Resiliency for your portfolio.
Maxam Arbitrage Fund – Q4 2021 Commentary
Dear fellow investors,
The Maxam Arbitrage Fund1 gained +1.7% in the fourth quarter and +5.5% for the calendar 2021 year. The fund’s annualized return since inception is +7.4%.
Mergers and acquisitions volumes topped over US$5 trillion in 2021 – a record year for deal making. Factors fueling the robust dealmaking included increased executive confidence, rising company valuations, low interest rates and significant amounts of private equity capital seeking targets. Plentiful dealmaking led to a large opportunity set to deploy capital into.
A notable development during the year has been the less precedent-oriented approach that the U.S. Federal Trade Commission (FTC) and the Department of Justice (DOJ) are taking towards mergers in certain industries. The seemingly increased willingness of the FTC and DOJ to challenge certain mergers led to a widening of some merger arbitrage spreads as the year progressed, especially in larger cap transactions. This was especially notable in June when the DOJ sued to block AON’s acquisition of Willis Towers Watson, successfully scuttling the deal.
A byproduct of the less-formulaic stance taken by some US regulatory bodies has meant spreads have not only widened in some of the larger transactions, but they have remained relatively wide right up until close, sometimes only really tightening during the last few days before deal consummation.
The Maxam Arbitrage Fund’s flexibility and our investment process, which has a significant focus on risk management, helped us avoid some of the carnage from the notable deal breaks during the year, which included Willis Towers Watson, PNM Resources and Sportsman’s Warehouse.
The fund participated in 136 deals during 2021. Heading into 2022 the fund held 29 merger arbitrage positions with an average gross spread of 2.2% and average months to expected close of 1.9 – this represents an implied annualized return of approximately 13%2.
The 2021 year was notable not only for the record amount of M&A activity, but also for record SPAC3 initial public offerings. Over 600 SPAC IPOs hit the market in 2021 raising approximately US$160 billion – more than twice as many IPOs, raising almost twice as much capital than in 2020 (which was itself a record year).
Half of the record 2021 SPAC issuance came in the first quarter, leading to a very well-supplied market. The large supply increase coincided with some of the speculative fervor coming out of the SPAC market, leading to the SPACs that were seeking transactions to trade at wider discounts to their trust values. This was an opportunistic set-up for us as we were able to selectively purchase issues that were trading at incrementally attractive IRRs.
We continue to approach SPACs purely from an arbitrage perspective – rather than speculation. There are currently almost 600 SPACs seeking acquisitions and the median discount to trust value was 2.5% at year end. These discounts have widened somewhat during January’s overall market volatility – our fund’s flexibility, and active approach, has allowed us to take advantage.
As of December 31, the fund was well-diversified across 183 SPACs with a gross yield to redemption of over 2.5%. Time to redemption for our SPAC portfolio is just over eight months, whereas the universe is approximately 1.2 years. A lower remaining duration provides us with attractive IRRs while also leaving us exposed to asymmetric upside return potential if the SPAC finds an acquisition that the market gets excited about.
Risk management is central to our disciplined investment process, and we are mindful of the increased scrutiny that regulators are applying in their review of transactions. Regulatory approval risks are typically more prevalent with large and mega-cap combinations, and in situations where competition and market dominance are of concern.
Our fund’s flexibility affords us with advantages from a liquidity perspective with respect to both managing risks and seeking returns. We enjoy the flexibility of deploying capital in mid-cap, and some small cap, deals where the regulatory risks are much less burdensome (if present at all) and spreads are as attractive (if not more so) than in their larger cap brethren.
With many of the factors that drove record deal activity in 2021 remaining in place today, we expect healthy deal activity in 2022 – providing us with attractive opportunities to deploy capital.
In addition to the attractive spreads available to us today in both traditional merger arbitrage and SPAC arbitrage, the prospect for rising interest rates should reinforce returns. Arbitrage is a low duration strategy that has historically exhibited improving returns as interest rates have risen.
The Maxam Arbitrage Fund is well-suited to the current environment. The strategy’s low-risk and consistent return profile, plus its low correlation with traditional equity and fixed income strategies, make it an attractive solution for both diversification and returns.
Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.
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 The annualized rate of return calculation assumes no deal breaks , no timeline changes, or any price amendments ( positive or negative.
3 Special Purpose Acquisition Company
Maxam Capital Management Ltd. is the manager for the Maxam Arbitrage Fund. Important information about the Fund is contained in the Fund’s Simplified Prospect us, 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 [email protected] www.maxamcm.com