Category Archives: Investment Banking

Hospital and Health System M&A: Q1 2024 Review

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M&A Volume Up in Q1 2024 vs. Q1 2023: $10 billion Target Revenues


The number of hospital and health system M&A deals announced in the first quarter of 2024 was significantly higher than in the same period in 2023: 18 announced transactions with $10 billion in total revenues for the targets vs. 12 deals in Q1 2023 with a total of $3.4 billion in revenues for the targets. The 81 deals announced in the last 12 months is the highest it
has been over the last few years, building upon the recent momentum of hospital and health system mergers, acquisitions, and divestitures across the country.

Other observations by the Cain Brothers M&A team:

  • Significant number of for-profit conversions to not-for-profit (e.g., divestitures by Tenet and HCA)
  • Significant number of divestitures by national systems to regional health systems
  • Accelerated closing timeline for 3 deals in CA: closed in 30-60 days — prior to new hospital merger review process going into effect April 1, 2024 in CA
  • Q1 2024 total volume of 18 transactions with $10 billion in revenues for targets vs. $3.4 billion for Q1 2023
    This quarter saw transformative deals that may reshape how healthcare is delivered, reflecting creative partnerships that continue to form in a changing healthcare environment. Academic medical centers continue to make investments in assets
    of high strategic value to expand their clinical, teaching, and research capabilities. Large regional systems were quite active, with large cross regional mergers and smaller strategic acquisitions. With the Consumer Price Index (CPI) holding steady with the previous quarter, alleviation of supply cost pressures will benefit health system financials and allow them to deploy more capital.

In early January, General Catalyst’s healthcare investment subsidiary, Health
Assurance Transformation Corporation (“HATCo”), announced its intent to
acquire Summa Health, one of the largest integrated health delivery systems in
Ohio. This announcement made waves in the healthcare industry, not just
because of the size of the acquisition, but because it is the first major health system
investment for newly formed HATCo. General Catalyst, a venture capital firm
formed in 2000, is known for its investments in global companies including Airbnb,
Warby Parker, Snap, and Kayak. General Catalyst launched HATCo in October
2023 as a vehicle to enable health systems to enhance technological health
capabilities, improve financial results, and assist in meeting the shift to value based care, creating a sustainable and quality-driven healthcare model for providers and patients.

Under the terms of the deal, Summa Health will become a subsidiary of HATCo
and transition from a not-for-profit to a for-profit corporation. A community
foundation will be formed to continue to invest in the social determinants of health
to enhance community outcomes in the Akron-Canton region. With its first
acquisition, HATCo aims to become a chassis for future acquisitions and growth
for General Catalyst. The deal is expected to close by the end of 2024.

Academic medical centers were active acquirers in the first quarter of 2024. On
the West Coast, two University of California systems announced acquisitions from
for-profit operators. In January, UCLA Health announced it is the process to
acquire West Hills Hospital and Medical Center from HCA. The 260-bed hospital
is located in the San Fernando Valley, north of Los Angeles, and will be UCLA’s
first acute care hospital in the area. In February, UC Irvine Health signed a
definitive agreement to acquire Tenet’s Pacific Coast Network, which include
four hospitals in Los Angeles and Orange counties (see below for transaction
multiples). The acquisition greatly expands UCI Health’s presence and inpatient
bed capacity to complement their flagship UCI Medical Center in Orange. These
deals come off the heels of two other University of California deals announced in
2023; UC San Diego Health’s acquisition of Alvarado Hospital from Prime
Healthcare, and UCSF’s announcement to acquire two San Francisco hospitals
from Dignity Health, further demonstrating the UC system’s mandate to grow and
provide greater access to care in California.


Further east, the University of Minnesota announced in February its intent to
reacquire the University of Minnesota Medical Center from Fairview Health.
The University of Minnesota Regents voted to support a nonbinding letter of intent
with Fairview that would provide the ability for the University’s eventual ownership
of the medical center by 2027. The University of Minnesota previously sold the
medical center to Fairview in 1997.


In January, Penn Medicine announced it intends to acquire Doylestown Health,
a single-hospital system in Bucks County, PA. The seventh hospital for Penn
Medicine, the acquisition of Doylestown Health follows a trend of expansion for
Penn Medicine, with the acquisition of Chester County Hospital, Lancaster General
Health, and Princeton Health all within the past 10 years. The transactions by
academic health systems this quarter continue to follow the trend of AMC
expansion through development of new entry points into their care network,
investments in community health, and developing the ability to expand their
teaching and research capabilities.

In addition to the sale of its Pacific Coast Network to UC Irvine Health, Tenet also
sold Sierra Vista Regional Medical Center and Twin Cities Community
Hospital to Adventist Health in California. The two hospitals, located in San Luis
Obispo County in Central California, were sold to Adventist Health for
approximately $550 million, implying a Revenue and EBITDA multiple of 1.6x and
14.5x, respectively. The Pacific Coast Network transaction to UCI Health
announced in February came with a $975 million price tag, reflecting a 1.0x
multiple of revenue and 13.7x multiple of EBITDA. These transactions follow trends
of Tenet’s strategic divestitures in high value deals and reflect a broader trend of
acquisitions of targets of high strategic value to health systems. It is worth noting
that part of the reason for higher multiples in these California transactions is that
buying is still cheaper than the high cost to build.


Regional expansion continued this quarter in the Northeast with Nuvance Health’s
announcement in February that it will be joining Northwell Health. With seven
hospitals in Nuvance and the largest in the State of New York with Northwell, the
organizations would merge to form an integrated healthcare delivery system of 28
hospitals, 15,000 physicians, and over 1,000 care sites. In July 2023, Nuvance
received a credit downgrade from Moody’s driven by weakened operating
performance and reduced liquidity. As stated by both organizations, the merger
also allows Northwell to expand into Connecticut while making significant
investments in Nuvance’s existing clinical care footprint.


On the other hand, a number of regional mergers in recent years have been called
off, including this quarter with the cancellation of the proposed merger between
Essential Health and Marshfield Clinic. Previously announced in July 2023, the
health systems formally ended merger discussions in January, determining that
the affiliation was not the right path for the organizations. Marshfield previously
paused merger discussions with Gundersen Health System in 2019.

There were also a number of single hospital acquisitions and tuck-in transactions for larger systems. Below are highlights of a few other notable transactions announced this quarter:

In February, St. Louis- based Mercy announced its plans to acquire Via Christi Hospital, its
related physicians and other ancillary healthcare locations from Ascension. 152-bed Via Christi
hospital will be Mercy’s third hospital in Kansas, as Mercy continues to grow westward. In 2023,
Mercy acquired SoutheastHEALTH followed by its acquisition of Hermann Area District Hospital.

In January, Northern New Jersey health systems, CarePoint Health and Hudson Regional
Hospital announced they are seeking to form a new combined entity that will merge the for-profit and not-for-profit hospitals together. Hudson Health System will be the new namesake of the four hospital system. Under the proposed agreement, two of the four hospitals will remain not-for-profit safety net hospitals. The unique arrangement comes after the New Jersey Department of Health confirmed that CarePoint was in financial distress and began to work with local government leaders on a solution. CarePoint executive leaders confirmed the arrangement with Hudson Regional will improve the organization’s operational and financial strength.

Also in New Jersey, Atlantic Health System announced in January its intent to merge with Saint
Peter’s Healthcare. Atlantic Health, located in Morristown, NJ, is a seven-hospital health system
with locations across New Jersey and Pennsylvania. Saint Peter’s Healthcare is a catholic not-forprofit system with a 478-bed flagship hospital in New Brunswick, NJ. The announcement follows a 2022 judgment by the FTC to block a proposed merger between Saint Peter’s Healthcare and RWJBarnabas Health, citing the deal would cause anti-competitive concerns with merging New Brunswick’s only two hospitals.

WellSpan Health signed a definitive agreement to acquire Evangelical Community Hospital, a
131-bed acute care hospital in Lewisburg, PA. With the pending acquisition, the hospital will
become WellSpan Evangelical Hospital and will continue to serve the Central Susquehanna Valley. WellSpan is an eight-hospital system, serving six counties in Pennsylvania and two counties in Maryland. The deal is expected to close in July.

Each quarter, health system acquirers typically cite the need to grow and the desire to enchance clinical outcomes as motivating factors for deal activity. On the other hand, as we are seeing play out in real time, financial challenges area key driver of M&A for sellers. California-based Pipeline Health faces financial challenges as it retrenches its existing portfolio. In late 2023, Pipeline exited the Texas market driven by unsustainable financial losses. This example highlights the need for health systems to match mission-driven growth objectives with the reality of a harsh and volitile operating environment.


Portfolio rationalization, AMCs with the capital to make big bets, and inter-regional consolidations are major trends that will continue into 2024. With an election looming and an uncertain healthcare and regulatory landscape, affiliation opportunities will need to be thoughtful and metric driven.

Inside Rating Committee: Five Things to Know

Posted on by • Posted in CEO, CFO, Credit Quality, Credit Rating Committee, Credit Rating Process, Credit Ratings, Debt Capacity, Debt Service, Debt Service Covenants, Debt Service Coverage Ratio, Debt Structure, Debt Swap, Health System, Hospital, Hospital Industry, Investment Banking • Leave a comment
https://www.kaufmanhall.com/insights/blog/inside-rating-committee-five-things-know?utm_source=mkto&utm_campaign=lisa-blog&utm_medium=em&utm_term=230816&mkt_tok=NjU0LUNOWS0yMjQAAAGNnaAfQ4HxVh8e0sc5F8PmNxGh2e1V8weDyXipzBIVnLL5LzUR1VYmjhi3ii6i_oTv2W6o4VwtoMExlHJBWj0BzJXcVLwcuQL8QCtWH_IxwFSI

Rating agencies have done a great job in increasing transparency around how ratings are determined. Detailed methodologies, scorecards, and medians are a big part of that effort.

Central to the rating process is the rating committee. All rating decisions are made by a rating committee, not an individual. The rating committee provides a robust discussion of various viewpoints as it deliberates, votes, and assigns ratings to the debt instrument.

Here are five things to know about what happens in a rating committee.

1. Rating committees are presided over by a Rating Committee Chair.

The Chair’s primary responsibility is to check that the committee follows numerous processes that meet company and SEC-mandated guidelines. For example, the Chair must verify that the correct methodology is being used to determine the rating, or if a rating requires additional methodologies (such as short-term rating methodologies on variable rate debt). The Chair must confirm that the rating decision will be based on verifiable facts or assessments (such as an audit) and that voting members are free of conflicts. Committees can be subject to internal and external reviews after the fact to ensure that decisions were made impartially and documented correctly.

The Chair ensures that the committee is populated with voting members who possess in-depth knowledge about the sector or related-credit knowledge (such as a higher education analyst in the case of an academic medical center) and are skilled in credit assessment. Each voting member has one vote and an equal vote. Serving as a voting member of a rating committee or as a Chair is a privilege and must be earned.

2. The rating committee discussion centers around the ability of a borrower to repay its obligations, or said another way, the likelihood of payment default.

As such, debt structure is integral to the rating committee. Detailed information provided in the committee package will include information on outstanding and proposed debt (if a bond financing is imminent), debt structure risks (fixed versus variable, for example), debt service schedule (level payments or with bullets), maturities and call dates, taxable and tax-exempt debt, bank lines and revolvers, counterparty risk and termination events, derivative products such as interest rate swaps and collateral thresholds, senior-subordinate debt structures, bond and bank covenants, obligated group, and security pledge, to name a few. Leases and pension obligations are also considered, particularly when liabilities outsize the direct debt.

Rating committees review hundreds of financial metrics to assess recent financial performance and an organization’s ability to pay debt in the future. Audited financial statements, year-to-date results, and annual budgets and projections are the basis for computing the financial ratios. Non-quantitative factors include success with past strategies and capital projects, market position and essentiality, management, governance and corporate structure, workforce needs, and local economic data. Confidential information provided by the organization is also shared. The job of the lead analyst is to distill all the information and present an organized credit story to the rating committee.

3. Rating consistency is paramount.

An “A” should be an “A” should be an “A.” Comparables (or “comps”) are an important part of the rating committee. Comps may include the other hospitals and health systems operating in the same state given shared Medicaid and state regulations (such as Certificate of Need or state-mandated minimum wage), workforce environment (such as the presence of active unions), and similar economic factors. Like-sized peers in the same rating category also populate comps. The type of hospital being evaluated is also important. For example, health systems that own health plans would be compared to other integrated delivery systems; likewise for children’s hospitals, academic medical centers, or subacute care providers. Medians are also a part of the comps and provide relativity to like-rated borrowers by highlighting outliers.

4. Rating committee spends time reviewing the draft report to make sure the committee’s views are accurately expressed and check that confidential information was not inadvertently revealed. If you want to know what was discussed in the rating committee, read the last rating report.

Over the years, many executives have asked to speak directly to the rating committee. While that is not possible, you can bring your voice to the discussion with an informative, well-crafted rating presentation. That brings me to my final “inside rating committee” point.

5. Rating presentations matter.

Effective, informative presentations that encapsulate your organization’s strengths will be shared with the rating committee. Every slide in your presentation should send a clear message that the organization’s ability to repay the debt and exceed covenants is strong. Emphasize the positives, acknowledge the challenges, and share what your action plan is to address them. Do your homework and review what you shared with the analysts last year; they will be doing the same to prepare. Provide updates on how the strategic plans are going. If you exceeded your financial goals, explain how. If you fell short, explain why.

How you tell the story is as important as the story itself. That’s how you can inform the discussion and ensure your voice is heard around the rating committee table.

Fitch: Outlook is negative for CHS

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https://www.beckershospitalreview.com/finance/fitch-outlook-is-negative-for-chs.html?utm_medium=email&utm_content=newsletter

Fitch Ratings has affirmed the “B-” long-term issuer default ratings of Franklin, Tenn.-based Community Health Systems, and revised the company’s rating outlook to negative from stable. 

The credit rating agency said the negative outlook reflects operating performance deterioration in the first half of this year, with significant increases in labor costs. Higher costs, weakness in volumes and acuity mix drove a downturn in the for-profit company’s revenue, resulting in a reduction in its financial guidance for this year, Fitch said. 

CHS ended the first six months of this year with a net loss of $327 million on revenues of $6.04 billion. In the first half of 2021, the company posted a net loss of $58 million on revenues of $6.02 billion.

Fitch noted that CHS still benefits from its strengthened liquidity and balance sheet after several debt refinancing and exchange transactions. CHS also benefits from investments in outpatient care and higher-acuity inpatient services, the credit rating agency said. 

Thoughts of the Day: Charlie Munger

Posted on by • Posted in Arguments, Common Sense, Derivative Accounting, Economy, Inflation, Investing, Investment Banking, Investments, Legacy, Lower Expectations, Marriage, Pretending, Thought Leaders, Thought of the Day, Understanding • Leave a comment

https://www.marketwatch.com/story/charlie-munger-warren-buffetts-right-hand-man-just-turned-98-and-has-some-choice-words-about-inflation-ebitda-and-marriage-11641319939?siteid=yhoof2

Many Americans, even those who don’t pay much attention to investing and the markets, know the name Warren Buffett.

Buffett, of course, is the billionaire philanthropist who created one of the greatest investment fortunes in history. Far fewer, however, know the name of his longtime business partner Charlie Munger.

And that’s a shame, because Munger is at least half the brains behind Berkshire Hathaway BRK.A BRK.B, the holding company he runs with Buffett and which manages billions and billions of investor dollars.

Notably, despite his deal-making prowess, Buffett is a big fan and longtime proponent of low-cost personal investing.

Munger turned 98 on Jan. 1. To celebrate his wit and market wisdom, here is a collection of quips from various interviews and question-and-answer sessions over the years.

On business education

Those of you who are about to enter business school, or who are there, I recommend you learn to do it our way. But at least until you’re out of school you have to pretend to do it their way.

On common sense

If people weren’t so often wrong, we wouldn’t be so rich.

On company earnings

Yeah, I think you would understand any presentation using the word EBITDA, if every time you saw that word you just substituted the phrase “bullsh** earnings.”

On a changing economy

So no, I’m optimistic about life. If I can be optimistic when I’m nearly dead, surely the rest of you can handle a little inflation.

On public spending

Everybody wants fiscal virtue but not quite yet. They’re like that guy who felt that way about sex. He was willing to give it up but not quite yet.

On legacy

Well, you don’t want to be like the motion picture executive in California. They said the funeral was so large because everybody wanted to make sure he was dead.

On stock buybacks

I think some people just buy it to keep the stock up. And that, of course, is insane. And immoral. But apart from that, it’s fine.

On marriage

Warren: Charlie is big on lowering expectations.

Munger: Absolutely. That’s the way I got married. My wife lowered her expectations.

On the purpose of money

Sure, there are a lot of things in life way more important than wealth. All that said…some people do get confused. I play golf with a man. He says: “What good is health? You can’t buy money with it.”

On money managers

The general system for money management requires people to pretend that they can do something that they can’t do, and to pretend to like it when they really don’t. I think that’s a terrible way to spend your life, but it’s very well paid.

On systematic investing

Well, I can’t give you a formulaic approach, because I don’t use one. If you want a formula you should go back to graduate school. They’ll give you lots of formulas that won’t work.

On human nature

As Samuel Johnson said, famously: “I can give you an argument, but I can’t give you an understanding.”

On financial innovation

It’s perfectly obvious, at least to me, that to say that derivative accounting in America is a sewer. is an insult to sewage.

On business competition

Competency is a relative concept. And what a lot of us needed to get ahead was to compete against idiots. And luckily there’s a large supply.

On cryptocurrency

I think the people who are professional traders that go into trading cryptocurrencies, it’s just disgusting. It’s like somebody else is trading turds and you decide, “I can’t be left out.”

On investment bankers

Once I asked a man who just left a large investment bank, and I said, “How does your firm make its money?” He said, “Off the top, off the bottom, off both sides, and in the middle.”

And finally, a parting shot

Munger: I think I’ve offended enough people.

Buffett: There’s two or three in the balcony!

Hastening the demise of independent physician practice

Posted on by • Posted in Disruption, Investment Banking, Investor Owned, Market Consolidation, Physician, Physician Acquisition, Physician Compensation, Physician Employment, Physician Independence, Private Equity, Value Creation, Value Proposition, Value-Based Healthcare • Leave a comment

https://mailchi.mp/bfba3731d0e6/the-weekly-gist-july-2-2021?e=d1e747d2d8

Physician Practice Sales to Private Equity Doubled in 3 Years

A new report from consulting firm Avalere Health and the nonprofit Physicians Advocacy Institute finds that the pandemic accelerated the rise in physician employment, with nearly 70 percent of doctors now employed by a hospital, insurer or investor-owned entity.

Researchers evaluated shifts to employment in the two-year period between January 2019 and January 2021, finding that 48,400 additional doctors left independent practice to join a health system or other company, with the majority of the change occurring during the pandemic. While 38 percent chose employment by a hospital or health system, the majority of newly employed doctors are now employed by a “corporate entity”, including insurers, disruptors and investor-owned companies.

(Researchers said they were unable to accurately break down corporate employers by entity, and that the study likely undercounts the number of physician practices owned by private equity firms, given the lack of transparency in that segment.) Growth rates in the corporate sector dwarfed health system employment, increasing a whopping 38 percent over the past two years, in comparison to a 5 percent increase for hospitals.

We expect this pace will continue throughout this year and beyond, as practices seek ongoing stability and look to manage the exit of retiring partners, enticed by the outsized offers put on the table by investors and payers.

Rational Exuberance for Medicare Advantage Market Disrupters

Posted on by • Posted in Aging Population, Business Model, Business Valuation, Disruption, Investment, Investment Banking, Investments, Market Outlook, Market Trends, Market Value, Medicare Advantage, Population Health, Private Equity, Profit Model, Profit Motive, Social Determinants of Health, Utilization Trends, Value Creation, Value Proposition • Leave a comment

Click to access Industry_Insights_6.23.21.pdf

Insurers Running Medicare Advantage Plans Overbill Taxpayers By Billions As Feds Struggle To Stop It | Kaiser Health News

Medicare Advantage (MA) focused companies, like Oak Street
Health (14x revenues), Cano Health (11x revenues), and Iora
Health (announced sale to One Medical at 7x revenues), reflect
valuation multiples that appear irrational to many market observers. Multiples may be
exuberant, but they are not necessarily irrational.


One reason for high valuations across the healthcare sector is the large pools of capital
from institutional public investors, retail investors and private equity that are seeking
returns higher than the low single digit bond yields currently available. Private equity
alone has hundreds of billions in investable funds seeking opportunities in healthcare.
As a result of this abundance of capital chasing deals, there is a premium attached to the
scarcity of available companies with proven business models and strong growth
prospects.


Valuations of companies that rely on Medicare and Medicaid reimbursement have
traditionally been discounted for the risk associated with a change in government
reimbursement policy. This “bop the mole” risk reflects the market’s assessment that
when a particular healthcare sector becomes “too profitable,” the risk increases that CMS
will adjust policy and reimbursement rates in that sector to drive down profitability.


However, there appears to be consensus among both political parties that MA is the right
policy to help manage the rise in overall Medicare costs and, thus, incentives for MA
growth can be expected to continue. This factor combined with strong demographic
growth in the overall senior population means investors apply premiums to companies in
the MA space compared to traditional providers.


Large pools of available capital, scarcity value, lower perceived sector risk and overall
growth in the senior population are all factors that drive higher valuations for the MA
disrupters. However, these factors pale in comparison the underlying economic driver
for these companies. Taking full risk for MA enrollees and dramatically reducing hospital
utilization, while improving health status, is core to their business model. These
companies target and often achieve reduced hospital utilization by 30% or more for their
assigned MA enrollees.

In 2019, the average Medicare days per 1,000 in the U.S. was 1,190. With about
$14,700 per Medicare discharge and a 4.5 ALOS, the average cost per Medicare day is
approximately $3,200. At the U.S. average 1,190 Medicare hospital days per thousand,
if MA hospital utilization is decreased by 25%, the net hospital revenue per 1,000 MA

enrollees is reduced by about $960,000. If one of the MA disrupters has, for example, 50,000 MA lives in a market, the
decrease in hospital revenues for that MA population would be about $48 million. This does not include the associated
physician fees and other costs in the care continuum. That same $48 million + in the coffers of the risk-taking MA
disrupters allows them deliver comprehensive array of supportive services including addressing social determinants of health. These services then further reduce utilization and improves overall health status, creating a virtuous circle. This is very profitable.


MA is only the beginning. When successful MA businesses expand beyond MA, and they will, disruption across the
healthcare economy will be profound and painful for the incumbents. The market is rationally exuberant about that
prospect.

Blue Cross Blue Shield sues AllianzGI over investment strategies

Posted on by • Posted in District Court, False, Fiduciary Duty, Investment, Investment Banking, Investments, Lawsuit, Mislead, Misleading, Risk, Risk Management • Leave a comment

https://www.pionline.com/courts/blue-cross-blue-shield-sues-allianzgi-over-investment-strategies

Blue Cross Blue Shield’s national employee benefits committee filed a lawsuit against Allianz Global Investors and its investment consultant Aon Investments USA, charging both with breaches of fiduciary responsibilities and breach of contract regarding more than $2 billion in losses in the insurer’s defined benefit plan trust.

The lawsuit, filed Wednesday in U.S. District Court in New York, alleges that AllianzGI took “reckless actions” in the management of three funds the manager had said offered downside protection against market declines and volatility, according to the court filing.

As of Jan. 31, the National Retirement Trust of the Blue Cross and Blue Shield Association had a total of $2.9 billion invested in the AllianzGI Structured Alpha Multi-Beta Series LLC I, AllianzGI Structured Alpha Emerging Markets Equity 350 LLC, and the AllianzGI Structured Alpha 1000 LLC, according to the filing.

The numerical values in the strategy names correspond to the amount of alpha in basis points above a corresponding index the strategy is expected to achieve.

After the funds experienced heavy losses in February and March, the investments were liquidated and redeemed, and the committee received about $540 million, according to the filing.

As of Dec. 31, 2018, the Blue Cross and Blue Shield Association National Retirement Trust had $4.6 billion in assets, according to its most recent Form 5500 filing.

The lawsuit, which includes claims breach of fiduciary duty and breach of contract against both AllianzGI and Aon, alleges that AllianzGI “caused the (benefits) committee to believe that structured alpha’s risk profile was consistent with Allianz’s stated investment strategy rather than the actual risk profile, either by making false or misleading representations about structured alpha or failing to disclose information necessary to correct prior representations that were inconsistent with how Allianz was actually managing the strategy.”

The suit alleges Aon breached its obligations by “failing to monitor and inform the committee of breakdowns in Allianz’s risk management protocols, learning only after the catastrophic events of March 2020 that Allianz had inadequate risk management in place.”

AllianzGI’s structured alpha strategies have historically been designed to be both long and short volatility, according to a September 2016 presentation: Taking range-bound spread positions, to sell options that were most likely to expire worthless (short volatility); hedged positions designed to protect against market crashes (long volatility); and directional spread positions designed to generate returns when equity indexes rise or fall more than usual during multiweek periods (long/short volatility).

The lawsuit alleges that “when equity markets declined, volatility spiked and the funds’ option positions were exposed to a heightened risk of loss in February and March 2020, those promised protections were absent.”

The lawsuit seeks relief including restoration of all losses, actual damages and accounting and disgorgement of fees and profits.

John Wallace, AllianzGI spokesman, said in an email: “While the losses sustained by the Structured Alpha portfolio during the market downturn in late February and March were disappointing, AllianzGI believes the allegations made by Blue Cross Blue Shield are legally and factually flawed. We will defend ourselves vigorously against these claims. Blue Cross Blue Shield was advised by a sophisticated investment consultant to evaluate the Structured Alpha strategy. These funds sought to deliver substantial returns of as much as 10% above, net of fees, the returns of the fund’s benchmark, an index like the S&P 500. As was fully disclosed to Blue Cross Blue Shield, the Structured Alpha strategy involved risks commensurate with those higher returns. Blue Cross Blue Shield and their consultant determined that the Structured Alpha Portfolio fit with their overall investment goals and risk tolerances.”

The $15.3 billion Arkansas Teacher Retirement System, Little Rock, filed its own lawsuit against Allianz Global Investors and subsidiaries in July, regarding its own losses in structured alpha strategies.

Robert Elfinger, Aon spokesman, said the company does not comment on pending litigation.

Sean W. Gallagher, Adam L. Hoeflich, Nicolas L. Martinez, Abby M. Mollen and Mark S. Ouweleen, partners at Bartlit Beck, attorney for the plaintiffs, could also not be immediately reached for comment.

 

 

 

 

Warren Buffett: An appreciation

Posted on by • Posted in Caution, Clarity, Communication, Consistent, Decision Making, Evidence-based Leadership, Evidence-Based Plan, Investing, Investment, Investment Banking, Investments, Leadership, Logic, Management, Patience, Shareholder Value, Shareholders Meeting, Strategic Advantage, Strategic Alignment, Strategic Leadership, Strategic Plan, Value, Value Creation, Value Proposition • Leave a comment

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/warren-buffett-an-appreciation?cid=other-eml-alt-mip-mck&hlkid=500c2a923cdd4ff19d66acac00e2a9fa&hctky=9502524&hdpid=e758f2ed-7de7-4263-9faa-7daf7b3bdaa7

Celebrating Warren Buffett on his 90th birthday | McKinsey

As Warren Buffett turns 90, the story of one of America’s most influential and wealthy business leaders is a study in the logic and discipline of understanding future value.

Patience, caution, and consistency. In volatile times such as these, it may be difficult for executives to keep those attributes in mind when making decisions. But there are immense advantages to doing so. For proof, just look at the steady genius of now-nonagenarian Warren Buffett. The legendary investor and Berkshire Hathaway founder and CEO has earned millions of dollars for investors over several decades (exhibit). But very few of Buffett’s investment decisions have been reactionary; instead, his choices and communications have been—and remain—grounded in logic and value.

Buffett learned his craft from “the father of value investing,” Columbia University professor and British economist Benjamin Graham. Perhaps as a result, Buffett typically doesn’t invest in opportunities in which he can’t reasonably estimate future value—there are no social-media companies, for instance, or cryptocurrency ventures in his portfolio. Instead, he banks on businesses that have steady cash flows and will generate high returns and low risk. And he lets those businesses stick to their knitting. Ever since Buffett bought See’s Candy Shops in 1972, for instance, the company has generated an ROI of more than 160 percent per year —and not because of significant changes to operations, target customer base, or product mix. The company didn’t stop doing what it did well just so it could grow faster. Instead, it sends excess cash flows back to the parent company for reinvestment—which points to a lesson for many listed companies: it’s OK to grow in line with your product markets if you aren’t confident that you can redeploy the cash flows you’re generating any better than your investor can.

As Peter Kunhardt, director of the HBO documentary Becoming Warren Buffett, said in a 2017 interview, Buffett understands that “you don’t have to trade things all the time; you can sit on things, too. You don’t have to make many decisions in life to make a lot of money.” And Buffett’s theory (roughly paraphrased) that the quality of a company’s senior leadership can signal whether the business would be a good investment or not has been proved time and time again. “See how [managers] treat themselves versus how they treat the shareholders .…The poor managers also turn out to be the ones that really don’t think that much about the shareholders. The two often go hand in hand,” Buffett explains.

Every few years or so, critics will poke holes in Buffett’s approach to investing. It’s outdated, they say, not proactive enough in a world in which digital business and economic uncertainty reign. For instance, during the 2008 credit crisis, pundits suggested that his portfolio moves were mistimed, he held on to some assets for far too long, and he released others too early, not getting enough in return. And it’s true that Buffett has made some mistakes; his decision making is not infallible. His approach to technology investments works for him, but that doesn’t mean other investors shouldn’t seize opportunities to back digital tools, platforms, and start-ups—particularly now that the COVID-19 pandemic has accelerated global companies’ digital transformations.

Still, many of Buffett’s theories continue to win the day. A good number of the so-called inadvisable deals he pursued in the wake of the 2008 downturn ended paying off in the longer term. And press reports suggest that Berkshire Hathaway’s profits are rebounding in the midst of the current economic downturn prompted by the global pandemic.

At age 90, Buffett is still waging campaigns—for instance, speaking out against eliminating the estate tax and against the release of quarterly earnings guidance. Of the latter, he has said that it promotes an unhealthy focus on short-term profits at the expense of long-term performance.

“Clear communication of a company’s strategic goals—along with metrics that can be evaluated over time—will always be critical to shareholders. But this information … should be provided on a timeline deemed appropriate for the needs of each specific company and its investors, whether annual or otherwise,” he and Jamie Dimon wrote in the Wall Street Journal.

Yes, volatile times call for quick responses and fast action. But as Warren Buffett has shown, there are also significant advantages to keeping the long term in mind, as well. Specifically, there is value in consistency, caution, and patience and in simply trusting the math—in good times and bad.