NEWSLETTER of March 31, 2023

The following content has been added at finexpert:

Deloitte
2023 INSURANCE OUTLOOK
In recent years, most insurance companies have proven to be extremely flexible and resilient in the face of current global challenges. Internal systems and competencies have been improved. The implementation of agile working and technology strategies has also proven its worth. But how prepared is the insurance industry to face all the new challenges by 2023 (and beyond)? >more

Nuveen
2023 GLOBAL INSTITUTIONAL INVESTOR SURVEY
Institutional asset owners are reframing the future and preparing their portfolios for a market regime that differs dramatically from recent decades. These efforts are being driven by monumental shifts in monetary policy, rising geopolitical uncertainty, energy transition and many other forces disrupting the investment landscape. Our third-annual research survey of 800 global institutional investors uncovers new insights into how investors expect to achieve their investment objectives. >more

BCG
THE M&A WINDOW IS WIDE OPEN—FOR NOW
The current moment may be the best time in years to pursue transformative deals that radically accelerate your strategy and strengthen your competitive advantage. Valuations are down. And while the economic environment is uncertain, historically, downturn deals have outperformed. With so much dry powder on balance sheets — and so many companies aspiring to reinvent themselves to address critical megatrends, such as the imperative for digital transformation and the existential challenge of climate change and sustainability — deals will get done. And first movers will have the pick of the lot. >more

Lazard
2022 SECONDARY MARKET REPORT
The secondary market delivered a second consecutive year of estimated volumes in excess of $100B in 2022, continuing to prove itself as a highly relevant part of the private capital markets, irrespective of the macroeconomic environment. That is not to say that the market was immune from the macroeconomic and geopolitical disruption of 2022: volumes were down ~20% on 2021. This decline can be attributed to, amongst other things, bid/ask spreads on LP sales (as declines in the public markets increased the difficulty of assessing the fair value of private investments) and secondary firms increasing selectivity on GP-led deals after a substantial year of deployment in 2021. >more

ALIGNING INCENTIVES AT SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS: A PROPOSAL BY THE SQUAM LAKE GROUP
Martin N. Baily, John Y. Campbell, John H. Cochrane, Douglas W. Diamond, Darrell Duffie, Kenneth R. French, Anil K. Kashyap, Frederic S. Mishkin, David S. Scharfstein, Robert J. Shiller, Matthew J. Slaughter, Hyun Song Shin, and René M. Stulz
2023
To address the moral hazard problem that can motivate bank executives to take excessive risks and to fail to raise capital when needed, a group of 13 distinguished financial economists recommends that systemically important financial institutions be required to issue contingent convertible debt (CoCos) and to hold back a substantial share - as much as 20% - of the compensation of employees who can have a meaningful impact on the survival of the firm. This holdback should be forfeited if the firm's capital ratio falls below a specified threshold. The deferral period should be long enough - the authors suggest five years - to allow much of the uncertainty about managers' activities to be resolved before the bonds mature. Except for forfeiture, the payoff on the bonds should not depend on the firm's performance, nor should managers be permitted to hedge the risk of forfeiture. The threshold for forfeiture should be crossed well before a firm violates its regulatory capital requirements and well before its contingent convertible securities convert into equity. The Swiss Bank UBS has paid bonuses to its top 6,500 executives that have been structured in exactly this way. Management forfeits its deferred compensation if the bank's regulatory capital ratio falls below 7.5%, and its contingent convertible debt is set up to convert into equity if the bank's capital ratio falls below 5%. >more

HIGH-YIELD DEBT COVENANTS AND THEIR REAL EFFECTS
Falk Bräuning, Victoria Ivashina, and Ali K. Ozdagli
2023
High-yield debt, including leveraged loans, is characterized by incurrence financial covenants, or “cov-lite” provisions. Unlike the maintenance covenants in traditional loans, when triggered, incurrence covenants preserve equity control rights, and instead activate pre-specified restrictions on the borrower’s actions. Similar to the effects of the shift of control rights to creditors, the drop in investments under incurrence covenants is large and sudden. This evidence reveals a new propagation mechanism of economic shocks that works through contractual restrictions which are at play for a highly-levered corporate sector and become binding long before borrower’s default or bankruptcy. >more