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Steward Quarterly Highlights 2nd Quarter 2021

Steward Quarterly Highlights 2nd Quarter 2021

Themes This Quarter
A convergence of changes is altering the investing landscape. It is our pleasure to share some of our mid-year themes along with visibility into the US Middle Market. We highlighted many of these themes during the Hispanic Heritage Foundation’s Investor Forum “Evolution of the Private Markets.”  
8th Annual Investors Forum - Evolution of the Private Markets
8th Annual Investors Forum - Evolution of the Private Markets
At the center of the convergence is the shifting logistics of people and goods. Below the surface, a new intensity of capital is being felt during the rebuilding of inventories and technology. Input prices, employee migration and cultural shifts make the next chapter even more complex. Even traditional industries are adapting to global political, economic and cultural imperatives. 
“There is such power in listening deep…A workplace which embraces this with courage will flourish with diverse perspectives, genuine empathy, improved understanding and unbridled energy to spark positive action.”
Nicole Perkins, Author, Former Leader at Hawthorne-PNC
Onshoring supply chains. Complex supply chains and upside pressure on raw material pricing have sent corporate leaders and policymakers back to the drawing board to ensure redundant supply for components and materials. The technology industry, in particular, has become acutely aware of the dependency on hot spots in Asia for specialty components. Additional localized US domestic production is expected to accelerate to meet the demand for new primary or secondary suppliers.
Companies are staying private longer. By remaining private, companies enjoy a window during which they take strategic steps with a longer-term focus on growth and sustainability. Private equity dry powder plays a vital role in these changes, especially as they bring an experienced playbook in order to make bold and deeper adjustments. We anticipate that the more than 200,000 companies within the US Middle Market will continue to use this advantage to gain market share.
The retreating distressed market. Forecasts for a robust distressed debt market in 2021 have evaporated. Classic asset-rich reorganization opportunities did not materialize to the extent expected due in large part to successful policy coordination. Credit levels remain high, and servicing still relies on the continuation of low rates. That said, the bankruptcy of Katerra, a disruptive construction tech startup, added to the growing number of venture-backed deals heading for protection.
Softbank’s Vision Fund, an investor in Katerra, found itself in trouble as the company faced delays and cost overruns. The road to becoming a venture darling offers many detours and off-ramps for the majority that fail to reach the exponential growth required to continue venture funding. Bankruptcy can often be averted if a loyal customer base has been established and attractive growth opportunities are still in sight. In this case, the opportunity is ripe for new investors, such as Small Buyout managers, to step in and clean up the disparate and dissatisfied investor base while steering towards new strategic goals with less ‘burn’.
Return of the mega-deal. This quarter marked the largest leveraged buyout in a decade. Medical supply company Medline was acquired by a consortium that included Blackstone, Carlyle and Hellman & Friedman for more than $30 billion. This is also an example of friendly competitors collaborating to transact at bigger deal sizes. Blackstone and Starwood teamed up to purchase Extended Stay America, a hospitality company and REIT for approximately $6 billion. The continuation of inexpensive financing markets and significant dry powder presages more mega deals to come.  
Commodity price instability. We expect pricing pressure will lead to a greater focus on efficient and sustainable practices to manage scarce resources. Gyrations in lumber, iron ore, crude oil and copper prices are expected to translate into margin volatility and stimulate innovation in industrial processes. The ongoing shortages and price spikes may worsen as a result of the proposed infrastructure legislation. There is increasing skepticism about whether these inflationary pressures will be transitory or ultimately put upward pressure on rates.
Labor and corporate migration. The surge in work-from-home allowed families and companies to rethink their office configurations. Inbound migration to states like Texas and Florida has expanded centers of excellence across sectors. In combination with global corporate tax harmonization, the mobility of both talent and companies is uprooting corporate footprints. The second-order effects are just starting to be felt and will cause further shifts in demand for services and infrastructure.
America has always been and will always be a work in progress. Every generation has contributed and must contribute to that ongoing progress.
Vartan Gregorian, 12th President of the Carnegie Corporation
Firm News
In April, Jordan Selleck, host of the “Investors and Operators” podcasts, interviewed Steward’s Managing Partner, Sheryl Mejia. They covered a lot of ground, including the formation of Steward and the inefficiencies in the funding markets for teams spinning out as founders.
Congratulations & Thanks
Thank you to Emerging Manager Forum (USA) for an engaging conversation around “The Debut Fund ESG Advantage.” Panelists included Chavon Sutton of Cambridge, Sonia Kowal of Zevin, Sheryl Mejia of Steward and Cate Faddis of Grace Capital. Key takeaways included the importance of an ESG toolbox to prevent long-term value erosion.
Thank you to the leadership of Hispanic Heritage Foundation’s Investor Forum which took place in May. Featured speakers included CIOs Rodrigo Garcia of Illinois State and Rodney June of LACERS, as well as trustees Cynthia Ruiz of LACERS, Henry Jones of CalPERS, Ophelia Basgal of ACERA and Jose Antonio Tijerino of University System of Maryland Foundation and numerous other notable institutional investors.
What We Are Reading
New Providence Capital Ideas Series. Innovation is the New Moat. Rob Inches and John Paduano detail their analysis on the need to change traditional investment frameworks to capture the impact of innovation as an increasing source of value. They underscore the complex and necessary task of valuing intangible assets.
New York Times, The DailyThe Unlikely Pioneer Behind mRNA Vaccines. The story of Dr. Katlain Kariko’s persistence in pioneering the mRNA COVID-19 vaccine includes years of rejection and her staunch belief in her work.
The Drawdown.  In conversation with Hamilton Lane veteran Paul Yett, Krystal Scanlon discussed his tenure collecting and evaluating ESG information at the firm and fund levels.
Financial Times. Measuring What Matters: The Scramble to Set Standards for Sustainable Business. Among the proliferation of competing metrics and acronyms, companies and investors are beginning to see the light at the end of the tunnel for more consistency. 
Philadelphia Business Journal. Difficult Conversations in the Workplace.  Nicole Perkins details her experience writing a raw and open letter to her team and opening up in the workplace. 
Connected RE Magazine. Katerra Files for Bankruptcy Protection.One of the largest investments by the Softbank Vision Fund team files for bankruptcy, causing a healthy awareness for all venture-capital investors.  
About Steward
Steward Asset Management is an anchor investor to private equity teams approaching their first institutional launch.  We utilize strategic anchor partnerships to build diversified portfolios of private equity and opportunistic strategies. Our lens focuses on strategies that address innovation and disruption in the healthcare, consumer, industrial and technology sectors in the US Middle Market. 
In the attractive small fund universe, funds under $1 billion, Steward’s anchor partnership approach unlocks additional return potential by seeking to generate GP participation. Steward serves as a catalyst for founders while providing support and guidance. These features are unique to the Steward program and includes a focus on alignment and diversity.
Headquartered in New York City, Steward’s competitive advantages include a deep pipeline of talent, proprietary assessment tools, experience negotiating terms and extensive relationships within the emerging manager investor community. The team has an accomplished track record of deploying capital to smaller and diverse asset managers. 
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