Steady and positive through the market volatility.

Maxam Arbitrage Fund – Q1 2025 Commentary

Dear fellow investors,

The Maxam Arbitrage Fund¹ gained +1.42% in the first quarter of 2025.

Through the market volatility and uncertainty created by U.S. President Trump’s aggressive tariff edicts and other policy announcements, the Maxam Arbitrage Fund has been positive and steady – demonstrating its unique value as a portfolio diversifier.

Performance in the first quarter was driven by 19 successful deal closures and our SPAC positions continuing to benefit from liquidations, extensions, and the growth of cash held in-trust.

Looking back at Q1.

After a tepid start to the year, we saw several new deals announced towards the end of the first quarter with seven of the 16 new deals in March coming in the final week. That was a welcome sign given the volatility that Trump’s policies are inflicting on the markets. Thanks to the late quarter surge, global M&A values actually finished the first quarter up year-on-year – although it certainly didn’t feel that way.

Merger arbitrage spreads moved wider on some of the sharper down days for the markets over the last few weeks. This is not uncommon during periods of investor stress, especially on days when >90% of stocks were in the red.

We have used the market volatility to add to deals in which we have a high degree of conviction. Because of the short-duration nature of M&A transactions – and the basis that these deals are legally binding contracts – it is often beneficial to take advantage of such widespread volatility.

We added 49 new definitive deals to our database during the first quarter. 57% of those new deals targeted companies with market capitalizations under $1 billion – signifying healthy activity in a market segment that we like to take advantage of, and one that we suspect may be even busier in 2025.

During the quarter we initiated 19 new merger arbitrage positions, and we had 19 successful deal closures and zero deal breaks.

Some notable deals that we owned which successfully closed during the quarter included: Filo Mining, Smartsheet, 03 Mining, Barnes Group, SecureWorks, Avid Bioservices, Canadian Western Bank, Summit Materials, Heroux-Devtek, Redishred, Retail Opportunity Investments, EMCORE, Payfare, Arcadium Lithium, Lucero Energy, ICC Holdings, Quisitive Technology Solutions, and Softchoice.

At the end of the fourth quarter the fund was diversified across 22 merger arbitrage positions.

Dearth. Not death.

Although the total value of M&A deals increased in Q1, the number of deals was down. The 49 new definitive deals that we added to our database during the first quarter were 22% fewer than the 63 deals we added in the first quarter of 2024.

In our previous quarterly commentary, we stated that the “ingredients are in place for a strong period of M&A activity”. Those ingredients included: a supportive interest rate environment, valuation dichotomies, private equity funds with record amounts of undeployed capital, executive confidence, and an overhauled anti-trust leadership regime in the U.S. that is expected to be much more deal friendly.

Many of those ingredients remain in place today, however executive confidence has undoubtedly taken a hit from Trump’s tariff announcements – which have been much more aggressive than expected. As a result, some deals that were in-the-works have likely been put on hold pending more clarity.  

Experience informs us that a pick-up in M&A is a matter of when, not if. We saw a similar dynamic during the COVID-19 pandemic when deal activity slowed as deal makers and executives took a step back to assess the rapidly evolving landscape. As it became clear that the pandemic would not be the end of the world, nor of capitalism, deal activity resumed. The current uncertainty will subside, and we will see M&A pick up as it does.

And, after a market correction where valuation dichotomies have become even greater, we would not be surprised to see a higher number of management buyouts announced and hostile takeovers attempted. We expect this activity may be even more pronounced in the small and mid-capitalization segments of the market.

In that regard, this quote from Brookfield Corporation’s recent letter to shareholders caught our eye:

“…there are increasingly a group of companies that do not fit neatly into indexes and as a result, trade poorly relative to value. This creates a significant opportunity to take public companies private, as the value of the assets are far greater than the price that the assets trade in the market…”²

We enjoy the flexibility of being able to invest in both large and small cap deals. And we are ready to take advantage.

Keep Calm and SPAC On.³

The steady flow of SPAC IPOs continued into the new year with 19 new issues going public in the first quarter, down slightly from the 23 IPOs in Q4 2024. Total new issuance amounted to US$3.1 billion, marking the third quarter in a row above the US$3 billion mark. This relatively healthy SPAC IPO market contrasts to a rather lackluster market for traditional IPOs on both sides of the Canada-US border.

There were 197 listed SPACs at quarter-end, with 106 of those searching for a deal and 91 with announced deals working towards completion. Aggregate trust values for all SPACs was approximately US$17 billion, up from US$15 billion at year-end as IPOs outweighed liquidations and completions.

The rate of liquidations slowed in Q1 with seven SPACs deciding to return capital to investors, about half the average quarterly rate throughout 2024. This is primarily a result of many sponsors continuing to seek extensions when nearing the end of their initial timeline to complete a deal – as evidenced by approximately 60% of active SPACs having already taken at least one extension. Deal completions, aka de-SPACs, removed another 10 SPACs during the quarter.

The median IRR for the SPAC universe remained relatively steady throughout the quarter at around 5%. However, the bifurcation that we noted at year-end continues to persist. Younger issues with larger trust values trade in the 4-5% IRR range, whereas older issues with smaller trusts often trade above 5% IRRs. Our active and nimble approach allows us to take advantage of this dynamic. Hence, we remain quite constructive on the low-risk opportunity set that SPACs provide for us to deploy capital into.

At quarter end our SPAC exposure was well diversified across 66 positions, providing the fund with a very low risk base of stability.

Steady through the fog → poised for it to clear.

Maxam Arbitrage Fund – a liquid, short duration, and non-correlated strategy – has been doing its job during a particularly challenging market environment.

Bolstered by the aforementioned factors for deal formation that remain in place, we anticipate a pick-up in M&A activity as the fog of uncertainty currently clouding the markets dissipates.

In the meantime, the current opportunity set and the level of activity across deals and SPACs affords us the ability to build a diversified portfolio while applying our disciplined risk management framework. Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

¹ Maxam Arbitrage Fund, Class F, net of fees and expenses. Inception date October 1, 2020. Please contact us regarding other series of fund units or visit our website www.maxamcm.com

² Brookfield Corporation Letter to Shareholders Q4 2024.

Maxam Capital Management Ltd. is the manager for the Maxam Arbitrage Fund. Important information about the Fund is contained in the Fund’s Simplified Prospectus, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. Disclosed historical returns for periods greater than one year are annualized unless otherwise noted and are net of fees and expenses. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. This document is not intended to provide legal, accounting, tax, or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Arbitrage Fund prior to investing. Please contact us for more information at: (604) 685-0201 info@maxamcm.com www.maxamcm.com