COVID-19 FAQ: Asset Management

May 2020

The global pandemic has disrupted business continuity across all industries, and for asset managers, that’s manifesting in extreme volatility in their clients’ investment portfolios. Additionally, the reliance by all stakeholders on digital tools to facilitate transactions will only accelerate digital transformation adoption and intensify post-crisis competition.

Here are some of the most frequently asked questions and resources to help asset management firms in their immediate response and planning.

To learn more and access numerous insights, resources and webinars, you can also visit our Crisis Response Resource Center here.
 

A. The SEC has provided conditional relief for registrants that are impacted by COVID-19 and are unable to file on a timely basis. During March, the SEC issued new orders extending the due dates for required filings by investment advisers and registered funds, including BDCs. The exemptions granted relate to reporting and delivery requirements for registrants due between March 13th and June 30, 2020 (inclusive). Registrants must also disclose why they were unable to file on a timely basis.
 
For more information on how to take advantage of the extension, consult recent announcements from the SEC, including those here and here.

A. COVID-19 has created significant uncertainty for companies large and small. For asset managers, this has manifested in extreme volatility in their clients’ investment portfolios. Bonds, real estate and other assets that make up firms’ investment holdings have also followed a downward path, making it difficult to find a safe haven—other than cash—during these extraordinary times.
 
In the short term, business continuity planning has taken center stage. Asset managers are focused on setting up secure remote working environments to maintain both the safety and productivity of employees, as well as monitoring cash flow in order to continue operations. While it’s understandable that asset managers are in ‘reactive’ mode, it’s prudent to take a step back and put together a crisis management team, including executive leaders, investment managers, communications and account staff. They can help to methodically assess how to maintain operations while limiting exposure risks to employees and the customers they serve.
 
A critical component of asset management firms’ business continuity plans will be to communicate clearly and regularly with clients about the impact of COVID-19 on investments in their own portfolio. After all, asset management firms’ fundamental mission is to assess risks associated with market volatility and proactively position portfolios to benefit or minimize loss accordingly. This is the chance to shine and earn clients’ loyalty and trust for the long term.

A. Defaulting on a covenant allows the contractor, such as a lender, to demand early repayment of the outstanding balance or deny the company access to further funding or services. Asset management firms need to be intimately familiar with the terms of their contracts and clear about how the contractor interprets the various clauses and covenants. From there, firms need to assess which covenants they’re likely to breach, if any, over the coming weeks and months. Armed with that knowledge, they have the option of negotiating longer payment terms with vendors, for example, or negotiating a debt service holiday or covenant relief.
 
Asset management firms may also be on the receiving end of such inquiries from portfolio companies, businesses and individuals with whom they have outstanding loans. As such, it will be increasingly important to pay close attention to whether their clients are in breach of any covenants, and thus should have access to services or funds curtailed.
 
When it comes to investment portfolios, one issue that asset managers are monitoring is issuers of collateralized loan obligations (CLOs) and their appetite to extend capital or activate covenants to leveraged mid-sized and large business borrowers that have experienced severe disruption from the global pandemic.
 
To learn more, view our insight: Middle Market Businesses Need a Plan to Weather the COVID-19 Crisis.

A. Asset management firms have seen significant operational disruption as a result of the COVID-19 pandemic. Most employees are now required to work remotely, and clients are turning to mobile apps and online channels to review investment portfolio information. Client consultations with asset managers are also being conducted by phone and videoconferencing, which is a preferable method to in-person meetings for most clients at this time, even though many bank branches remain open.
 
As a result, clients’ comfort with conducting transactions in a digital environment will accelerate. For years, asset management firms have seen fintech companies as a potential competitive threat, and this will only intensify in a post-crisis business environment. To capture new business opportunities, acquisition of fintech firms or the development of proprietary digital technology will be a primary growth driver for asset management firms. For example, in February, Morgan Stanley announced plans to acquire E-Trade in an effort to expand market share and attract new customers. This is a prominent example of how longstanding asset management firms have already started to adapt to industry disruption and competition from the fintech industry, and they are adopting digital transformation more broadly.
 
To learn more, view our insight: Managing Your Risk During the COVID-19 Crisis.

A. Asset management firms with no more than 500 employees may be able to leverage some aspects of the economic stimulus packages passed by the federal government. In particular, for small businesses, the CARES Act includes two disaster loan programs—The Paycheck Protection Program (PPP) and the Emergency Economic Injury Disaster Loans (EIDL) program. The PPP is a forgivable loan program that significantly expands which organizations are eligible for Small Business Administration (SBA) loans. For organizations facing financial strain as a result of COVID-19, these loans can help offset a variety of costs.
 
The CARES Act also provides funds for the EIDL program, and it makes several changes to this program, which is available to businesses and nonprofits of all sizes in a declared disaster area. Currently, all 50 states, the District of Columbia, Puerto Rico, Guam and the Northern Mariana Islands have all been declared disaster areas for purposes of the EIDL Program. These loans are processed directly through the SBA. Asset management firms can apply for loans under both SBA programs, as long as they don’t cover the same expenses.
 
Employers who don’t take advantage of the PPP would be eligible for a 50% credit on qualifying wages paid to employees between March 13 through December 31, 2020, if they either:

  • Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19; or
  • Experience a significant decline in gross receipts during the calendar quarter, relative to a comparable quarter in 2019.

All employers are eligible to defer their social security tax liability due March 27 through the earlier of PPP loan forgiveness, if applicable, or December 31, 2020.

In addition to these loans, the CARES Act also includes a number of tax savings opportunities, including the Employee Retention Credit, AMT credits, net operating loss carrybacks and tax-deductible charitable contributions.

While there are many opportunities available in the stimulus bills, eligibility for some provisions is dependent on company size and other factors, and many benefits are mutually exclusive or have other implications. Given the level of complexity in deciding which relief measures to pursue and in securing them, it is critical for organizations to consult with professionals in order to maximize their savings and direct relief where it will matter most.

It’s also important to note that asset management firms with an international presence should look at what additional opportunities maybe available in the countries in which they operate.
 
To learn more, view our insights: Breaking Down the CARES Act’s $500 Billion Economic Stabilization Plan and CARES Act Aids Employers Who Continue to Pay Employees.

A. Under normal circumstances, asset management firms are uniquely able to assess risks and proactively position portfolios to prevent or minimize loss accordingly using a methodical process. However, due to the many challenges of the COVID-19 pandemic, asset managers have to make decisions based on constantly changing information, and thus they should update their short-term risk profile based on the unique nature of their business. While their techniques for evaluating risk may be sound, honed through decades of experience, they also rely on third-party vendors and other services to share accurate and timely information to inform these decisions.
 
It’s critically important then for asset managers to understand the unique risk profile and operational challenges associated with their third-party vendors. One of the proven ways of designing an action plan to mitigate risk is to conduct a business continuity risk assessment, which should review numerous areas including supply chain disruption, cybersecurity threats and more. This should also include an evaluation of all third-party vulnerabilities. Scenario planning for a range of circumstances can also help identify potential risks for the medium term that may not yet be apparent.
 
For firms invested in alternative asset classes such as private equity (PE), asset managers should proceed with caution. Both at the fund level and at the portfolio company level, changes in cash flow and deal activity can present significant risks, particularly due to uncertainty around the pandemic’s duration. From a deal perspective, the associated disruption to revenue and earnings, as well as uncertainty about projected performance, has negatively impacted valuations.
 
In the longer term, asset management firms must enhance their ability to anticipate risk before the next crisis occurs. They can use the current crisis to analyze their business’ resilience in its day-to-day operating environment and identify areas for improvement.
 
To learn more, view our insight: Determining Your Infectious Disease Risk during COVID-19 Outbreak.

A. Cybersecurity is a vital concern in a largely digital economy. For this reason, safeguarding against cyber threats is more important now than ever before. While businesses scramble to respond to the COVID-19 outbreak, the rate of telecommuting has increased dramatically, potentially increasing the number of network entry points. Cybercriminals have also become more aggressive, probing to exploit any vulnerability and leverage new attack vectors. More than ever, it is imperative to take the necessary steps to monitor and protect against cyber threats.
 
Strong access controls ensure that only those who are authorized can access sensitive data, while audit controls track access to systems. Intrusion detection systems also monitor traffic across the network and raise alerts about any suspicious activity, making it possible to stop cyber threats as they arise. A cloud VPN for employees can provide secure access to the organization’s network and shared files and encrypt all data. Two-factor authentication further strengthens these protections. Internal threats are also a significant concern, but these can be mitigated by audit controls and intrusion detection. Staff should also be trained to identify any suspicious activities, such as phishing emails, and promptly report these to the IT department.
 
Faced with a litany of potential threats and limited resources, asset management firms and their portfolio companies can benefit from threat-based cybersecurity. This approach identifies the most common attack vectors and focuses security efforts on protecting aspects of the network that are most likely to be targeted by threat actors. Firms should also review their cyber insurance policy to understand coverage and the potential costs of filing a claim. Lastly, firms must develop, review and update incident response and business continuity plans as necessary, in order to remain responsive to emerging threats and vulnerabilities during a changing business climate.
 
To learn more, view our insights: Top Cybersecurity Recommendations Amid COVID-19 and COVID-19 Data Security.

A. In response to the COVID-19 pandemic, governments around the globe have taken action to provide both companies and individuals with tax relief designed to increase cashflow and help companies continue to employ their workers. In the U.S., the CARES Act addresses the economic impacts of COVID-19 and includes a number of tax relief options.

The CARES Act includes payroll tax credits for employers that have been impacted by COVID-19 but have retained their employees, and it permits employers to defer payment on the employer portion of Social Security tax that would otherwise be due at the end of this year.

Additionally, the CARES Act accelerates the refund schedule for corporate AMT credits, which are now fully refundable for either the 2019 or 2018 tax years. The CARES Act also allows businesses to utilize net operating losses (NOLs) generated in prior years to offset 100% of taxable income for tax years 2019 and 2020.

While there are many tax savings opportunities included in the CARES Act, eligibility for some provisions is dependent on company size and other factors, and many benefits are mutually exclusive or have other tax implications. Given the level of complexity in applying these provisions, it is critical that organizations consult with tax professionals in order to maximize their savings and understand the long-term impacts of their tax strategies.

Outside of the existing stimulus measures, asset management firms should also consider tax relief measures that predate the COVID-19 pandemic. If firms are working to develop, improve and adapt products and processes, they may be eligible for Research & Development tax credits from federal and state authorities.
 
To learn more, view our insight: A Global Tax Tool: COVID-19 Fiscal and Financial Measures to Support Businesses and Individuals.

A. The impact of COVID-19 is leading to more conservative valuations, a tightening credit market and investors taking a more cautious approach. Fundraising is also tougher in this new environment. EBITDA (earnings before interest, taxes, depreciation and amortization) calculations can only be considered on a case-by-case basis given that the specific impacts are unique to the respective industries, markets and regions. 
 
Estimates vary about the impact on PE buyout multiples relative to EBITDA, but many foresee a conservative turn from previous norms. Consequently, limited partner investors may have more positive opportunities as buyout fund valuations are expected to drop. During this downturn, which is the worst since the Great Recession of 2008, PE buyout distributions are expected to decline in size and frequency.
 
To learn more, view our webinar: 2020 Private Capital Outlooks: M&A, Shifting Strategies & Capital Deployment.

A. The Securities Industry and Financial Markets Association (SIFMA), a leading trade association for broker-dealers, investment banks and asset managers, communicated to the National Governors Association that it was vital that some of their members be exempted from shelter-in-place orders so they can continue to work on-site. Failure to do so, SIFMA warned, would “negatively impact market operations.”
 
To that end, banks—many of which have asset management divisions—are deemed ‘essential businesses,’ meaning that branches are able to remain open during the COVID-19 pandemic. To minimize the risk of the virus’ transmission, banks have been encouraging customers to use drive-through facilities to conduct routine business transactions and to make appointments to avoid crowds gathering in common branch areas, such as lobbies.
 
For locations that remain open to offer asset management services, the Occupational Safety and Health Administration (OSHA) has provided recommendations and descriptions of mandatory safety and health standards to prevent the spread of COVID-19, based on traditional infection prevention and industrial hygiene practices. For more information, OSHA has published a resource: “Guidance on Preparing Workplaces for COVID-19.”
 
Banks and other financial institutions should also refer to federal, state and local government requirements to inform social distancing and remote working protocols at branches. For example, San Francisco mandates that workers must work from home if they can do so and only be ‘on-site’ if they are unable to perform their job functions from home.
 
Furthermore, social distancing best practices include maintaining at least six feet between people, regularly disinfecting high-touch areas and having a stock of hand sanitizer available to promote personal hygiene. Various shelter-in-place orders throughout some states also help to reduce foot traffic as citizens are required to stay indoors unless they have a justifiable reason or extenuating circumstances.