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Steward Quarterly Highlights 2nd Quarter 2020

Steward Quarterly Highlights 2nd Quarter 2020
Private Markets | Emerging Firms | Talent and Trends
Welcome. We are pleased to share this inaugural issue. We have curated a collection that we hope you will find informative.

Themes This Quarter
Excerpts from our conversations during this unprecedented quarter…
“Essential” Defined. While business attire hung deep in the closet through months of sheltering in place, innovation accelerated secular changes with a focus on essential services — condensing what may have been ten years of innovation into the next few. Private equity middle-market investing often gravitates to the word “essential”, a differentiator from public markets that support a greater percentage of fashionable, themed businesses. Some public new economy companies such as AirBnB and Uber along with entertainment and gig economies were forced to virtually shut, following the worsening health trajectory. Investors now have a deeper appreciation for the benefits of investing in the most essential sectors including healthcare, technology, education and supply chain management. 
Digital transformation themes propelled more than just the K-to-12 crowd’s home learning. Technology adoption quickly facilitated remote healthcare, new media, social movements, workforce management and safety protocols. Better capitalized companies, as well as those that were able to pivot workflow and services, were best positioned to continue working, keeping their workforce intact with relative productivity.  
Cash Creates Kings.  Acquisitions that might not have otherwise occurred are expected as better capitalized contenders not only survive but thrive. On the horizon is a future of reduced competition and heightened pricing power, ultimately widening margins. 
The next two quarters are expected to provide greater transparency on the actual valuation re-set. Small-buyout strategies and middle-market growth equity often benefit from lower levels of leverage and flexible work forces. That being said, concentrated customer bases and sponsors with smaller warehouses of dry powder will create winners-losers. This period has provided investors with the advantage of a live stress test and ample add-on supply.
“A downturn can be a very good time to build a company…the parvenus and pretender are gone.” Michael Moritz, Sequoia Capital
Financial services experienced heightened respect not seen since pre-2008. The rapid onset of the PPP (Paycheck Protection Program) and loan forbearance have temporarily supported cash flows but reserves and workouts are expected to increase through the balance of the year. Moody’s reported a larger expectation of loss-given-default following a decade of credit expansion. This time, however, the U.S. banking system is armed with ample reserves, having retooled since the last recession.
Price discovery will continue to roll out for the balance of the year. The greatest uncertainty is within real estate and consumer-exposed equity and debt. The monthly wait-and-see cycle will continue as the early rounds of stimulus wane and the remote workplace transition impacts real estate demand and transportation. Localized regulatory actions may drive uneven outcomes as selective rent forbearance policies are put in effect. While capital markets continue to gyrate, many appetizing transactions at attractive multiples, not seen for many years, are expected to materialize. The question is, which investors will feel emboldened to act earlier, facing the risk of a further worsening of the health trajectory?
Leaders, Stakeholders, Employees. ‘Values’ trumped enterprise valuations as CEOs, reacting to short-term shocks and health risks, took care of their people first. Leaders focused on how to support high performing teams during rapid changes to operational workflows and explored new depths to the conversation around safety and bias. Resilience and grit were tested this quarter. In this time of a deeply felt re-evaluation of bias and diversity, we remain proponents of the drive for an inclusionary world.
“The best memorial we can build for those who lost their lives… a greener, smarter, fairer world.” Kristalina Georgieva, IMF
For our part in this transformative environment, we remain focused on identifying talented, high-performing managers seeking capital to launch their Fund I. We look forward to your participation in creating these opportunities. Wishing you and yours well during these challenging times.  
Firm News
Erin Shippee, Chief Operating Officer. We are pleased to welcome Erin Shippee as our Chief Operating Officer. Prior to joining, Erin was Managing Director at RBC Capital Markets in New York with operating responsibility across the platform’s multi-billion dollar fund of funds business. “We’re so pleased to have Erin join our team,” said Christine Egan, Partner at Steward Asset Management. “She brings a broad operational skill set and fiduciary mindset to meet our limited partners’ needs. Our team has worked with Erin as a counterparty over many decades and appreciated her dedication and knowledge.” Erin received a B.A. from Boston College and holds a Chartered Alternative Investment Analyst designation.
David Reiss, Principal, Fund Diligence & Execution. We are excited to welcome David Reiss to the investment team. Prior to joining, David was a Founder and Principal at Brookville Advisory, a specialist in credit-distressed investments. He will be a member of Steward’s investment committee and manage transactions from due diligence to execution. “We’re so pleased to have David join our team,” said Sheryl Mejía, Founding Partner at Steward Asset Management. “He brings broad knowledge of the capital markets with a deep expertise in credit and opportunistic strategies.” David first met Steward team members during his tenure at Bankers Trust Company. David holds an MBA from the Wharton School and a BA, Mathematics, from the University of Pennsylvania.
Thank You
Thank you to SEO for an inspirational early March SEO AICON conference. Special thanks to members of their leadership, William Goodloe and Julian Johnson. They honored Private Equity Women’s Network co-founder, Kelly Williams, with the well-deserved Reginald F. Lewis Award for leadership. 
Thank you also to AIF Global, the AIF Women’s Investor Steering Committee and leaders Brant Maller and Melissa Waller for awarding Sheryl Mejía a Trailblazer Award. The award ceremony was part of AIF Global’s New York conference in January 2020 which celebrated 15 years of delivering thought provoking content to the largest pension investors in the world.
What the Steward Team is Reading
“Economic Impact of COVID-19.” Linneman Associates. Dr. Peter Linneman, Founding Chairman of the Real Estate Department at the Wharton School, at the University of Pennsylvania.  Dr. Linneman contrasts the March to May economic change with a focus on the impact of real estate.
“It’s Time to Build.” Marc Andreessen.“It’s time for full-throated, unapologetic, uncompromised political support from the right for aggressive investment in new products, in new industries, in new factories, in new science, in big leaps forward.”
“Texas Teachers Emerging Manager Program Beats Benchmarks.”  Pensions & Investments. The program known for an overweight to private equity, real estate and opportunistic strategies celebrates its 15th year as well as over 1,800 attendees to its annual conference in February.
“XaaS, Everything as a Service, in 2020 Trends to Watch.” Deloitte provides a summary level overview of trends in the digital transformation.
“Core nutrition trends in 2020 and beyond demand more from innovators.” Natasha Spencer. Changing face of global nutrition involves food tech and provenance, the new look at an essential service while facing a supply disruption. Agriculture and aquaculture themes are emerging in infrastructure and real asset investing.
“CIO Conversations with Betty Salanic.”  Accelerate Investors. Angela Miller-May, CIO of Chicago Teachers’ Pension Fund, shares her thoughts and perspectives on switching career paths, preparing for the next recession, and investing globally. 
“Diversity and Inclusion Report.” CFA Institute works with the industry to help firms create high performing teams, improved business outcomes and conclude that leaders believe values=business outcomes.
“Don’t Panic.”  Akshay Mehra. Comments to private equity leaders and a good comedic read around managing relationships with portfolio companies. Akshay quotes Paul Graham: “If we’ve learned one thing from funding so many startups, it’s that they succeed or fail based on the quality of the founders.”
Steward Asset Management anchors newly forming private equity and opportunistic fund managers, whose strong track record demonstrates the potential to continue generating attractive returns. While maintaining a focus on the long-term partnership, we seek to accelerate the first close of Fund I and Fund II while reserving future capacity for our Limited Partners.  Visit our website.
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