A shifting environment leads to positive tailwinds for deal activity.
Maxam Arbitrage Fund – Q3 2024 Commentary
Dear fellow investors,
The Maxam Arbitrage Fund1 gained +1.1% in the third quarter of 2024.
Performance in the third quarter was driven by seven successful deal closures and some spreads narrowing to our benefit as deals advanced towards completion. In addition, our SPAC positions benefitted from liquidations, extensions, and the growth of cash held in-trust.
Attractive yields across our opportunity set and an improving environment for M&A activity supports our positive outlook for arbitrage.
Looking back.
New deal activity was steady during the third quarter. We added 66 new definitive deals to our database, plus another eight non-definitive or hostile situations. Year-to-date we’ve added 203 definitive deals to our database which is ahead of 175 deals added through the first three quarters of 2023.
Similar to previous quarters, there continues to be lots of M&A activity in the small and mid-cap segments of the market with 70% of the deals added to our database in Q3 under $1 billion in market cap.
The fund initiated 25 new merger arbitrage positions during the quarter, had seven successful deal closures and experienced zero deal breaks.
Notable owned deals that successfully closed during the quarter included: Apartment Income REIT, TSR Inc, Everbridge, Altus Power, Cerevel Therapeutics, Park Lawn and UGE International.
At the end of the third quarter the fund was well diversified across 42 merger arbitrage positions.
Looking forward.
Deal activity has been improving, but it’s been a challenging environment for M&A over the last few years due to high inflation, elevated interest rates, and aggressive regulators. However, those headwinds are now dissipating, and we see tailwinds that support a favourable outlook for arbitrage.
In our last quarterly commentary, we stated that interest rates had likely plateaued and appeared poised to start declining. We’ve now seen two 25bps cuts from the Bank of Canada this year and the U.S. Federal Reserve reduced the fed funds rate by 50bps in September – its first cut in four years. Lower interest rates not only provide relief to indebted consumers and businesses, but they also make it cheaper for strategic buyers and private equity funds to employ leverage to make acquisitions. Supporting new deal activity even further is record amounts of undeployed private equity capital.
In addition to easier credit conditions – solid balance sheets, improving corporate profits and rising stock prices provide executives with the confidence to make acquisitions.
The current regulatory environment under the Biden administration has been one of the most aggressive antitrust regimes in recent decades – frustrating several high-profile transactions and likely delaying other tie-ups – so, it should come as no surprise that the tightly contested U.S. presidential election is being watched very closely by both dealmakers and arbitrageurs.
While a Trump administration is expected to be much more deal-friendly, Harris has reportedly been courting Wall Street and coming under pressure from some large donors to make leadership changes in antitrust enforcement2.
Whoever takes over in the oval office, it appears brighter days may be on the horizon for dealmakers.
SPAC from the dead.
In our Q2 commentary we noted a pick-up in SPAC IPOs during May and June – a trend that continued into the summer months. 18 new SPACs went public in the third quarter, including nine in August alone which was the highest monthly total since March 2022. This brings the year-to-date IPO count to 34 and nearly US $6 billion of capital raised, far surpassing the entire 2023 total when less than US $4 billion of new issuance came to market3. It might be zombie like levels compared to the bubble years of 2020 and 2021, but it’s nonetheless encouraging to see some signs of life in SPAC IPOs.
At the end of September there were 206 listed SPACs, down 12 during the quarter with the above-noted IPOs offset by closed deals and 11 liquidations3. Despite the shrinking universe, the aggregate value of all SPAC trusts increased slightly over the quarter to US $13.3 billion with new IPOs more than making up for those disappearing due to de-SPACs and liquidations.
Return estimates for existing SPACs continue to be healthy – the median IRR was north of 6% in Q3, and this has continued into Q4 – representing a compelling low-risk proposition with SPAC trust accounts invested in short-term government T-bills.
The end of the year is often a busy time for corporate actions with many SPAC sponsors weighing the pros and cons of liquidating or extending. Consideration is made as to whether the cost savings of winding up before year end outweigh the sponsor’s confidence in finding a quality deal. Such corporate actions can provide additional SPAC arbitrage opportunities.
Overall, we continue to see a healthy and low-risk opportunity set within the SPAC universe. The fund was diversified across 66 SPACs at the end of the third quarter.
Headwinds shifting to tailwinds.
We won’t call it a perfect storm, but we expect the pace of new deals to increase, driven by lower interest rates, significant undeployed private equity capital, a less challenging regulatory environment and rising corporate confidence.
While the most regulatory-challenged deals – such as Capri/Tapestry and Albertsons/Kroger – trade at very wide spreads, merger arbitrage yields on uncomplicated deals continue to trade in the high single and low-double digit annualized range. In particular, we continue to see healthy activity and attractive yields in small and mid-capitalization transactions, an appealing opportunity set that we are taking advantage of.
Maxam Arbitrage Fund has demonstrated its unique value over the last few years – generating positive returns during both equity and bond market volatility – providing investors with the ability to diversify risk and create more robust portfolios. With the recent interest rate moves and action in the bond market, a strategy like arbitrage makes a lot of sense to have in the mix.
We expect arbitrage to generate positive returns regardless of the market environment – and we think we have a particularly attractive environment in front of us. Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.
Sincerely,
Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.
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 https://ohiocapitaljournal.com/2024/10/18/both-presidential-candidates-are-courting-wall-street-will-antitrust-enforcement-be-the-cost/
3 SPAC data is from spacresearch.com
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
Insights
Fund commentary and our latest thoughts.
Maxam Arbitrage Fund – Q3 2024
A shifting environment leads to positive tailwinds for deal activity.
Maxam Arbitrage Fund – Q3 2024 Commentary
Dear fellow investors,
The Maxam Arbitrage Fund1 gained +1.1% in the third quarter of 2024.
Performance in the third quarter was driven by seven successful deal closures and some spreads narrowing to our benefit as deals advanced towards completion. In addition, our SPAC positions benefitted from liquidations, extensions, and the growth of cash held in-trust.
Attractive yields across our opportunity set and an improving environment for M&A activity supports our positive outlook for arbitrage.
Looking back.
New deal activity was steady during the third quarter. We added 66 new definitive deals to our database, plus another eight non-definitive or hostile situations. Year-to-date we’ve added 203 definitive deals to our database which is ahead of 175 deals added through the first three quarters of 2023.
Similar to previous quarters, there continues to be lots of M&A activity in the small and mid-cap segments of the market with 70% of the deals added to our database in Q3 under $1 billion in market cap.
The fund initiated 25 new merger arbitrage positions during the quarter, had seven successful deal closures and experienced zero deal breaks.
Notable owned deals that successfully closed during the quarter included: Apartment Income REIT, TSR Inc, Everbridge, Altus Power, Cerevel Therapeutics, Park Lawn and UGE International.
At the end of the third quarter the fund was well diversified across 42 merger arbitrage positions.
Looking forward.
Deal activity has been improving, but it’s been a challenging environment for M&A over the last few years due to high inflation, elevated interest rates, and aggressive regulators. However, those headwinds are now dissipating, and we see tailwinds that support a favourable outlook for arbitrage.
In our last quarterly commentary, we stated that interest rates had likely plateaued and appeared poised to start declining. We’ve now seen two 25bps cuts from the Bank of Canada this year and the U.S. Federal Reserve reduced the fed funds rate by 50bps in September – its first cut in four years. Lower interest rates not only provide relief to indebted consumers and businesses, but they also make it cheaper for strategic buyers and private equity funds to employ leverage to make acquisitions. Supporting new deal activity even further is record amounts of undeployed private equity capital.
In addition to easier credit conditions – solid balance sheets, improving corporate profits and rising stock prices provide executives with the confidence to make acquisitions.
The current regulatory environment under the Biden administration has been one of the most aggressive antitrust regimes in recent decades – frustrating several high-profile transactions and likely delaying other tie-ups – so, it should come as no surprise that the tightly contested U.S. presidential election is being watched very closely by both dealmakers and arbitrageurs.
While a Trump administration is expected to be much more deal-friendly, Harris has reportedly been courting Wall Street and coming under pressure from some large donors to make leadership changes in antitrust enforcement2.
Whoever takes over in the oval office, it appears brighter days may be on the horizon for dealmakers.
SPAC from the dead.
In our Q2 commentary we noted a pick-up in SPAC IPOs during May and June – a trend that continued into the summer months. 18 new SPACs went public in the third quarter, including nine in August alone which was the highest monthly total since March 2022. This brings the year-to-date IPO count to 34 and nearly US $6 billion of capital raised, far surpassing the entire 2023 total when less than US $4 billion of new issuance came to market3. It might be zombie like levels compared to the bubble years of 2020 and 2021, but it’s nonetheless encouraging to see some signs of life in SPAC IPOs.
At the end of September there were 206 listed SPACs, down 12 during the quarter with the above-noted IPOs offset by closed deals and 11 liquidations3. Despite the shrinking universe, the aggregate value of all SPAC trusts increased slightly over the quarter to US $13.3 billion with new IPOs more than making up for those disappearing due to de-SPACs and liquidations.
Return estimates for existing SPACs continue to be healthy – the median IRR was north of 6% in Q3, and this has continued into Q4 – representing a compelling low-risk proposition with SPAC trust accounts invested in short-term government T-bills.
The end of the year is often a busy time for corporate actions with many SPAC sponsors weighing the pros and cons of liquidating or extending. Consideration is made as to whether the cost savings of winding up before year end outweigh the sponsor’s confidence in finding a quality deal. Such corporate actions can provide additional SPAC arbitrage opportunities.
Overall, we continue to see a healthy and low-risk opportunity set within the SPAC universe. The fund was diversified across 66 SPACs at the end of the third quarter.
Headwinds shifting to tailwinds.
We won’t call it a perfect storm, but we expect the pace of new deals to increase, driven by lower interest rates, significant undeployed private equity capital, a less challenging regulatory environment and rising corporate confidence.
While the most regulatory-challenged deals – such as Capri/Tapestry and Albertsons/Kroger – trade at very wide spreads, merger arbitrage yields on uncomplicated deals continue to trade in the high single and low-double digit annualized range. In particular, we continue to see healthy activity and attractive yields in small and mid-capitalization transactions, an appealing opportunity set that we are taking advantage of.
Maxam Arbitrage Fund has demonstrated its unique value over the last few years – generating positive returns during both equity and bond market volatility – providing investors with the ability to diversify risk and create more robust portfolios. With the recent interest rate moves and action in the bond market, a strategy like arbitrage makes a lot of sense to have in the mix.
We expect arbitrage to generate positive returns regardless of the market environment – and we think we have a particularly attractive environment in front of us. Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.
Sincerely,
Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.
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 https://ohiocapitaljournal.com/2024/10/18/both-presidential-candidates-are-courting-wall-street-will-antitrust-enforcement-be-the-cost/
3 SPAC data is from spacresearch.com
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
Categories