NUR January 2021 Edition

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Quick take on Iberian Markets



Turkey’s Currency Crisis


Overview of the 2020 M&A and PE Activity

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13 Page


Business Deep Dive: Lockheed Martin Corporation NIC-UD Fund: Monthly Performance

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Quick Take on Iberian Markets Spanish Parliament approved historical state budget for 2021. The Spanish Parliament, on the 3rd of December, approved by a large majority the new state budget bill for 2021. Spain’s budget proposed public investment valued at €239bn on top of the first €27bn provided by the EU’s coronavirus recovery fund. The 2021 state budget is highlighted for its strong emphasis on social policies to ease the difficult economic situation. Spain’s debt-to-GDP ratio rises to 114,1% in the Q3 of 2020. The Spanish Government´s debt rose as a percentage of its gross domestic product to 114,1% in the Q3 of 2020, up from the 110,2% registered in the previous quarter. Spain´s debt-toGDP ratio was 97,5% at the end of the Q3 of 2019. Measures to cushion the economic blow from the coronavirus have forced the government to ramp up spending this year, while economic output has slumped in the wake of restrictions on business. Recovery of the Portuguese economy. After what is expected to be the biggest recession ever (8,5% drop in 2020), according to the Government´s projections in the State Budget for 2021, presented in October, the Executive expects a real growth in GDP of 5,4%, based on the positive contribution of domestic demand and net external demand, through a greater dynamism of the components of private and public consumption, investment and a more intense export growth than the one expected for imports. Portuguese Banking: Non-performing loans and profitability fell. The total of non-performing loans continued to fall in the banking sector in Portugal, at a time where there are moratoriums for companies and families. However, the profitability of banks also remained in decline, affected by the measures adopted by the Government in the context of the pandemic. At the end of 2020, banks had less €800m in non-performing loans, compared to the end of June, in net terms. Additionally, it was also recorded, in the whole, €6,8bn of net non-performing loans, compared with €10bn in September 2019.

Guilherme Santos Effectively, the weight of non-performing loans in the total loan portfolio decreased by 0,2 percentage points, to 5,3%. In 2020, the fall of the PSI-20 was the lowest since 1994. The Stoxx600 ended the year with a negative balance, being the Spanish IBEX one of the most punished indexes in Europe, falling 15,45%. The decline in the IBEX is mainly due to the high weight banking has on it since banking, oil and transports were the most affected segment by the pandemic. The Portuguese stock market depreciated 6% in 2020, the lowest since 1994. Spain and the United Kingdom reach agreement on Gibraltar. The Spanish Minister of Foreign Affairs announced the beginning of an agreement with the United Kingdom regarding Gibraltar. The principle of the deal will allow the application of the European Union policies and programs to Gibraltar, such as the Schengen Agreement or a customs regime for the traffic and transport of goods and measures of fair competition in the tax, environmental labour, and social fields. TAP’s restructuring plan sent to European Commission. The TAP restructuring plan sent by the Portuguese Government to the European Commission is just the basis for a negotiation process. The State, which holds 72,5% of the share capital, presented the plan that it considers appropriate to make the company viable and sustainable. The plan designed by the Government includes a reduction in the number of workers, wage cut up to 25%, reduction of flee and of air routes. Galp to close a refinery in 2021. Galp will close the refining activity in Matosinhos starting next year and concentrating its refining operations and future developments in the Sines complex. With this decision, Portugal is left with only one refinery operating. The closure of this refinery is in line with decarbonisation, but the Government is concerned with the dismissal of workers. 3

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Turkey’s Currency Crisis After a rough year for the lira, there might be hope for better times When did Turkey’s problems start to appear? In 2001, Turkey was faced with an economic crisis. Turkey relied heavily on foreign investment for economic growth, but due to enormous budget deficits, high inflation and political instability, it led many foreign investors to divest from the country. They withdrew $70bn worth of capital from the country in a matter of months. This underscored financial and political instability led to further panic in the markets. Stocks plummeted and the interest rate reached 3,000%. Large quantities of Turkish lira were exchanged for U.S. dollars or euro, causing the Turkish central bank to lose $5bn of its reserves. To recover from the crisis, Turkey received a US$19bn IMF bailout. After that, the good times rolled in. Between 2002 and 2008, the economy expanded at an average growth rate of 16,6%. Such stellar growth made Turkey one of the fastest growing economies in the G20. In 2018, it entered in recession, soaring 2% from 2018 to 2019.

The currency and debt crisis of 2018 In 2018, another crisis hit in and Turkey has not yet recovered from it. It was characterized by the Turkish lira plunging in value, high inflation, rising borrowing costs, and correspondingly rising loan defaults. The crisis was caused by the Turkish economy's excessive current account deficit and large amounts of private foreign-currency denominated debt, in combination with President Recep Tayyip Erdoğan's increasing authoritarianism and his unorthodox ideas about interest rate policy. Some analysts also stress the leveraging effects of the geopolitical frictions with the United States and recently enforced tariffs by the Trump administration on some Turkish products such as steel and aluminium. To alleviate the situation, on August 15, Qatar pledged to invest $15bn in the Turkish economy making the lira rally by 6%, and interests rates rose, hitting 24% in September 2019. These actions helped to decrease inflation and alleviate the depreciation of the lira, but no relevant structural economic changes were made.

Bruna Travassos What led the lira to its lowest value ever against the dollar, and how is it appreciating again?

High (Unproductive) Capital Accumulation Turkey’s rapid growth was mainly due to fast capital accumulation. This capital accumulation was based on rapid foreign capital inflows, which was used to largely finance construction activities. Most of the capital accumulation was financed through foreign debt as the country had access to cheap credit in a world of low interest rates, a global economic recovery at the time and significant quantitative easing. However, by building the economy on the sand, at one point or another, it will come crashing down. For Turkey, this crash came about 2018.

Lack of Central Bank Independence In most advanced economies, the independence of the Central Bank from the Government enables it to set interest rates and macro policies for the longterm. In Turkey’s case is different. Not only the governor of the central bank is assigned by the president, but the president has also the power to say over elected positions and, in the case of Turkey, it has been putting its Central Bank under pressure to drop interest rates and expand credit. From 2016 until now, the Central Bank has had four different presidents, which is unusual by all accounts.

Low Interest Rates In 2018, President Erdoğan referred to interest rates as “the mother and father of all evil”, arguing that lower interest rates would save Turkey from the economic turmoil. An unconventional economic approach which goes against the widely held view that low interest rates are an expansionary policy which tend to lead to higher inflation, not to mention a weaker currency. e

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This all helps set the backdrop to Turkey’s current crisis. An economy which has slid into recession in 2018, a currency which has fallen since the beginning of 2019 by 29% against the dollar, and an inflation rate in the double digits.

High Inflation Rate The high inflation rate quickly erodes the value of money. Turkey has previously suffered from high inflation in the past. Even though nowadays it is lower than in the 90s (60%-120%), it still spiked to 25% in 2018, which is high for today’s standards. Typically, some inflation is expected, with most Central Banks targeting 2%, whereas Turkey has been targeting over 7% a year. From a currency perspective, the problem of inflation is that if it is more than the inflation of other currencies, it diminishes the value of the currency.

exports is less than the supply of lira through paying imports, and lira, unlike the US, is not as demanded as a foreign reserve. Tourism is a crucially and reliable source of foreign currency. About 45 million overseas tourists visited Turkey in 2019, equivalent to 60% of its population, who brought with them $35bn. Arrivals in the first half of 2020 were down by three quarters.

Foreign Direct Investment in Turkey The Foreign Direct Investment (FDI) was highly affected by Turkey’s political turmoil of the last years, and its decrease was the catalyst of showing the fragility of Turkey’s economy not only in 2001, but also in 2018, as Turkey is highly reliant on it. FDI inflows declined significantly to $8,4bn in 2019, edging down from $13bn in 2008 (-35%).

Household Reaction - Dollarization

Inflation Rate vs Interest Rates One way to counter high inflation, is to simply offer higher interest rates on Turkish lira holdings. Yet, as explained before, Turkey has not been a fan of higher rates. One year ago, the benchmark interest rate was 20%, until August 2020 it decreased 8,25%, and in September it hiked again by 10,25%. It is still not enough, as negative real returns are still a problem.

Households have been swapping their quickly diminishing liras on a more stable foreign currency: the dollar. Currently, more than 50% of Turkish deposits are held in foreign currencies. While this helps to protect household savings, it can make a currency decline even worse, as a bigger share of the population sells more liras for less dollars. It also restricts the effectiveness of economic interventions, as there are less liras being held by households to be impacted by Government policies.

Turkish Companies - Looming repayment deadlines

Source: Trading Economics

Turkey’s Current Account The core issue for the lira is excessive supply relative to demand. Turkey imports more than exports, leading to a constantly negative current account. You may be thinking that so does the US. The problem is that demand for lira through Turkish

During the stellar growth (2002-2008), Turkish companies borrowed heavily externally, and it was largely done in dollars. Turkish banks and corporates have so far defied warnings that they could struggle to roll over their $170bn pile of debt that comes due in the next 8 months. The trouble is that Turkish companies earn mainly in liras, so the size of the debt keeps growing as the lira plummets relative to the dollar.

Before the Lira hit its lowest in November, what was the Central Bank doing?

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To resolve these issues, the Central Bank had been trying to meet a number of mutually exclusive goals: maintain low interest rates, reduce inflation, promote economic growth and keep the lira stable. In order to achieve it, the Turkish Central Bank has spent a considerable portion of its foreign reserves buying liras in the open market. To boost its ability to do this, Turkey tripled a foreign currency swap deal with close ally Qatar to $15bn. In addition to buying dollar reserves, the Central Bank has been hedging its bets by buying gold. In fact, Turkey has been doing this to such an extent that in July 2020 it became the world’s largest buyer of gold due to increasing concerns that it will not be able to do a direct dollar swap. The country also took the rather unconventional step of temporarily banning six large currency trading banks from trading the lira in hopes of stopping speculation on its weakening currency. A move considered to be a step away from an open liberalized market.

debt being so high, especially since in the beginning of 2020 as it experienced a credit boom, which it made very reliant on FX debt.

Why was it not working?

On November 20, to combat the depreciation of the lira, the Central Bank hiked interest rates from 10,25% to 15%. One month after, Naci Agbal, the new Governor of the Central Bank, who was the Minister of Finance between 2015 and 2018, announced that it would lift its main interest rate from 15% to 17% - its highest level in more than one year, which was a surprise for most analysts. The lira gained around 0,8% following the decision, reaching 7,57 to the dollar. Mr. Agbal also announced that the Central Bank would no longer sell dollars to prop up the lira, a policy that has cost about $150bn over the past two years. These decisions have been bringing positive sentiment to investors.

These plans are underpinned by the assumption that the lira crisis will be over in the short-term. Selling foreign currency reserves to support the currency is only a viable option for as long as you have reserves to sell. Goldman Sachs estimates that the Central Bank has spent $65bn in supporting the currency this year alone. With gross foreign reserves having fallen to $93 bn. Over half of these reserves are borrowed with the bank relying on an elaborate system which borrows from the foreign currency savings held by Turkish citizens. For how long can this go on? Some analysts think this will go on for as long as there is not a run on Turkey’s banks by local households.

How Covid-19 impacted the lira As stated previously, Turkey relies heavily on foreign investment, and since the Covid-19 pandemic led investors to avoid emerging economies due to the economic uncertainty, liras were being sold. Tourism, which is a key economic activity for Turkey was severely hit, which negatively affected both GDP and demand for lira. The key factor influencing how the pandemic impacted the lira to this extent is due to its external

A drowning Lira/USD The Turkish lira has been one of the worst performing currencies in the world. During the first half of 2020, it plunged almost 50%. On November 6, it hit its lowest level ever! On November 9, lira soared by the most in over 2 years against the dollar (4%) after Mr Erdoğan unexpectedly fired the Governor of the Central Bank. The Treasury and Finance Minister resigned and cited ill health as the reason, this decision came one day after the governor of the Central Bank being fired by Erdoğan. The new Governor Minister announced that the new policy goal is price stability.

What is the Central Bank doing now?

Turkey’s 5 years CDS - Increase in investors’ confidence Meanwhile, Turkish five-year Credit Default Swaps (CDS) - a form of insurance against potential sovereign debt default - fell to their lowest in over nine months, reflecting the improvement in investor confidence towards Turkish assets. In the last three years, Turkish CDS have risen as high as 616 basis points, from around 160 basis points, as investors have increasingly lost confidence in the ability of the Central Bank to manage monetary policy and the currency effectively. 6

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US five-year CDS, by comparison, are around 8 basis points.

Is the change of Governor enough?



Currently, the Governor is implementing policies that are beneficial for the lira and for the long-term economic stability of the Turkish economy, but for how long it will keep interest rates high? During the peak of the Turkish economic crisis of 2018. interest rates were set high, but it didn’t take too long until decreasing them again due to Erdoğan opinion in interest rates. Recently, in November 18 of 2020, Erdoğan said: “It is clear what the high interest costs. Can we really invest when there are high interest rates? Can we get employment? Can we manufacture? It is not possible. So, we need to be much more careful at this point.” In conclusion, it is hard to predict for how long interest rates remain high. On one hand, after this statement, the Central Bank rose interests again (17%), which might indicate a change of opinion by Erdoğan, on the other hand, Erdoğan public opinion on interest rates lasts long.

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Overview of the 2020 M&A and PE activity The year of 2020 will forever be remembered as the year of a global pandemic that locked people inside their houses, glued to their electronic devices as the only way to contact the outside world. The financial world, just like in 2008 but due to very different reasons, was shaken by the resulting economic effects of what is essentially stalling the economy to save the lives of our elderly population, and the Mergers and Acquisitions (M&A) and Private Equity (PE) industries were not out of it. While the economy faltered, the actions taken forward by the US Federal Reserve and other central banks to keep interest rates low and the stimulus packages have provided a safety net for the M&A and PE industry to surge at a fast pace after the March and April activity tumble, making 2020 a strangely strong year. Before we dive in the analysis of these two industries, a very short clarification between their differences should be mentioned. What M&A and PE deals have in common is that in both cases there is a firm that is acquiring another (whether is a private or publicly traded one), but, while Private Equity firms are merely financial buyers who are concerned on the gains from the future sale of that firm and metrics such as IRR and exit multiples, in M&A deals, corporate buyers (such as Google and Nestlé, for example) are more focused with the long-term strategy and spill over effects of that acquisition (possible synergies such as economies of scale, acquisition of a “doorway” into new markets, acquiring know how capabilities…) to get an advantage against their business peers.

Bernardo Patrício

than in the 2008-2009 crisis, but activity began to pick up the pace from June onwards as companies tried to fight the “new normal” by pursuing defensive M&A activity: either raising cash through divestitures of non-core or non-performing assets or to lower costs through “horizontal” mergers to create a new and more financially viable company in the face of an unprecedented crisis. In the last quarter of the year, the news regarding the Biden victory and the announcement of 3 new vaccines for COVID-19 was the jumpstart that the corporate world needed to finally go forward with their investments. In the same day Moderna’s vaccine was revealed to the world and 1 week after Pfizer had done the same, $40bn worth of M&A deals were announced as chief executives look to use cheap debt or excess cash to pursue strategic M&A. One of those deals was the $11.6bn acquisition of the US operations of BBVA by PNC, becoming the 5th largest US bank in a period where financial services companies are in a difficult position with tight credit spreads and increasing default rates. In fact, according to a Financial Times article, this 4th quarter has been the third strongest in two decades and higher than in 2018 and 2019, despite only being barely midway to the end of the quarter. M&A activity has surged 32,8% year-on-year as new vaccines are announced 700 600

Overview of M&A activity

Pedro Penas


$ 612Bn $ 491Bn

$ 461Bn




During the lockdowns of March and April, the increasingly fast spread of COVID-19 throughout the world placed on hold the majority (if not all) of the M&A deals that were being developed for months and months. The situation was dire and according to a BCG report, the global deal volume in April 2020 was 80% lower than December 2019, being the US region the most affected one with a -51% YoY M&A activity from $500bn to just $253bn in the first quarter of 2020. Some deals were even cancelled such as the $30bn hostile bid by Xerox to HP. The drop-off was initially worse

300 200 100 0


Source: Financial Times

SPAC frenzy This year has also been special for more reasons than a global pandemic.

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In the capital markets world, there has been a resurgence in Special Purpose Acquisition Companies (SPACs) which are blank-check companies for which the only purpose is to use the funds raised in the IPO to acquire a company and sell it in the future at a higher valuation and distributing the profits to its investors, much like private equity funds work. Since it provides a simpler process and lower fees for Investment Banks for a company to go public, the number of this type of IPOs has increased from 59 in 2019 to 248 in 2020. As the purpose of these funds is to only pursue M&A deals, they have also been one of the reasons why the industry was able to recuperate after the March and April lows as they fulfil their main purpose of buying other companies. High net worth investors such as famous hedge fund manager Bill Ackman have also joined the financial frenzy as he created his own Pershing Square SPAC, raising $4bn at $20 per share. It has been “heard in the street” that he might try to buy Bloomberg LP, but no deal has been put forth yet. Some of the most known SPAC deals are Nikola in the EV market and Virgin Galactic in space travelling. These deals have also been important for private equity funds, as a way to cash-in on their prior investments in a time where businesses have had a hard time in generating revenue and need quick liquidity support to operate.

Microsoft looked set to be the chosen company, but after some struggles with the Chinese firm, it decided to abandon the deal and so Oracle, partnering with Walmart, decided to step in. The process agreed on September was that a new firm, TikTok Global, would be created to handle the app’s operations, but soon afterwards contradictory statements regarding the ownership of this firm by Oracle and ByteDance immediately stalled the process to a halt. The download ban issued by President Trump was never really enforced as courts felt that the president likely overstepped its authority in pushing to ban the app and the deadlines for the deal to be closed have been extended a few times. It’s probable that ByteDance is trying to “squeeze” this deal into the Biden Administration that will take office on January 20th, where it hopes to have a more favourable position from the new president, while it is still unsure what will be Joe Biden’s stance on this issue. Finally, due to changes in the exports regulation in September, China will need to approve this deal so that the intellectual property (the algorithm TikTok uses) may be transferred to an American company creating more hurdles for the realization of this deal that could shape up the social media industry, currently dominated by Facebook.

"As more SPACs chase limited opportunities, the quality of the acquisitions will suffer. This euphoria may resemble the 2001 "" bubble."

The semiconductor sector has seen an increase in “mega-deals” activity during this year. Earlier this year, Analog Devices, a chip maker for industrial usage, bought Maxim Integrated for $21bn at a 23.2x LTM EV/EBITDA multiple at a 22% premium; Nvidia, a maker of graphics processing units (GPUs) for personal computers, bought Arm from Softbank after it was taken private in 2016, a firm with a huge presence in central processing units (CPUs) for smartphones, for $32bn; and, finally, AMD also joined in with a $35bn all-stock acquisition of Xilinx, a maker of programmable chips, at a 32.2x LTM EV/EBITDA and a 25% controlling premium. These moves in the chip-making industry make sense as the world will shift to 5G and IoT in an hyperconnected world, but lefts out the renowned CPU maker Intel which has been struggling in facing off competition, even being called out recently by an activist investor due to that issue.

300 248

(SPACs) IPO Count

250 200 150 100 50





0 2016





Source: Refinitiv

TikTok acquisition debacle Another big highlight this year was the ban on the TikTok app by Donald Trump in US territory, leading to a possible acquisition of ByteDance, the parent company, by an American company.

M&A highlights of the year

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In the financial data industry, S&P Global acquired IHS Markit, who owns software used by Wall Street to underwrite corporate stock and bond offerings, for about $44bn (27.6x LTM EV/EBITDA) with only a small premium of less than 5%, the largest deal of the year which will create what some are calling a new “data juggernaut” to compete with largely successful Bloomberg LP. Also, the London Stock Exchange’s acquisition of financial data provider Refinitiv from private equity firm Blackstone, approved recently by the EU antitrust commission, for $15bn further show that there is the desire to end the established dominance of Bloomberg terminals in most financial firms. Finally, the pandemic has accelerated the digitalization of our lives and some firms are trying to better capture the long-term effects of these new trends. One of those is related to the digitalization of healthcare as Teladoc, a market leader in virtual care delivery, acquired Livongo, a pioneer in applied health signaling, most notably diabetes, for $18.5bn which will create a combined entity that would be the undisputed leader in both acute (short-term diseases) and chronic care where Teladoc hopes to create an integrated system through which patients can see a doctor and manage their diseases all virtually. On the other hand, with lockdowns and the reduction in restaurants’ revenue, online food delivery services have flourished during this pandemic and the acquisition of Grubhub by Just Eat Takeway for $6bn is a demonstration that these delivery firms, which typically have large losses, need to grab market share and decrease the intensity of competition in order to be a profitable business. The merger of these two will crease a transatlantic giant in the food delivery business, as Takeway competes with Uber Eats, Deliveroo and Delivery Hero in Europe and Grubhub faces Doordash, Uber and Postmates as peers in the American market.

Overview of PE activity Amid a global pandemic and quite volatile financial markets, throughout the first nine months of 2020, private equity funds had already made a record number of buyout deals. In fact, according to data from Refinitiv’s third-quarter M&A report, more than 5,500 private equity-backed mergers and

acquisitions were announced up to the end of September, culminating in the highest year-to-date total since Refinitiv began tracking leveraged buyout data in 1980. However, the overall deal value declined 6% from the same period in 2019, with private-equitybacked M&A activity totaling $345.4bn at the end of September. Matt Toole, director of deals intelligence at Refinitiv, said the increase in deal count and decline in dollar volume can primarily be explained by a “resurgence” in mid-market deals, as well as a “bumpy” year for valuations. He also mentioned that, after a record fundraising in 2019 for private equity firms, the pandemic has created buying opportunities, with private equity deals having accounted for 15% of overall M&A activity up to September. Technology companies and industrials firms have been the biggest targets so far this year, accounting for 41% of private equity deals, with deal activity in the consumer products and industrials sectors having increased 61% compared to 2019. In contrast, telecommunications sector deals have fallen by 67%. Also, according to a PwC report, as many travelers valued safety more than convenience following the COVID outbreak, investors renewed their focus in automobiles – an industry that was relatively flat or even slightly declining in 2019. The report highlights another development likely to continue changing the way PE firms think about investing – the rise of Environmental, Social and Corporate Government (ESG) investing. This is especially true across the technology industry, where public pressures have driven leaders to address issues including public safety and security. So, remarkably, in a year of shutdowns and a global recession, the value of private equity deals soared to its highest level since 2007. As stated in a Financial Times’ Due Diligence article, enormous government stimulus packages, and sweeping central bank crisis measures, meant that in deal making terms, the worst global pandemic since 1918 ended up being a mere blip. The Federal Reserve’s historic decisions to cut interest rates to zero, buy investment grade bonds and exchange traded funds that own riskier junk debt, gave companies a lifeline — and ensured private equity’s continued access to cheap debt for new deals. 10

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Global PE dealmaking roars in 2020 (Deal value, $bn)

will be a need for private capital, both in the short term, to keep vital companies afloat, and longer term, to invest in new growth industries. Equally to any other economic recovery, private equity has a role to play; it should take the chance to show how it can be a responsible investor.

800 700 600 500 400

PE firms are increasingly selling to themselves

300 200 100

Year to Dec 22 for each year


















Source: Refinitiv

PE’s risky cheap debt move While the pandemic has wreaked havoc with most companies’ balance sheets and upset business plans everywhere, for one group of investors, there is a silver lining in the cloud that is coronavirus. Private equity groups are taking advantage of soaring demand for corporate debt by loading the companies they own with even more borrowing and using the fresh loans to pay themselves big dividends. By the middle of September, almost 24% of money raised in the US loan market had been used to fund dividends to private equity owners. This was up from an average of less than 4% over the two previous years. In an attempt to lessen what is becoming a severe downturn and to enable hard-hit companies to raise cash cheaply to survive, central banks around the world, led by the US Federal Reserve, have helped to create the benign credit conditions by pushing interest rates to historic low levels. By loading up companies with borrowing at a time of peak economic uncertainty, private equity groups could de-risk their own exposure by taking cash out of the business. But the higher risk of defaults has consequences for stakeholders greaa beyond the private equity owners. PE industry’s power and influence has grown enormously amid a huge shift of investor money away from public markets. This is only likely to grow; recent figures show the industry has unspent cash totaling almost $2.5tn. Proposals in the US to allow ordinary savers to invest in private equity funds through their employer-sponsored retirement accounts potentially opens a huge new growth area, making the need for greater transparency even more imperative. As today’s crisis is so severe there

Blackstone, EQT, BC Partners and Hellman & Friedman are among the buyout groups to have sold companies to funds that they control this year or made plans to do so. Although this model emerged before the pandemic, its use has been ignited by it. Lazard estimates that the value of such deals will hit $35bn this year, up from $7bn just four years ago. The transactions allow firms to hang on to good companies — an attractive prospect as the industry’s $2.5tn pile of unspent money drives up the competition for new acquisitions. They also provide a solution if a buyout fund nears the end of its ten-year life but has not yet sold its portfolio companies. To execute them, a private equity firm creates a so-called continuation fund, finds investors to back it and then uses it to buy a portfolio company already owned by one of its other funds. At the heart of the process are groups known as secondary funds, specialist asset managers that raise money from pension and sovereign wealth funds. They are ploughing more of their cash into continuation deals, partly in the hope of generating quicker returns than they would from a traditional 10-year private equity fund. Industry executives say it can be a way of offloading struggling companies that rival buyout firms, trade buyers or public investors do not want.


Total value of continuation fund deals ($bn)

30 25 20 15 10 5 0 2016





Data includes a small number of deals in which private equity groups sell investors’ stakes in theirs funds. Data for 2020 is estimated. Source: Lazard

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Some deals, for example, involve a bundle of companies that can include “a dog and a star”, according to a senior private equity dealmaker, because “if you’re just selling the dog, no one’s going to buy it.” The momentum behind these transactions — sometimes known as sidecar deals — is expected to build next year. “I think every single private equity firm will consider doing something like this at some point,” said David Kamo, head of US private equity M&A at Goldman Sachs. For a buyout firm, selling a portfolio company to itself is now an “option like selling to [another company] is, like an IPO or selling to a SPAC,” said Mr Kamo. Some of the biggest deals of 2020 regarding this model in specific included the sale of BioMed Realty group, which leases real estate to life sciences companies, by Blackstone from one of its funds to another, in a $14.6bn deal in October. Likewise, CapVest sold the French pharmaceuticals business Curium to a new fund that it set up, after an external sale process that had been expected to value the company at about €3bn collapsed in March. EQT sold the enterprise software business IFS from an older fund to a newer one for €3bn in July, while BC Partners is considering selling its stake in Springer Nature to a new fund that it would control, in a deal that may value it at about €6bn.

before Deloitte resigned as their auditor over governance concerns – on a £6.8bn deal, which is still subject to approval from the Competition and Markets Authority. The coffee and doughnuts chain Dunkin’ Brands agreed on a deal to be acquired for about $9bn by Inspire Brands, the private equity-backed fast-food group behind Buffalo Wings and Sonic. As 2020 ends, the large listed buyout groups’ share prices have rebounded, and Blackstone and KKR are trading at all-time highs. Low interest rates have created such demand for higher-yielding debt that buyout groups are increasingly able to load companies they own with fresh loans and use the money to pay themselves dividends.

PE highlights of the year In the beginning of the year, we assisted to one of the largest leveraged buyouts in years, with Thyssenkrupp agreeing to sell its elevator division private equity groups Advent and Cinven for €17.2bn. However, as the pandemic hit, debt financing dried up and shares in Blackstone, Apollo, Carlyle and KKR tumbled, pre-crisis deals for American Express’s business travel unit and Victoria’s Secret were called off. Shortly after the first impact of the pandemic, the industry was already back to aggressive maneuvering, with Silver Lake and Sixth Street Partners injecting $1bn in fresh capital into Airbnb to help the rental company weather downturn and KKR constructing a complex deal including a $750m investment in the cosmetics maker Coty, that it had been seeking for years. In a bold play, Mohsin and Zuber Issa, the brothers who run the TDR Capital-backed petrol stations business EG Group, made their most audacious acquisition yet: buying Asda from Walmart — days NIC Undergrad Review


Business Deep Dive: Lockheed Martin Corporation Benedita Velozo

Raquel Tavares

After the $10bn merger between Martin Marietta and Lockheed Corporation, Lockheed Martin Corporation (LMC) was formed, being known as a global security company, whose purpose is to provide transnational military defence and strengthen local economies. Its main operations involve the research, design, development, manufacturing and integration of advanced technology products and services.

Markets Lockheed Martin Corporation’s shares are quoted on the New York Stock Exchange. As of March 2020, LMC’s shares were mainly held by institutional investors: State Street Corporation, Vanguard Group, BlackRock, Capital Group Companies, amongst others. The company’s shareholders have enjoyed a good run. The world’s largest pure-play defense contractor has a portfolio that is the envy of the industry. The stock is up 85% over the past five years, besting the S&P 500 by 20pp, in September 2020. LMC’s share price enjoyed a slow growing trend until 2013. From that year onwards the price started to pick up due to the added contracts established by the company and the deals it had closed in the past years, bringing great hopes of success to in The company reached its all-time high

on February 11, 2020, at a closing price of 439,85. After selling off early this year, Lockheed stock is now forming a flat base. The stock tumbled below its 50-day and 200-day lines as the Covid-19 pandemic rattled the overall market. After finding resistance at those key levels in November, LMC’s stock has been falling away from them headed into the end of the year.

Price Performance

Source: Bloomberg; Note: LMT US Equity – Lockheed Martin Corp; SPSIAD Index – S&P Aerospace & Defense Select Industry Index

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History and Development The company supplies aircrafts to commercial customers, these being businesses involved in commerce and the government. It is the world’s largest defense contractor, a term referring to entering a contract with the government for the production or selling of services to its military or intelligence department. The US government represents 71% of LMC’s revenues of which 10% was funded by the Pentagon. The company is the world’s largest arms producer, making $44.9bn in arms sales in 2017. Government support has allowed LMC to be at the forefront of cutting-edge defense technologies and play a significant role throughout US history, from World-War II, missions to the moon, to making vehicles autonomous in today’s day and age. LMC leads an international supply-chain and has focused its operations in four key business segments: aeronautics, rotary and mission systems, space systems, missiles and fire control.

Aeronautics Aeronautics, representing 37% of revenues, is LMC’s core business activity. It is responsible for the manufacturing of military aircrafts and home to the Skunk Works facility. The segment is the maker of the F-35 Lightning II aircraft, currently the most advanced jet fighter in the world and accounting for 25% of the defense contractor’s purchases. Skunk Works is LMC’s pseudonym for their Advanced Development Projects (ADP), where 85% of their work is classified. Therefore, an estimated 30% of LMC revenues can be considered from confidential sources. Nevertheless, several projects have been disclosed, including Flying Mach 3.2, the fastest manned airplane, and F-117 Nighthawk, the first jet fighter made to be undetected by the enemy. Rotary and Mission Systems (RMS) RMS, representing 29% of revenues, is committed to making manned and unmanned missions successful. These missions serve a variety of intents for different groups, such as the Air

Force, the Army, the Coast Guard, the Marine Corps, the Navy, as well as for medical, commercial and research purposes. The RMS accomplishes this mainly through providing IT support, such as cyber security, simulation and training services, sea and land defense systems, mission support systems and radars. Another key operation in the RMS is the production of its helicopters, submarines and fixedwing aircrafts. Fixed-wing aircrafts are typically used for the release of munitions, signalling or observation. A key helicopter is the Blackhawk whose primary function is to carry troops and provide logistical support but can also be used for medical evacuations or special missions such as ‘search and rescue’. Space Systems Space Systems, accounting for 20% of the company’s revenues, is comprised of missions to space for military, commercial, civil or undisclosed purposes. These can involve manufacturing for launches of communication satellites, space probes and military defense systems. LMC has also successfully established two joint ventures with Boeing, United Space Alliance (USA) and United Launch Alliance (ULA). Joint ventures represent a joint commitment of two companies into establishing a third and separate company. Founded in 1996, USA supported missions to space as NASA’s primary partner in day-to-day human space operations management until being dissolved in 2019. The joint venture relied heavily on the Space Shuttle program which was terminated in 2011. ULA was founded in 2006, as a space craft manufacturer for launches into orbits around planets in the solar systems. The ULA is the most experienced space launch company in the US, with 133 successful consecutives launches, currently holder of the Guinness World Record for ‘most consecutive successful launches.

NIC Undergrad Review


Amongst the most notable satellites and spacecrafts manufactured by Space Systems are the Space Shuttle, the Orion Spacecraft - holding the first crewed spacecraft mission to the moon and the Hubble Telescope, one of the largest space telescopes taking high-resolution images of space. It is currently working on the new USAF Space Fence (AFSSS replacement), a sophisticated satellite built for identifying and tracking small debris and microsatellites that could harm any new launches to space. Missiles and Fire Control (MFC) MFC, specifying 14% of LMC’s revenues, is responsible for the design, development and manufacturing of air and missile defense systems. These include tactical missiles for short-range battle use, appropriate for battle developments; air-toground precision strike weapon systems, which are weapons shot from airplanes to the ground with extreme precision, leaving little to no collateral damage outside of the target; systems for logistics and missile fire control; manned and unmanned ground defense vehicles; mission operation support and readiness, and energy management services. Nevertheless, despite these four key segments, the company also invests in healthcare systems, renewable energy systems, intelligent energy distribution, and compact nuclear fusion.

o Lockheed Martin developed the technology behind the aeroshell that will protect NASA’s newest rover, Perseverance, and deploy the first-ever Mars helicopter which was launched on the 30th of July 2020. The Perseverance rover will study the geology of Mars while searching for signs of past microbial life, collect samples of rock and even set stage for human exploration. The respective NASA mission also debuts the first helicopter designed for another planet, named Ingenuity, to test autonomous flight on Mars. o This past August, it was announced that the US Army had awarded Lockheed Martin a $183m contract to produce High Mobility Artillery Rocket System launchers and associated hardware to be delivered starting late 2022. These new launchers will provide unmatched mobile firepower in support of multi-domain operations. o Recently, Sikorsky, a Lockheed Martin company was awarded a new contract from the US Navy to build six additional helicopters in order to support the US Marine Corps in its mission to conduct expeditionary heavy-lift assault transport of armored vehicles, equipment and personnel to support distributed operations deep inland from a sea-based center of operations. The helicopter maker, Sikorsky, was purchased by Lockheed in 2015 and was highly criticized by the Pentagon as it would lead to a reduction in competition. o In November 2020, Lockheed Martin completed the acquisition of the I3 Hypersonics portfolio of the software and systems engineering company. The deal will expand the acquiror’s capabilities to design, develop and produce integrated hypersonic weapon systems for its customers, which are much faster than the speed of sound by definition and crucial to guarantee strong manoeuvrability at high speeds.

Lockheed Martin’s revenues are mainly concentrated in the United States, being the Government the company’s biggest client. However, the revenue distribution also includes other geographies such as the Asia Pacific, Europe and the Middle East.

News and Deals

o The Covid-19 pandemic proved itself to be a formidable challenge to Lockheed’s main F-35 production line, in Texas, as well as its network of suppliers across the globe. This becomes pertinent as Lockheed Martin delivered only 123 out of the 141 F-35s to the US military and international customers in 2020. This was mainly due to supply chain disruptions which slowed down the production. Nevertheless, the company took measures to mitigate the impact 15

NIC Undergrad Review

of the coronavirus pandemic such as accelerating payments to small businesses that build components for the aircraft and grappling with Covid-19 breakouts that have sometimes led to the quarantine of a portion of its supply chain. It has been stated that it will take until 2023 for the company to catch up to its original production schedule. o It was announced on December 2020 that Lockheed is set to acquire Aerojet Rocketdyne, which will enhance the company’s support of critical US and allied security missions and retain American leadership in space and hypersonic technology. Aerojet Rocketdyne is a world-recognized aerospace and defense rocket engine manufacturer with deep customer relationships and significant demand for its innovative technologies. The acquiree’s propulsion systems are already a key component of Lockheed Martin’s supply chain and several advanced systems across its Aeronautics, Missiles and Fire Control, and Space business areas.

Performance Analysis LMC has been experiencing a positive trend in revenues, growing on average 8% year on year (yoy). The US Government has increased spending on the military by $60bn from 2017 to 2019 (source: Statista, US military spending). Consequently, the respective US Government sales at LMC have increased an average of10% yoy. International and commercial sales have not experienced much variation. In 2017, Lockheed Martin registered in its income statement a deferred tax income expense of $3.45bn, which lead to a lower net income in that year, explaining the larger increase in net income of 168% from 2017 to 2018, as deferred tax income was back at its usual lower range. Net income displayed a more normalized increase of 23% from 2018 to 2019. The Return on Equity (ROE) displayed a huge increase from 2017 to 2018. Additionally, the Return on Assets (ROA) increased from 4% in 2017 to 13% in 2019. In the third quarter of 2020, LMC reported operating profits of $1.76bn, an indicator of positive returns for the year. The gross margin has been experiencing a positive trend, proving the company’s continuous ability to increase revenues, reduce costs, thus improving overall profitability. The company has been experiencing a downward trend in the Debt-to-Assets ratio, indicating a progressively lower reliance on debt to finance its operations. This can also be seen in the yearly increase in financing cash outflows as the company has been repaying increasing levels of its long-term debt. There has been the exhibition of continuous negative investing outflows, from an investment in fixed tangible assets for production and intangible assets.

Source: Bloomberg

Source: Bloomberg

NIC Undergrad Review


Operating inflows are consistently positive, showing strong returns of cash in its revenues. In 2018, operating cash flows were lower at $3.14bn, when compared to 2017 and 2019, which were at $6.48bn and $7.31bn, respectively. This was mainly due to a non-cash adjustment, which could refer to an increase in depreciation expenses.

Industry Overview

Source: Bloomberg


The defense sector fell out of favor in 2020 as investors worried about long-term growth trends. Additionally, election years tend to weigh on defense, as a charge of administration can mean a shift in priorities and create uncertainty about future spending. However, there have not been many thoughts regarding a safer world, meaning there is no long-term shortage of demand for the products these types of companies sell. One of the things to keep in mind right now when considering possible investments in this industry is where the federal budget will be concentrated on. The Pentagon budget tends to be cyclical, and defense contractors after years of sustainable growth were bracing for a slow down, regardless of the election’s results. However, even if the general trend is clear, it is important to bear in mind that there is a lot to be learned in the upcoming months as President-elect Joe Biden and his administration present their first budget request to Congress.

Another point also intertwined with the previous idea that the new administration will weigh heavily in this industry, it is common knowledge that the incoming Pentagon leadership team is expected to take a more sceptical view toward mergers. This is quite important as this industry has relied on past mergers to enrich the big competitors with more integrated, efficient and distinguishably successful products. However, it is not time to despair regarding this industry as military programs continue to be critical to national defense, especially when current geopolitical tensions are considered.

Price Performance Of Comparable Companies

Source: Bloomberg; Note: LMT US Equity – Lockheed Martin Corp; GD US Equity – General Dynamics Corp; NOC US Equity – Northrop Grumman Corp; LHX US Equity – L3Harris Technologies Inc

NIC Undergrad Review


From the many companies in the industry, the ones to be analysed as comparables to Lockheed Martin are in the table above. Even though companies like Boeing could be in some way considered competitors, the range of products that Boeing provides is much larger as only one-third of its revenues comes from defense contracts, and thus were excluded from this analysis. All of the three peers are headquartered in the US and, thus, are under similar standards in terms of regulations and demand. However, even though we are considering the companies to be comparables, their market capitalisations do not match Lockheed’s, as for instance, the company in question has almost double the market capitalisation of Northrop Grumman Corp. With this being said, Lockheed is indeed a major player in the industry in terms of orders, products and market size.

Valuation Overview On the last day of 2020, LMC was trading at $354,98. Through the comparable analysis of the peers mentioned in the ‘Industry Overview’ section, the 52 week-range and EV/Sales ratio metrics suggest the company’s price is in line with LMC’s current price. The P/B strongly indicates that the company is overvalued. However, its large misalignment with the other valuation metrics makes it less reliable for the analysis, being in some way considered an outlier. On the other hand, both the P/E ratio and the EV/EBITDA suggest that Lockheed Martin is undervalued. The relative analysis suggests the company is currently fairly-priced, even though, some metrics may suggest a slight undervaluation, which can be augmented after the previously mentioned acquisition of Aerojet Rocketdyne. This deal can

add great value to the company’s business model and become even stronger than it already is in this competitive market.

Risks v

LMC’s dependence on the United States Government means changes in US defense & aerospace budgets can significantly impact the company’s revenues. This can also make the company vulnerable to political changes. The new presidency with President-elect Joe Biden and the Congress holding majority of the Democratic party, has shown pressure to reduce the defense budgets. There will be more pressure to diplomatic and economic aid as opposed to military. Nevertheless, the US President-elect has pledged to invest in unmanned vehicles and artificial intelligence systems. The pledge also indicates that the F-35, the biggest investment in defense by the US alongside LMC, might be the last manned fighter that the US ever builds. This can lead to the jet fighters becoming obsolete sooner than expected. Moreover, increases in US Government regulations can limit the company’s ability to expand

internationally and export its weaponry. Lockheed Martin only sells its products to the US and allies. Competitiveness in markets abroad could also make it increasingly difficult for the company to keep up and, therefore, miss out on potential defense contracts. Any disruption to LMC’s global supply chain, could lead to an inability to ramp up production. The company is currently facing several lawsuits filed in 2020, for toxic pollution, from people who have developed life threatening medical conditions. A lawsuit alleges the company exposed workers to harmful pollutants and another one alleges its weapons manufacturing facility in Orlando has polluted the air, soil and groundwater in surrounding neighborhoods since 1995. This has negative repercussions for the company’s goodwill and make the company pay significant costs in settlement.

NIC Undergrad Review


In a world where corporate social responsibility is becoming increasingly important, misconduct can have worsened consequences than before, with an additional weight on investors perspectives of the company.

Outlook Lockheed Martin holds strong cashflows and has been experiencing increasing sales, but could see slow growth in the future, close to single digits. Overall, the US Government has not been planning any major changes to its defense budgets, which should keep its yearly expense on LMC stable. International sales could experience some difficulties due to the economic fallout in the Middle East accounting for 6% of its revenues and difficulties in other countries rebounding from the Covid-19 pandemic. Nevertheless, the F-35 is currently the key driver for the company’s growth, accounting for 25% of the defense contractor’s purchases and could generate up to $1.1trn of lifetime revenue. This gives the company a stable outlook, able to reap the benefits having won the Joint Strike Program. The Space Systems segment should see increasing growth due to a rise in space exploration. The space launch services are predicted to grow 15% yoy from declining launch costs and advances in technologies. Lockheed Martin has partnered with Jeff Bezos’ space company “Blue Origin” to develop a lunar lander. Nevertheless, SpaceX can become a future threat given its increasing dominance in the space exploration industry. The large investments made by Jeff Bezos and Elon Musk could make rivalry more intense. In the Aeronautics segment, the secretive facility Skunk Works is developing the X-59 quiet supersonic jet for NASA. If appreciated by the general public, this jet can be the future of the commercial supersonic flights. The company’s latest acquisition of Aerojet Rocketdyne in 2020 could bring the competitive advantage amongst peers LMC needs to grow in the industry it faces. The horizontal expansion is predicted to give LMC $100M in cost savings. This is due to the access to propulsion systems which is crucial to its Missiles and Fire Control segment. Finally, Lockheed Martin Corporation is a company representative of the US Government’s investments in defense and aerospace. It is

continuously innovating and at the forefront of some of the most ground breaking technologies. In addition, a lack of rises in the US defense budget and increasing competitiveness in space will make it difficult for the company to increase its sales significantly. Nevertheless, LMC’s continuous investments in production and the several contracts it currently holds will allow for the company to remain profitable and experience significant growth in the coming years if the US Government continues to rely on LMC to support space and weaponry related contracts.

NIC Undergrad Review


NIC-UD Fund December was marked by various vaccine approvals around the globe and a new stimulus check in the US André Fael

Bernardo Patrício

Global Markets Following the news of 3 vaccines with high efficacy rates in the November issue, in the month of December, 2 of these vaccines (from Moderna and Pfizer/BioNTech) were given the Emergency Use Authorization (EUA) label from the FDA, in the US. The approval frenzy, led by the United Kingdom, reached Canada and the European Union, besides the US. At the very end of the month, the World Health Organization also granted emergency validation to the Pfizer vaccine. These very important news have pushed equities to new highs, with the MSCI World Index gaining 1,73%. Bitcoin, the leading cryptocurrency in the world, has reached all-time highs after the 2017 run. Already at over €24,000, representing almost a 50% increase during the month, this alternative financial

instrument is set to benefit from the new stimulus checks, as are equities. In the Foreign Exchange market, the US dollar has taken a dive against a basket of other currencies such as the Australian & New Zealand Dollar, the Pound and the Euro. In the Fixed Income market, yields are down in the 10Y Bonds of the U.S., U.K. and Germany. Given that the yields are down, this means that investors have been increasing their exposure to bonds during the month. Oil increased during the month, with the WTI Crude Feb21’ contracts rising 7% during the month. Precious metals such as silver and gold have also risen during the month, with silver rising more than 10% and gold closing at €1554 per troy ounce.

Current Positions Regarding portfolio allocation, no positions have been opened during the month. EDP was the only position closed, at a share price of €4,76. The industry of Gaming/eSports and Social Media/Internet have been the biggest performers, with the first more than doubling. The Pharmaceutical industry has been the worst performing one, with our company failing to fully capitalize on the Covid-19 pandemic. Our cash position now represents over one-fourth of the portfolio, which means that while we missed out on some performance, we are ready to take on new opportunities and further diversify the fund.

Positions Weight on Total Equity


Entertainment US Pharma US


Internet US


Utilities US 8.30%

Electric Batteries ETF Gold Miner


6.10% 10.20% 3.66%

Consumer Products EU 2.96%


Streaming/Entertainment US Equity

Current Price

Open Price










US Equity




Social Media/Internet

US Equity





US Equity





US Equity




EV Battery





Consumer Products

EU Equity




Gold Miner

CND Equity



Gaming ETF Renewables US





20 NIC Undergrad Review

NIC-UD Share Price (Inception Cumulative Returns)

3% 2% 1% 0% 11/30/2020 -1%







-2% -3% -4%

Monthly Performance

Benchmark Analysis 25%

The NIC-UD Fund finished the year greatly outperforming our benchmark (MSCI World Index), with the portfolio’s share price increasing over 5,5%. In fact, not only did we beat the benchmark, but we also delivered higher returns in December than all the main indexes. It is worth noting that although our portfolio gradually increased during the month (as we can see in the right bottom graph), this performance was mostly driven by 2 financial instruments, one stock and one exchange-traded fund. Following a recovery in November, the month of December was one of the best performing months, with the expectations of another stimulus package and the approval of 2 vaccines helping in the realization of these returns. But not all indexes delivered the same returns. In fact, the Shanghai Composite and the Eurostoxx 50 have been subpar during the month, contrasting with the Eurostoxx 50’s previous outperformance in November. On the other hand, the biggest names in tech (FANG+) outperformed all represented indexes, second only to our fund.

20% 15% 10% 5% 0% -5% -10% ETF #1 Stock Stock Stock Stock ETF #2 Stock Stock Stock #1 #2 #3 #4 #5 #6 #7

Portfolio Returns vs Benchmarks 6%

5.54% 4.86%

5% 3.82%








2% 1% 0%

Portfolio (Share Pri ce)

MSCI World Index

S&P 500 FTSE 100 Eurostoxx Nikkei 225 Shanghai FANG+ 50 Composi te

Corporate News 46 different states in the U.S. have filed an antitrust lawsuit against the social media giant Facebook. The company is being accused of suppressing competition through monopolistic business practices. The states are asking the U.S. District Court in Columbia to “restrain Facebook from making further acquisitions valued at or in excess of $10 million” without notification. Furthermore, the plaintiffs also ask for “the divestiture or restructuring of illegally acquired companies, or current Facebook assets or business lines.” Ironically, the suit is largely based on Mark Zuckerberg’s e-mails, with him writing in one that “Instagram was our threat. (…) One thing about start-ups though is you can often acquire them.” and that “It is better to buy than compete”. Now switching billionaires, Elon Musk’s wealth has skyrocketed in 2020 with Tesla ending the year with a $668bn market capitalization. Following over a year of positive financial returns, Tesla finally managed to meet the requirements to enter the coveted S&P500 index. On the 21st of December, the electric vehicle manufacturer entered the index with a 1.69% weighting. 21 NIC Undergrad Review

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