Maxam Arbitrage Fund – Q2 2024

More M&A… including some action up North!

Maxam Arbitrage Fund – Q2 2024 Commentary

Dear fellow investors,

The Maxam Arbitrage Fund1 gained +1.1% in the second quarter of 2024.

Performance in the second quarter was driven by 16 successful deal closures and our SPAC positions benefitting 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.

The quantum of announced mergers and acquisitions continued to improve during the second quarter of 2024. We added 74 new definitive deals to our database, a 17% increase over the previous quarter and a 28% increase over Q2 2023.

The fund initiated 24 new merger arbitrage positions during the quarter, had 16 successful deal closures and experienced zero deal breaks.

Notable owned deals that successfully closed during the quarter included: Daseke, MediaValet, Orford Mining, Societal CDMO, IBEX Technologies, Think Research, NEOGAMES, Tricon Residential, Agitili Inc, ZeroFox Holdings, SP Plus, MDF Commerce, The LS Starrett co, Indigo Books & Music, Via Renewables, and Taro Pharmaceutical Industries.

At the end of the second quarter the fund was well diversified across 27 merger arbitrage positions.

Looking forward… to more M&A.

The improvement in deal volumes is encouraging, particularly against a backdrop where higher interest rates, a challenging regulatory environment, and U.S. election year uncertainty have undoubtedly hampered activity – especially for larger and complex transactions.

Continuing a trend that we have been highlighting, M&A activity was robust in the small and mid-capitalization segments of the market during the second quarter. Smaller companies are trading at much cheaper valuations than their larger brethren, making them accretive targets for opportunistic buyers. This continues to be an attractive portion of the arbitrage opportunity set for us to invest in – and we are also benefiting from this dynamic in our equity fund, the Maxam Diversified Strategies Fund.

And there is reason to be optimistic that deal activity will continue to increase and broaden out. Interest rates have likely plateaued and appear poised to start declining, providing would-be acquirors with additional financial flexibility and firepower. The prospect of a Republican administration would also likely create a more predictable regulatory environment for deal-makers – although we suspect many larger transactions may wait for the outcome of the US election before proceeding.

Supporting future deal activity even further is the increasing pressure that private equity firms are under to deploy their record US $1.2 trillion of capital – more than 26% of which was raised over four years ago2.

Northern lights.

Many of our positions tend to be in deals south of the border, where there is consistently a variety of solid deals to choose from. Canada is a much smaller market than the U.S. both from a capitalization perspective and in terms of the number of companies – and thus typically experiences less deal activity as a result. 

Of late, we are seeing an increase in takeover activity up North – certainly in part due to the attractive valuations that many quality Canadian companies trade at relative to their US counterparts. From cemetery and funeral services provider Park Lawn and payment technology company Nuvei to decision analytics company Copperleaf Technologies and community solar project developer UGE International – there are some solid deals with attractive arbitrage yields to choose from.

I had a flashback to 1998 when the news hit the wire on July 11th that National Bank had reached an agreement to acquire Canadian Western Bank.

26 years ago, Canada’s finance minister did not allow the proposed mergers of Royal Bank + BMO and TD + CIBC to go through – citing too much power in the hands of too few banks and a significant reduction of competition.

While the National + CWB transaction is likely to be a longer dated deal, perhaps with some political twists and turns, this is a different deal in a different competitive landscape than the 1998 proposed bank mergers.

Deal activity is picking up, and there is lots to do… including up here in Canada.

Dr. Market, is that a pulse?

After only six SPAC IPOs in the first quarter and zero in April, the SPAC market came to life in May and June with the biggest new issuance quarter in two years. 10 new SPACs raised over US $1.8 billion in the quarter, a promising sign given that all of 2023 saw less than US $4 billion raised. While still a far cry from the lofty issuance years of 2020 and 2021 – when nearly US $250 billion was raised in two years – it is encouraging to see fresh (or recycled) capital being deployed into SPACs.

There were 218 listed SPACs at the end of the second quarter, inclusive of the new IPOs, which is 17 fewer than the previous quarter as closed deals and liquidations outnumbered new issuances3.

Risk adjusted returns across the SPAC universe are healthy – the projected median IRR was above 6% for most of the second quarter, and this has continued into Q3. The SPAC market remains actionable for our nimble and active approach, allowing us to high-grade our holdings and take advantage of liquidations, extensions and trading opportunities.

At the end of the second quarter the fund was diversified across 66 SPACs.

An attractive and improving opportunity set.

While we are not yet back to pre-Covid M&A activity levels, deal volumes have been solid and appear poised to improve with the anticipation of interest rate cuts, a broadening of market breadth and private equity buyout funds sitting on record amounts of undeployed capital.

Existing merger arbitrage yields on solid and uncomplicated deals are as attractive as we have seen in several years. And SPACs, backed by T-bills held in-trust, continue to offer very attractive risk-adjusted yields.

Maxam Arbitrage Fund has demonstrated its unique value over the last few years – during both equity and bond market volatility – providing investors with the ability to diversify risk and create more robust portfolios.

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://commercial.bmo.com/en/us/resource/mergers-acquisitions/specialty-finance/middle-market-ma-update-q2-2024/

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

Maxam Diversified Strategies Fund – Q1 2024

A broadening rally. The shift is on.

Maxam Diversified Strategies – Q1 2024 Commentary

Dear fellow investors,

The Maxam Diversified Strategies Fund1 gained +5.0% in March, +10.5% in the first quarter of 2024, and +14.2% over the last 12 months.

It was a strong quarter for most risk assets as investor sentiment continued to improve off the October 2023 lows when the US Federal Reserve signaled that its campaign to cool inflation via aggressive interest rate hikes was likely coming to an end – and that we would likely see rate cuts in 2024.

Businesses and consumers have been weathering higher interest rates better than feared, and consensus has trended towards the view that a hard landing for the economy will be avoided. However, while inflation has been tapering lower, it is still higher than desired and proving more difficult to quell than anticipated. As a result, we have seen a re-setting of rate cut expectations from as many as six in 2024 to now (mid-April) as few as one.

Shifting into gear.

Despite interest rate cut expectations moving further out, we have begun to see a broadening of the equity rally beyond the narrow leadership that was a defining characteristic of the markets last year. We view this as constructive because it signals that investors are increasingly comfortable with the shifting market environment.

As investors search for value and opportunity beyond the Magnificent Seven2, small and mid-capitalization companies have begun to show some life. Recall that while almost everything lagged the mega cap growth theme, the share prices of smaller companies suffered disproportionately from investor disinterest and capital outflows because, as a group, they are perceived to be more sensitive to the economy, inflation, and interest rates. This dynamic, as we have covered in previous commentaries, has resulted in many quality companies trading at attractive absolute and relative valuations.

We are not alone in seeing value in smaller companies and non-household names – there has been an uptick in small and mid-cap M&A as opportunistic acquirers take advantage of valuation dichotomies present in the marketplace. We expect this activity will continue.

We are encouraged that the shift we are seeing is still in its early stages.

Exposures, activity, and positions.

Strength was broad-based across the fund’s holdings in Q1. Notable positive contributors to fund performance included larger positions in VitalHub, Vecima Networks, Sylogist and Ag Growth International. Other strong performers included DRI Healthcare, Information Services Corp, Kraken Robotics, and Trisura Group. 

Our investment in VitalHub is a good example of the success one can have by identifying an underfollowed company whose valuation is disconnected from its business performance. This provider of enterprise software to the health care space had already put up a series of solid quarters before its Q3 2023 results really caused investors to take notice. Operating in a large addressable market, with a strong balance sheet, solid organic growth, and a pipeline of accretive M&A opportunities, VitalHub has the characteristics of a true compounder.

For Kraken Robotics, our investment thesis was (and is) a mix of strong bottom-up fundamentals and a compelling top-down thesis lining up. Kraken is a marine technology company that designs and supplies advanced sonar and optical sensors, and robotic systems used in military and commercial applications. The company’s leading-edge products are seeing very strong demand from the defense industry. We purchased our initial position in Kraken when it was relatively unknown – and it still isn’t that well known today – but we expect that will change. Kraken’s management team has shown confidence in their growth outlook by recently providing revenue guidance for the first time and outlining a large pipeline of opportunities.

At the end of the first quarter the fund was well diversified across all 11 sectors with the top 25 positions accounting for 55% of net assets. From a strategy perspective, fund exposures include 77% in fundamental longs, 22% in special situations, 4% in convertible debentures, 6% in arbitrage, and 2% gross exposure in short positions.

What’s to come.

In our 2023 year-end commentary we discussed the notion that “narrow markets and low expectations convey significant opportunity.

While we are encouraged that investor sentiment has generally improved and that markets are a little less narrow than they were a few months ago, there is still a wall-of-worry facing investors → stubborn inflation, uncertainty regarding interest rates, questions regarding economic growth, and geopolitical conflicts. Many of these fears continue to be reflected in securities prices today, resulting in an environment that continues to be well-suited to our company-specific and value-oriented approach.

It is prudent to expect some volatility in a shifting market environment. If there is a market pullback (and there usually is), we will be selectively taking advantage of it.

With valuations in our favour and investor attention beginning to look beneath the surface of the large caps and household names, we believe that we are in a fertile investment environment with a compelling set-up in front of us.

We are excited about the potential returns ahead.

Thank you for your trust and confidence. Please reach out with any questions.

Sincerely,

Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.

1 Maxam Diversified Strategies Fund, Series F, net of fees and expenses. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com.

2 The Magnificent Seven stocks include Amazon.com (AMZN), Apple (AAPL), Google parent Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA).

This information is intended to provide you with information about the Maxam Diversified Strategies Fund and is not an offer to sell or solicit. Disclosed performance is based on Class X, A and F units and is net of all fees and expenses. Inception date for Class X is June 30, 2009; Class A is December 31, 2012 and; Class F is January 31, 2013. The performance fees on Class X units are subject to a 5% annualized hurdle. Important information about the Fund is contained in the Simplified Prospectus and Fund Facts which should be read carefully before investing. Prior to August 24, 2022 this Fund was offered via Offering Memorandum only and was not a reporting issuer. Historical audited financial statements for this period are archived here. The expenses of the Fund would have been higher during such period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer. Prior to becoming a reporting issuer, the Fund was not subject to the investment restrictions and practices in NI 81-102. 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. The securities of the Fund are sold only through IIROC registered dealers in those jurisdictions where it may be lawfully offered for sale. Accredited investors or certain other qualified investors may also purchase securities through Maxam Capital Management Ltd in reliance on certain prospectus exemptions available in National Instrument 45-106. Investors should consult with their own investment advisor and obtain a copy of our applicable Simplified Prospectus and Fund Facts documents before investing in the Fund. Investors should seek advice on the risks of investing in the Fund before investing. This document may contain forward-looking statements. These forward-looking statements are based upon the reasonable beliefs of Maxam Capital Management Ltd. at the time they are made and are not guarantees of future performance, are subject to numerous assumptions, and involve risks and uncertainties about general economic factors which may change over time. Maxam assumes no duty, and does not undertake, to update any forward-looking statement and cautions you not to place undue reliance on these statements as actual events or results may differ materially from those expressed or implied in any forward-looking statements made. 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 Diversified Strategies Fund prior to investing.

Maxam Arbitrage Fund – Q1 2024

Solid deal flow + Attractive arbitrage yields.

Maxam Arbitrage Fund – Q1 2024 Commentary

Dear fellow investors,

The Maxam Arbitrage Fund1 gained +0.6%in the first quarter of 2024.

Positive fund performance for the first quarter was driven by 15 successful M&A deal closures but impacted by one deal break. Our SPAC holdings were also positive contributors to performance as they continued to benefit from liquidations, extensions, and the ongoing growth of cash held in-trust.

We have a positive outlook for arbitrage in the current environment. Deal flow is solid – and we think poised to improve – and arbitrage spreads are as attractive as we’ve seen in several years.

Megadeals and more beneath the surface.

New M&A deal flow in the first quarter was encouraging, especially considering cautious expectations due to higher interest rates, a still challenging regulatory environment, and election year uncertainty.

Several megadeals helped fuel a more than 20% rise in global deal values during the first quarter – there were 10 deals valued at more than US$10 billion, including two over US$30 billion2.

Let’s be cautious about calling one quarter a trend, but the uptick in large cap M&A deals is a welcome development. Large deal announcements signify some renewed confidence that buyers are increasingly comfortable with the economic landscape, and that they believe they can navigate what continues to be a challenging regulatory environment. And while interest rates remain elevated, lower rates – when they do come – should help fuel more deal activity, especially from the private equity community that is sitting on piles of uncalled capital.

We continue to see lots of new deal activity beneath the surface of the large caps. During the first quarter we added 63 new definitive deals to our database – with 37 of those transactions being under US$1 billion in market capitalization.

Small and mid-cap deal activity should continue to be plentiful with opportunistic acquirors looking to take advantage of some material valuation dichotomies across the market capitalization spectrum. This is an attractive segment of the arbitrage opportunity set for us to take advantage of because, while there are nuances to every deal, smaller deals tend to trade at wider spreads than larger transactions, face less regulatory scrutiny, and close more quickly → less risk and superior IRRs.

The fund initiated 27 new merger arbitrage positions during the quarter and, as mentioned above, had 15 successful deal closures and one deal break.

Some notable owned deals that successfully closed during the quarter included: StarTek, Logistec, Q4, ImmunoGen, Vanstar Mining, Neighbourly Pharmacy, Harpoon Therapeutics, Sovos Brands, Science 37 Holdings, Textainer Group, Karuna Therapeutics, Cymabay Therapeutics, and Farmers Edge.

Our lone deal break during the quarter was Sequans Communications. Would-be acquiror Renesas Electronics abandoned their purchase of Sequans after the company received an adverse tax ruling. As much as we’d like to avoid them all, deal breaks are a reality of an arbitrage strategy. This was just our fourth deal break since launching the fund three and a half years ago (out of over 330 deals invested in) and our overall deal success rate is over 98%. This deal break occurred in late February and the fund had already recovered the decline by mid-March → highlighting the low-drawdown and typically quick recovery nature of the strategy.

At the end of the quarter the fund held 29 merger arbitrage positions.

Still ticking along.

At the end of Q1 there were 235 listed SPACs, down from 270 at the end of 2023 and over 530 at year end 2022. Approximately 70% of the decrease in the quarter came from closed deals, and 30% from liquidations. The decline was partially offset via six new SPAC IPOs, down slightly from nine in Q4 2023.

While the SPAC universe is shrinking, it continues to provide us with an opportunity to earn attractive risk-adjusted returns via liquidations and extensions. SPAC trust account balances grow their capital by investing in T-bills, and we are seeing a healthy number of sponsors offer incentives – topping up trust accounts with additional capital – to compensate shareholders for staying invested another few months while management searches for a deal.

While the traditional IPO market has been slow, if we do see a pick-up in activity it may also portend some optionality coming back into SPACs – namely if investors get excited about announced deals. This optionality is essentially being priced at zero across most SPACs that are still searching for deals, which means we are getting paid to wait. A “call option” that we get paid for? Yes please.

SPAC IRR’s continue to be healthy with the median around 6%, similar to levels at the end of 2023. At the end of the first quarter the fund was invested in 52 SPACs, down from 72 at year-end.

Looking ahead.

Arbitrage yields that we are deploying capital into are as attractive as we’ve seen in several years. Relatively straight forward deals trade in the 7-8% annualized range while some off the radar deals, and those with more uncertainty, trade into the low-to-mid teens. These arbitrage spreads look particularly attractive on an absolute and risk-adjusted basis.

Maxam Arbitrage Fund has demonstrated its unique value over the last few years – during equity and bond market volatility – providing investors with the ability to diversify risk and create more robust portfolios.

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://www.bnnbloomberg.ca/megadeals-make-a-comeback-to-power-660-billion-m-a-revival-1.2051649

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

Maxam Diversified Strategies Fund – Q4 2023

Narrow markets and low expectations convey significant opportunity.

Maxam Diversified Strategies – Q4 2023 Commentary

Dear fellow investors,

The Maxam Diversified Strategies Fund1 gained +6.6% in the fourth quarter of 2023.

Over the last few quarters, we have opined on the steep wall of worry that investors have faced – surging inflation, rising interest rates, recession fears, geopolitical conflicts – and on the narrow breadth that was a characteristic of the equity markets in 2023.

Facing the wall of worry, savers could invest in GICs and T-bills with little risk and, thanks to higher interest rates, earn a reasonable return. And, as you can see in the chart below, the Magnificent Seven2 left other segments of the markets far behind in 2023, most noticeably ramping higher post the U.S. regional banking crisis in March. Investors flocked to these mega cap technology stocks where growth, fueled by the artificial intelligence theme, was most readily assumed.

2023 was a strong bull market for mega cap tech stocks, and a relatively mediocre year for most other markets.

Narrow markets and low expectations convey significant opportunity.

While almost everything has lagged mega cap tech, the wall of worry has arguably impacted small and mid-capitalization companies the most. Smaller companies are generally perceived to be more sensitive to the economy, inflation, and interest rates – the devil is in the details of course, and that is part of the opportunity.

In addition, investor disinterest and outflows have resulted in small/mid-caps trading at material discounts to large caps. This valuation discount is in contrast to smaller companies historically trading at premium multiples, as can be seen in the chart below.

Positively, we observed an improvement in market breadth towards the end of the year. In our view, this may mark the beginning of a trend where companies beneath the surface of the mega caps start to re-rate higher. This is a segment of the market where we see significant value and opportunity.

Exposures

At the end of the fourth quarter the fund was well diversified across all 11 sectors with the top 25 positions accounting for 54% of net assets. From a strategy perspective, fund exposures include 69% in fundamental longs, 28% in special situations, 4% in convertible debentures, 8% in arbitrage, and 1% gross exposure in short positions.

Many holdings contributed to performance in Q4, but notable positive contributors included H2O Innovation (we discussed H2O’s takeout in our Q3 commentary), Vitalhub, DRI Healthcare, Pollard Banknote, Kraken Robotics, Rogers Communications and Westaim. Some notable detractors from performance in the quarter included Hamilton Thorne, Vecima Networks and Ag Growth International.

Many of our holdings are not your typical household names – and we believe that is often where compelling opportunity can be found. Maxam Diversified Strategies Fund can provide investors with unique exposure to under-followed and mispriced companies.

We recently added to our position in Ag Growth International at prices that we believe reflect compelling value. Ag Growth is a global leader in providing equipment and infrastructure solutions to the agriculture industry. The company is trading at a near decade low multiple despite appearing to be poised for long-term growth driven by a multi-year ag infrastructure investment theme, with particular strength coming from international markets.

With so much negative macroeconomic news and low expectations already reflected in the security prices of many of our portfolio companies, we expect that – in addition to strong business results – moderating inflation and stabilizing (or declining) interest rates will increasingly support favourable valuation re-ratings.

Taking advantage of the opportunity set.

It is not just small and mid-cap companies where we see compelling opportunity, but the prolonged malaise and bear market that these companies have suffered through has resulted in some very attractive valuations.

As we detailed in the ‘Redux’ section of our Q3 commentary, aspects of the current market environment remind us of the set-ups we saw in 2000 and 2009, periods which resulted in multi-year outperformance for small caps.

Of note, we have already begun to see an uptick in small and mid-cap M&A as opportunistic acquirers take advantage of valuation dichotomies present in the marketplace. We expect this activity will continue.

We believe that we are in a very fertile investment environment – one that is particularly well-suited for our flexible approach and value-oriented style. We are excited about the potential returns ahead.

Thank you for your trust, patience, 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 Diversified Strategies Fund, Series F, net of fees and expenses. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com.

2 The Magnificent Seven stocks include Amazon.com (AMZN), Apple (AAPL), Google parent Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA).

This information is intended to provide you with information about the Maxam Diversified Strategies Fund and is not an offer to sell or solicit. Disclosed performance is based on Class X, A and F units and is net of all fees and expenses. Inception date for Class X is June 30, 2009; Class A is December 31, 2012 and; Class F is January 31, 2013. The performance fees on Class X units are subject to a 5% annualized hurdle. Important information about the Fund is contained in the Simplified Prospectus and Fund Facts which should be read carefully before investing. Prior to August 24, 2022 this Fund was offered via Offering Memorandum only and was not a reporting issuer. Historical audited financial statements for this period are archived here. The expenses of the Fund would have been higher during such period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer. Prior to becoming a reporting issuer, the Fund was not subject to the investment restrictions and practices in NI 81-102. 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. The securities of the Fund are sold only through IIROC registered dealers in those jurisdictions where it may be lawfully offered for sale. Accredited investors or certain other qualified investors may also purchase securities through Maxam Capital Management Ltd in reliance on certain prospectus exemptions available in National Instrument 45-106. Investors should consult with their own investment advisor and obtain a copy of our applicable Simplified Prospectus and Fund Facts documents before investing in the Fund. Investors should seek advice on the risks of investing in the Fund before investing. This document may contain forward-looking statements. These forward-looking statements are based upon the reasonable beliefs of Maxam Capital Management Ltd. at the time they are made and are not guarantees of future performance, are subject to numerous assumptions, and involve risks and uncertainties about general economic factors which may change over time. Maxam assumes no duty, and does not undertake, to update any forward-looking statement and cautions you not to place undue reliance on these statements as actual events or results may differ materially from those expressed or implied in any forward-looking statements made. 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 Diversified Strategies Fund prior to investing.

Maxam Arbitrage Fund – Q4 2023

An attractive arbitrage environment. Expecting an uptick in M&A.

Maxam Arbitrage Fund – Q4 2023 Commentary

Dear fellow investors,

The Maxam Arbitrage Fund1 gained +1.4%in the fourth quarter and +5.2% for the 2023 calendar year.

Positive fund performance for the fourth quarter was driven by 30 successful M&A deal closures and our SPAC holdings continuing to benefit from liquidations, extensions, and the ongoing growth of cash held in-trust due to higher interest rates.

Regulators and recessions and bears, oh my!

Despite some expecting a slowdown in M&A transactions due to more frequent regulatory challenges, higher interest rates, rising geopolitical tensions and a softening economy, new deal activity was solid in Q4 – and throughout 2023 for that matter. Companies engage in M&A for a variety of reasons, and they do so in bull, bear and range bound markets.

While cumulative M&A deal value was lower in 2023 than it was in 2022, we added a greater number of deals to our database than we did in the previous year. Notably, we are seeing an uptick in small and mid-capitalization deal activity. In the fourth quarter alone, 50 of the 72 new deals that we reviewed were under $1 billion in market cap.

We expect to continue to see healthy deal activity beneath the surface of the large caps as opportunistic acquirors capitalize on some bargain valuations. This is an attractive opportunity set for us to take advantage of because small/mid-cap transactions often face less regulatory scrutiny than large deals and they typically close more quickly. Additionally, smaller deals can sometimes trade at higher gross spreads due to larger pools of capital not being able to allocate efficiently to them.

Merger arbitrage spreads continue to be attractive with annualized yields at approximately 10% on average – albeit with some dispersion around that figure. The fund invested in 28 new or existing deals during the quarter, had 30 successful deal closures and experienced one deal break.

Some notable owned deals that successfully closed during the quarter included: Dialogue Health Technologies, Activision Blizzard, Circor International, Terra Firma Capital, ABC Technologies, Alpha Lithium, Tabula Rasa HealthCare, NextGen Healthcare, Essential Energy Services, Argo Group International, Avantax, Greenhill & Co, Nova Royalty, Spark Power, Abcam, H20 Innovation, Opsens, Seagen, PCTEL, Midwest Holding and Patriot Transportation. Our lone deal break during the quarter was Flowserve’s intended acquisition of Velan which failed to receive regulatory clearance from France.

At the end of the quarter the fund held 26 merger arbitrage positions.

It ain’t over!

The final month of the year was a busy one for SPACs as some sponsors rushed to close deals or wind up prior to the turn of the calendar. There were 15 liquidations in December and a similar amount of de-SPACs, comparable figures to the prior two months combined. In all, Q4 saw the number of listed SPACs shrink from 330 to 270, and this includes nine new IPOs during the quarter. Encouragingly, this was the highest number of SPAC IPOs since Q1 this year.

Overall, the number of publicly listed SPACs in 2023 declined by roughly half. Despite this, the market size remains actionable and attractive for our nimble fund with remaining SPACs holding approximately US$18 billion of capital in trust accounts – a figure that is spread relatively evenly across those still searching for deals and those with announced transactions.

We view the current SPAC arbitrage environment as particularly favourable for our systematic and discretionary approach. Many sponsors are electing to extend their deal timelines by adding more capital to trust accounts – a corporate action that requires rigorous tracking and attention to detail. We’re doing the work, and we’re being rewarded. Another benefit of these extensions is that the much anticipated 2H23 “SPAC cliff” turned out to be more of a Blue square than a Black diamond2 – leaving us with a healthy opportunity set to start 2024.

At year end the fund’s SPAC holdings were well diversified across 72 positions and we continue to find strong risk-adjusted returns with over half the space trading at IRRs >6%.

Looking ahead.

Maxam Arbitrage Fund has demonstrated its unique value over the last few years – during equity market volatility and the rapid rise in interest rates – providing investors with an alternative to diversify and enhance their portfolios. As arbitrageurs, we expect the strategy to generate a positive return regardless of the market environment.

Utilizing our data-centric and disciplined investment and risk management process, we have an attractive opportunity set to deploy capital into today. Looking forward, we expect to deliver the same diversification benefits and, as suggested by current arbitrage spreads, attractive absolute performance.

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 Black diamond ski runs are often known for their steepness, and sometimes cliffs. Blue square ski runs are typically characterized by more gentle slopes.

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

Maxam Diversified Strategies Fund – Q3 2023

M&A activity highlights the value disconnect.

Maxam Diversified Strategies – Q3 2023 Commentary

Dear fellow investors,

The Maxam Diversified Strategies Fund1 declined -0.6% in the third quarter of 2023.

Q3 was a difficult quarter for both equity and bond markets. After a positive start to the quarter, the now all-too-familiar market narratives of high inflation, rising interest rates, recession fears and geopolitical conflicts began to dominate again. If that wasn’t enough, late August through early October is often the weakest seasonal period for equities each year.

As we finish the weakest seasonal period of the year, we enter the strongest seasonal period through year-end. A year-end rally would be very welcome of course – but whatever transpires it seems appropriate to expect continued market volatility in the near term.

You know those Buffett quotes that everyone loves?

The wall of worry is steep today. It is understandable, there is a lot to worry about with respect to the capital markets, the economy, and the world. And worry brings opportunity – companies are not cheap when everything is rosy and reflected in stock prices.

Framing part of the opportunity set: it has been a terrible market for small and mid-cap stocks over the last couple of years. The Russell 2000, S&P 600, and S&P/TSX Small Cap are down -31%, -25% and -23% since November 20212.

And it’s not just small and mid-caps. The S&P 500 Equal Weight Index is down -15% over that same time frame2. In our Q1 and Q2 commentaries we discussed the narrow breadth of the market this year and how a few mega cap companies were masking the weakness and opportunity beneath the surface.

Like a broken record, we have also been highlighting that small and mid-cap securities currently trade at a material valuation discount to large caps. Small caps have historically traded at a valuation premium to large caps, but they have shifted to a discount because as a group they are perceived to be more sensitive to the economy, inflation, and interest rates.

A recession may be a matter of ‘when’ not ‘if’ at this point – in any event, we see one already reflected in many security prices today. History reveals that markets are forward discounting mechanisms – and small caps typically outperform as inflation declines, interest rates fall, and the economy troughs and exits a recession.

Today we have an environment characterized by fear and an opportunity set full of securities that are down materially from their highs, trading at attractive valuations.

Take advantage. Be greedy when others are fearful.

There must be something in the water.

We have mentioned our investment in water infrastructure and technology company H2O Innovation in our quarterly commentaries on five previous occasions. On four instances we noted that it was a positive contributor to performance, and once that it was a negative contributor.

In our Q2 2022 commentary, when H2O was a detractor from performance, we wrote:

We’ve recently added to our position in H20 Innovation Inc., a water infrastructure and technology company whose shares were down -32% through the first six months of this year. We like this founder led business that has highly recurring revenues and is delivering strong organic and acquisitive growth.

Our intention was to highlight that we were adding to a high-quality and growing business that was trading at what we thought was an unreasonably depressed share price. And in our most recent commentary – yes just a few months ago – we took a small victory lap when H2O’s shares, reflecting the strong performance of the business, performed quite well.

Fast forward to the quarter that just finished on September 30th: H2O’s share price declined from $3.20 to $2.61, down -18%. Stock prices are volatile – often much more so than their underlying businesses.

We were preparing to write about the opportunity to add to this quality business again… H2O was performing quite well but getting no love from investors – albeit in a very difficult market environment, particularly for stocks not named NVIDIA or associated with the recent AI mania3.

On October 3rd H2O announced that they had entered into a definitive agreement to be acquired by Ember Infrastructure Management, a New York-based private equity firm, for $4.25 cash per share – a significant premium to where the public market was valuing the business.

Beyond H2O being a successful investment for the fund, it is illustrative of the value disconnect that exists for select companies in this market environment, and the opportunity that exists for investors.

With many quality small and mid-cap companies trading at unreasonably low valuations, or material discounts to their larger peers, we expect to see an uptick in M&A activity. Either the market will provide deserving businesses with a reasonable valuation, or an opportunistic acquiror will.

Exposures.

At the end of the third quarter the fund was well diversified across 11 industry sectors and its top 25 positions accounted for approximately 51% of net assets. From a strategy perspective, fund exposures include 66% in fundamental longs, 28% in special situations, 4% in convertible debentures, 12% in arbitrage, and approximately 2% gross exposure in short positions.

Positive contributors to fund performance during Q3 included Vitalhub, Celestica, NexGen Energy, Sprott Physical Uranium Trust and AG Growth International. Some notable detractors from performance in the quarter included H2O Innovation, Calian Group and Hamilton Thorne.

We have more value and catalyst rich names like H2O Innovation in the fund today.

Redux

There is compelling value beneath the surface of the mega cap companies that have garnered the preponderance of investor attention this year. Looking beyond any near-term volatility I see one of the best set ups for our style and approach since 2000 and 2009.

In 2000 the internet and technology bubble was bursting, former darlings declined and previously ignored companies and segments of the market began a period of significant outperformance.

In 2009, fears of ongoing recession following the GFC4 lingered in the psyche of investors, paralyzing them from action. But valuations were very attractive on normalized results – especially in quality small and mid-caps – creating a favourable environment for active investors.

Compounding our experience and learned knowledge, we see many of those same market dynamics present today.

Step up to the plate.

We concluded our last commentary with a section titled the “Hitter’s count” – describing the positive set up we see for deploying capital. With many security prices down significantly over the last couple of years that set up is increasingly attractive today.

Taking advantage of fear does not mean we aren’t mindful of the present risks – but it is precisely because investors are focused on those risks that we find ourselves in this fertile investment environment.

Looking through any near-term market volatility we see strong performance coming from the companies we own materially re-rating, targeted catalysts occurring, and/or a wave of M&A as opportunistic acquirers step in to take advantage of significant value dislocations.

Thank you for your trust, patience, 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 Diversified Strategies Fund, Series F, net of fees and expenses. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com. S&P/TSX Composite, S&P 500 Index and Bloomberg Aggregate Bond Index data sourced from Bloomberg.

2 Index performance data sourced from Bloomberg.

3 While AI is a legitimate growth area and opportunity for many businesses, the hype has created some inflated valuations. NVIDIA is a great company, but it might not trade at a great valuation today. Here’s an infamous quote from Scott McNeely, former CEO of Sun Microsystems, describing his company’s valuation during the technology and internet bubble that burst in 2000:

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

4 GFC is the acronym for the Great Financial Crisis circa. 2007-2008. https://en.wikipedia.org/wiki/2007–2008_financial_crisis

This information is intended to provide you with information about the Maxam Diversified Strategies Fund and is not an offer to sell or solicit. Disclosed performance is based on Class X, A and F units and is net of all fees and expenses. Inception date for Class X is June 30, 2009; Class A is December 31, 2012 and; Class F is January 31, 2013. The performance fees on Class X units are subject to a 5% annualized hurdle. Important information about the Fund is contained in the Simplified Prospectus and Fund Facts which should be read carefully before investing. Prior to August 24, 2022 this Fund was offered via Offering Memorandum only and was not a reporting issuer. Historical audited financial statements for this period are archived here. The expenses of the Fund would have been higher during such period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer. Prior to becoming a reporting issuer, the Fund was not subject to the investment restrictions and practices in NI 81-102. 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. The securities of the Fund are sold only through IIROC registered dealers in those jurisdictions where it may be lawfully offered for sale. Accredited investors or certain other qualified investors may also purchase securities through Maxam Capital Management Ltd in reliance on certain prospectus exemptions available in National Instrument 45-106. Investors should consult with their own investment advisor and obtain a copy of our applicable Simplified Prospectus and Fund Facts documents before investing in the Fund. Investors should seek advice on the risks of investing in the Fund before investing. This document may contain forward-looking statements. These forward-looking statements are based upon the reasonable beliefs of Maxam Capital Management Ltd. at the time they are made and are not guarantees of future performance, are subject to numerous assumptions, and involve risks and uncertainties about general economic factors which may change over time. Maxam assumes no duty, and does not undertake, to update any forward-looking statement and cautions you not to place undue reliance on these statements as actual events or results may differ materially from those expressed or implied in any forward-looking statements made. 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 Diversified Strategies Fund prior to investing.