vs economic lives.  Potentially a selective quarantine of more at risk population to allow less at risk population to get back to work was offered.  A very difficult question

INDUSTRIES & INTERESTS PANEL AND ROUNDTABLES.

In Agriculture, Food & Beverage, Panelist Jeff Anderson of Manus Bio described a trend toward US companies seeking multiple sources outside of China in food ingredients and other segments

As for the Coronavirus impact on the Cannabis Industry, Bill Healy noted that cannabis is a mixed picture as delays are likely in both Congressional legislation and state-wide ballot measures, but silver linings include higher demand and treatment as a protected industry by many states which also appreciate the tax revenues.

Specifically, he observed the following:

Unfavorable:

  • No recognition by Federal government regarding the aid package 

  • Congressional legislation this year is unlikely

  • Possible delays in state-wide petitions for cannabis-related ballot measures

Favorable:

  • Anecdotal reports of significant increases in medical and adult-use cannabis

  •  demand reported to rose and has been treated as a protected industry by many states.

  • State and local governments recognize cannabis as essential service

  • Consumer behavior—inelasticity of demand, consumer staple or discretionary?

  • Greater recognition by U.S. population of cannabis and CBD therapeutic powers

Long term: 

  • Very positive

  • State authorities get the joke: They will follow the money (taxes)

  • When push came to shove during the pandemic, authorities recognized the tax revenues, jobs, and societal advocacy for regulated cannabis products and services---and designated the sector as “essential services”  This is a big deal with long-term positive ramifications 

  • The cannabis secular evolution is empowered by recent developments—not weakened

As for the cannabis investment landscape near term: 

  • Coronavirus market sell-off only expedited the “Cannabis 1.0” death march---weak balance sheets, unfunded CAPEX, bloated overhead, and unprofitable business models are coming home to roost.  But this is a good thing!  

  • There will be consolidation and an evolution to “Cannabis 2.0” ---from early-stage investing and growth to real revenues and EBITDA

  • Watch out for “down-rounds” in VC portfolios—they’re coming

  • Tremendous credit opportunities (i.e., JP Morgan credit facility to Charlotte’s Web)

  • One-off growth capital opportunities, however, do exist.  SSO vs. MSO

  • Opportunities to buy revenues and Adjusted EBITDA for under 1.2x and 5.5x multiples

For Impact Investing, Ashley Grosh emphasized that Impact Investing is not just philanthropic, but typically has a screen that includes a social, economic and environmental impact. Her roundtable discussed examples of impact investments, particularly affordable housing and what the COVID impact is going to do for affordable housing. In infrastructure, they hope to see more green bonds issued, which should be attractive given where the yield curves are situated. They also talked about how many things can be considered impact, including the rollout of 5G, with social and health impact on communities. They highlighted the strain on electricity grids from data centers and technologies that are working to solve these issues. Impact will continue to be a major theme and more money will be qualified as impact.

Media and Sports are adjusting to closures of production and theaters and events, but Ken Halsband of Territory Pictures noted various ways how Hollywood is pivoting, to focus on content development while streaming grows even faster to become an even more entrenched way for consumption of content, which 5G will propel even faster. Paul Linden sees extraordinary buying opportunities in the sports world.    

Caroline Pugh of Oya Partners noted the dominant theme of the Next Generation focusing on evaluating current portfolios to continue to invest in and complete funding rounds for healthy startups while also keeping a pulse on long-term opportunities such as public equities and real estate.  the long-term trends and helping families reposition investments and look out for new opportunities such as real estate. 

The most lively conversation was between Will Sternlicht of SH Hotels and Resorts and BlueJeans CMO John Knightly, squaring off on the post-pandemic future of tech and travel. Tech and hospitality saw little quarrel over internal meetings and conferences permanently moving to digital space, But they had very different visions of the future of travel. 

Business travel will dry up because people will now be more comfortable doing video chats instead of in-person meetings. Or it won’t. Sternlight’s hospitality, real estate and FC fundraising experience leads him to the opposite conclusion, as, yes, more people will be able to work from home while sick, but business and education travel will return shortly. “Humanity's collective memory is too short,” Sternlight says, expecting most institutional LPs and family offices reluctant to write checks to people they've never met in person. Plus, he doesn’t foresee people in the brick & mortar world doing business without an in-person visit.

In Real Estate, one family offices active in this sector shared the following observations and open questions:

  • Projects under construction - tracking state and local executive orders and whether or not construction is deemed an essential business; local municipal offices closed/meetings cancelled and related delays for permit issuance, rezoning/variances, approval of incentives, building inspections, recording of deeds, etc.; contractors giving force majeure notices and borrowers asking lenders for extension of completion dates and relief for breach of negative covenants related to construction cessation

  • Stabilized projects - tenants are asking for rent concessions; there may be an opportunity to “blend and extend” (i.e., trading rent abatement for increased lease term); property managers wonder if there’s a duty to inform tenants of confirmed cases

  • Projects under contract for disposition - overseas buyers can’t travel here to do their site visits/due diligence; buyers can’t secure financing or are getting retraded on prior debt quotes; planned dispositions will be put on hold due to decreased NOI from tenants not paying rent

  • Macro questions without answers - will grocery delivery spur more cold storage development?; will this work from home experiment lead to less demand for office space?; will counties try to rebalance their budgets by increasing property taxes and/or permit fees?; will there be a resurgence in domestic manufacturing?

With respect to Automotive, Matthew Friedman (CEO of Bear Diversified) noted that Covid-19 has led to shut-down of automotive manufacturing. GM told suppliers it would shut down all North American operations until at least 4/13/20, and ramp up starting on 4/20/20, with all plants being back at full production by 5/4/20. FCA is shut down until at least 4/13/20 and Toyota until at least 4/20/20. The Federal government has earmarked substantial funds specifically to assist the domestic OEM’s and their tiered suppliers, but details have yet to be revealed.

The EV market is vulnerable in the current crisis. Partly that’s due to its relative youth and its dependence on global sourcing for its core technology, the batteries. Electric vehicles have already been a tough sell among average U.S. consumers. Low gasoline prices likely to make EV’s less attractive to consumers

On Energy, Anna Haskell pointed out that the high leverage of some US oil producers leaves them vulnerable, which could also represent an opportunity for those with dry powder. 

From the Energy and Industrials Roundtable, Turner Smith reported the following by segment: 

      >> Energy

  • Continued confusion over extend of oil demand destruction versus demand contraction

  • People will be driving less and flying less, but the EV market has probably been pushed-back

  • Russia has more staying power than Saudi Arabia, and is unlikely to be the one to blink first

  • U.S. shale production will need some price recovery to re-gain lost production; distress/bankruptcies likely but the resource is not going away.

  • The future of alternative feedstocks to clean fuel remains cloudy if very low gasoline prices persist

  • Long-term power demand is hard to predict; the work at home movement has increased consumption, but less commercial demand and EV demand could have opposite future impact

  • COVID 19 has led to a 6mm BPD global demand shock. Per recent call we had with Dan Yergin, we need to differentiate between “demand destruction” versus “demand contraction”.

  • U.S. has had recent record oil production of 13.1mm BPD, but this could contract by 2mm to 4mm BPD in key shale plays

  • Oil storage in the U.S. is filling up, portending further pricing pressure on oil. 

  • E&P Capex budgets in North America are being slashed 30% to 50%

  • Further distress expected in the energy sector

  • Approximately one-third of U.S. natural gas production represents “associated natural gas” (NG as a by-product to oil production). Lower oil production will result in less natural gas.

  • Lower fossil fuel prices will make certain areas of renewable energy less attractive, absent subsidies

  • There may be further knock-on effects in the U.S. petrochemicals industry

      >> Supply Chains

  • COVID has exposed the weak links in many areas, including manufacturing, pharma, and technical minerals

  • There will be a push to locate sources of supply closer to the end markets driven by national security concerns

  • Possible impact of U.S. stimulus on supply chain projects

  • The U.S. GDP was $21.4 trillion in 2019, with services representing almost 80%.  Less than 2% came from industrial production. 

  • The U.S. currently imports $2.5 trillion in goods, including capital goods ($678 billion), consumer goods ($654 billion) and industrial supplies ($522 billion). That’s a lot of “stuff” the U.S. could start making again. There are empty buildings all over this country that can support manufacturing again (old manufacturing spaces, former big-box retailers).  Many still have railroad spurs nearby to efficiently move raw inventories in and finished product out. A manufacturing renaissance in the U.S. would, naturally, maximize the use of robotics, artificial intelligence and other technologies. It’s a chance for America to rebuild using state-of the-art manufacturing processes and, thereby, improve our global competitiveness for decades. That is what China, Pakistan, Mexico, Vietnam, etc. have done since the 1980’s.

  • A reliable supply chain will require an increased amount of domestically sourced raw materials. The U.S. is a huge country with an enormous capacity to expand the agricultural base to produce biodegradable raw materials.

      >> Industrials, Infrastructure

  • Importance of 4 C’s- Cash, Costs, Capital and Customers

  • Many of these sectors have been deemed essential which creates additional sets of risks

  • Four key themes have been stressed by PE managers: (1) Employee health & wellbeing; (2) Financial Resilience (many companies have fully drawn their bank credit lines); (3) Business Continuity; and (4) Transparent info sharing across the portfolios leading to best practices

  • Infrastructure should be a critical component of any recovery from COVID 19- ranging from social infrastructure (hospitals, senior care, education) to transportation & logistics to telecommunications.

  • COVID 19 may alter the way the U.S. approaches education with momentum behind distance learning and training for essential workforce skills

  • COVID 19 may reverse the trend of people moving to large cities; in fact, there could be a new move to suburbia

  • Impact on commercial real estate such as office buildings could be profound

  • Some of the new required investment may pair-up well with Opportunity Zones

  • Food supply chain security and safety issues portends opportunities for in-door farming and aquaculture

      >> Building Products

  • COVID19 has led to shut-down of “non-essential” manufacturers (CleanFiber was recently mandated to shut-down by NY State, but got relief due to its functioning as a solid waste management facility); some construction is currently deemed essential, but environmental/waste management is essential.

  • Longer-term economic impact of the virus needs to be assessed with respect to housing starts and other new construction. 

  • Private timber managers have recently curtailed quarterly investor distributions to conserve cash for the “rainy day”

  • Remodeling/retro-fits in the past have outperformed new construction during economic downturns; this should provide some cushion to companies such as CleanFiber

  • Market trends should continue to favor products and processes embracing sustainability, including closed-loop economy plays like CleanFiber (corrugated waste material to clean building insulation): Columbia Pulp (waste wheat straw to clean pulp for sustainable packaging); Continuus Materials (recycled material/MSW to engineered building products).

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