Steward Quarterly Highlights

By Steward Asset Management - Institutionalizing Anchor Investing

Steward Quarterly Highlights 3rd Quarter 2020



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Steward Quarterly Highlights 3rd Quarter 2020

  • Building momentum in the heart of innovation, the US middle market, is being strengthened by creative solutions and aligned public-private partnerships.
  • Sector expertise is at a premium to navigate post-Covid-19 opportunities and execute revised business plans.
  • The size and sophistication of CLO managers has disintermediated distressed managers for now.
  • Firm News & What We’re Reading
Themes This Quarter
Building Momentum. With the acute focus on divestitures and durable capital structures dissipating, the spotlight is turning to post-COVID-19 opportunities. Policy will provide critical support to this next leg of growth, but how we rebuild will determine secular growth trends and ultimate success.
Areas most disrupted in the past few months—entertainment, real estate and travel—will likely provide the deepest long-term value opportunities. We anticipate near-term returns linked to accelerating trends around locally-sourced consumption, digital content, cybersecurity and life sciences. This will be further supported by the lagging replacement and upgrade cycles expected to bounce back over the next five years, potentially creating trends reminiscent of the roaring 1920s. 
Locally-sourced consumption has impacted the way communities and industry niches organize. At the same time, the health of metropolitan hubs and urban centers of innovation is waning as they experience rapid out-migration trends seeking less dense environs. Bold solutions are also emerging in new job creation, which is most pronounced across Steward’s primary market, the US middle market. Our focus on innovation and value creation will be central to these evolutions.
Sector Expertise and Adaptability. As 2019 business plans quickly became obsolete, the focus has turned to tapping professionals with the deepest sector expertise in business partnerships and re-engineering supply chains.
We are experiencing an in-sample stress test as companies and their private equity partners pivot their planning, protocols and logistics. Many of our pre-fund I emerging managers face bifurcated valuations as they seek post-COVID-19 opportunities. Dislocation has resulted in regional and sector-specific distress. Steward and its pipeline of managers are fortunate to be deploying with full aperture, without legacy distractions and towards areas where clarity can only improve. 
Efficiency, diversity and sustainability are key ingredients for longevity in this resumption of growth, whether these qualities pertain to materials management, workers’ safety, healthcare delivery, food supply or localized value-chains. Recency biases will leave short-term scars as we remain cautious in the return to normalcy. Our long-term expectations are bullish as we capture this once-in-a-decade opportunity to buy at reduced multiples amid the transformation.
“We have a huge opportunity here to rethink everything for the better. So not to build back but to build forward.”
Christiana Figueres, Founder, Global Optimism, and former UN Climate Negotiator
Complex Puzzles. Community resilience is challenged with concurrent crises, some of the largest of our time, creating complex challenges. From social inequalities and uneven access to essential services, to power outages, volatile weather patterns and the need for sustainable practices, progressive solutions are in demand. We also contemplate 400 years of poorly-implemented racial integration and social unrest at a time when US unemployment claims hit 25 million and quarterly GDP is at a 40-year low. Consequently, these issues continue to place risks on the most financially vulnerable population.
 Many political leaders have been working tirelessly through this time demonstrating unparalleled empathy for both their public constituents and the private sector as they support workforce engagement through the struggle. It is our hope and vision that the vicious cycle of problems turns into a virtuous circle of collaborative solutions that harness public-private partnerships to build productively forward.
CLO Managers Flex Their Muscle. CLOs thrived following the 2008-09 Great Financial Crisis, which led to a steady stream of issuances and fueled significant market growth. Today, many attractive stressed credits are being re-underwritten, extended and retained by behemoth CLO managers, which has stemmed the flow of deals to event driven and distressed funds. The pressure for CLO managers is to stay ahead of over-collateralization tests, which would divert cash to senior debt tranches. This doubling down poses an increased risk to the health of the insurance industry due their strong participation over the last decade. That being said, CLO managers have so far weathered the first leg of the storm relatively well, bringing resources and capital to selectively support and restructure at-risk holdings.
From our viewpoint, newly-forming opportunistic distressed funds are facing a near-term smaller menu of options. If conditions worsen, which we anticipate in specific sectors, the supply of deals for event driven and distressed strategies will be abundant. Currently, we are evaluating opportunities in real estate, consumer credit and transportation. We are also bracing for a larger opportunity set and are beginning diligence with tenured teams that stand ready to deploy their ‘inverse’ smell test and create value.
Firm News
Leroy Cody has assumed an executive role as Head of Business Development, moving over from his role as an Advisor/Operating Partner. He leads our efforts with Steward’s Limited Partners and strategic relationships.
As well, the Steward team invites readers to reference our ESG Framework, which we hope will provide guidance to others. It will continue to drive consistent authentic engagement on important long-term issues.
Steward welcomes three new Advisory Board Members
Milton Irvin brings perspective from a long career in financial services. Notable financial leadership roles include Salomon Brothers where he became the first African-American Managing Director. He has also served as chair of the Advisory Committee to the Pension Benefit Guaranty Corporation. 
Alhadi Alwazir brings experience in capital markets as well as principal investing, most recently as a partner at Eastgate Capital Group’s private equity and real estate practice. Currently, he is a Partner at Bio-nAbler, a life-science investment and advisory firm. 
Steve Marks, a long-standing alternatives investor, is focusing efforts as a Partner at WhatIF 88, a group of experienced Wharton alumni with a focus on social impact, corporate governance, due diligence, and advisory services.
Notable Events & Recognition
Invitation. Please join the discussion on September 30th (1pm EST) “LPs Discuss: Fund Due Diligence During the Pandemic & Beyond”. Sheryl Mejia of Steward will be joined by David Enriquez of New York City’s Bureau of Asset Management and Jeff Weston of Arizona’s Public Safety Personnel Retirement System. Registration is complementary of PEI Buyouts. Register here.
We look forward to participating as an expo sponsor of WAVE’s 2020 Women in Alternative Investment Virtual Career Forum on November 10-13. We invite you to join as a sponsor to support their worthy cause. Please reach out to Wave Coordinator, Danielle Fraser.  The WAVE forum provides a unified platform to encourage women to lean into careers in the Private Equity and Venture Capital business. Registration details.
Many thanks to the New America Alliance for hosting Hispanic asset management leaders in conversation with some of the most innovative emerging and diverse US pension investors in August. Solange Brooks is an inspiring addition to NAA’s leadership, joining from CalSTRS where she was renowned for uncovering private equity Fund I talent. Notable on the call was Milton Berlinksi of Reverence Capital, now investing Fund II, when he discussed how a financial services portfolio company pivoted during the Covid-19 crisis to becoming a leading PPP provider. Bravo to the Reverence team.
Also thank you to Winston & Strawn’s Eva Davis for hosting an engaging conversation with three pre-launch managers on July 22. Please enjoy the replay
What We Are Reading (& Tuning Into)
IFC Insights, World Bank Group, Mohamed El-Erian: How to Rebuild from the Shock of COVID-19. “In the new world, the initial conditions have changed. Now, it’s not a predestined world, because we can change things with good policies…We’ve got to do all we can to make sure that the productivity of labor isn’t hit in a major way. On the capital side, we have an opportunity to modernize and improve our infrastructure. Then we’ve got to bottle up the good things that are emerging from this crisis. Better private public-partnerships is an example.”
Barron’s interviews Yasir al-Rumayyan: Inside Saudi Arabia’s $360 Billion Investment Fund. “The pandemic is not going to last forever. It’s something that will eventually end, just like any other pandemic in the history of mankind. That’s why we started deploying funds into not only the U.S. markets, but also in global markets. These markets were really going down to levels unseen in a long time. And we started buying in. And we went into these investment opportunities in three different ways: opportunistic, strategic, or for rescue financing. We’re not your typical financial investor. We bring value, not only to the companies that we’re invested in, but also to the companies [in Saudi Arabia]. We always like to enhance the performance of our companies, while catering to the development in Saudi.”
Cambridge Conversations: Jasmine Richards, Head of Diverse Manager Research at Cambridge Associates. “Our primary goal is to find managers who can deliver excess returns. One of the areas where Cambridge has been most successful in doing that is identifying and investing in first, second, third-time funds. That dovetails perfectly with what the diverse manager universe looks like at this point, with many diverse firms tending to be newer and smaller. This is a way for us to keep the pipeline of ideas in our portfolios fresh and allows us to get into opportunities early and continue to grow with managers over time.”
Barron’s: Main Street Deserves Access to Private Equity, Too. “For various reasons, many companies are opting to remain private rather than offering their securities on the public markets… As a result, if 401(k) plans were prevented from investing in private equity, America’s workers would be denied access to a significant portion of the market.”
Blackstone’s Jon Gray interviewed by Talks with GS. Themes driven by the historic dislocation in markets brought on by the pandemic are behind Blackstone’s investment strategy moving forward. He provides evidence for the stepwise function in innovation that we’ve just experienced.
Tide Ten Conversation: Daniel Ingram, SVP for Responsible Investment Research and Consulting at Wilshire Associates, interviewed by Ron Falls Jr. of Post Advisory Group. Best practices include considering the benefits and costs of economic and social disruption separate from risks such as climate change. The S, social considerations, have historically had an element of judgement and values-based investing. The new view of the ‘S’ includes employee health and safety as well as supply chain disruptions that brought the risks closer to home.
Pulse by Ed Yardeni: Another Roaring Twenties May Be Ahead. The Roaring 1920s could be a precedent for the Roaring 2020s. World War I was followed by the Spanish Flu pandemic of 1918, which infected an estimated 500 million people…a 28% infection rate and nearly a 3% death rate. During that period assembly line innovation boosted productivity in many manufacturing industries, including the processed food industry. Refrigerated railroad cars and in-home iceboxes meant that vegetables were available in winter. Technological innovations are driven by the profits that can be earned by solving the problems posed by scarce resources. The current high-tech spending on IT equipment, software, and R&D rose to a record 50.1% of total capital spending in nominal GDP during the (2nd) quarter underlining innovation in process. ”
About Steward
Based in New York, Steward is an anchor investor to emerging private equity and opportunistic managers as they prepare to launch fund I. Steward focuses on the US private equity middle market with an emphasis on healthcare, consumer, industrial and technology verticals and at times combines complementary allocations to real assets and opportunistic strategies. Our value orientation screens for teams with a strong track record of working together and exhibit a fiduciary lens, leadership diversity, repeatable process, scalable strategy and limited use of leverage.  
The inefficient landscape of fund I anchor capital sources provides an opportunity to widen the funnel of talent while being early and influential with fund allocations that generate GP-carry participation to the benefit of our separate accounts and commingled portfolios.
Steward allocates to the first close of Funds I and II while reserving capacity in Fund III and beyond for our limited partners. We are institutionalizing the anchor capital landscape by efficiently bridging the gap between new firms and institutional limited partners through alignment on key standards. Our long-term focus seeks to steward the next generation of alternative asset managers.  
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