The economic and financial market volatility of the first quarter provided us with an abundance of arbitrage opportunities that led to strong performance in the second quarter.
Merger arbitrage spreads normalized in the quarter from the extremely wide levels of March 2020, although they remain considerably wider than preCOVID levels. As expected, deal flow has been quiet as corporate boards and management teams are more focused on addressing immediate business issues than making strategic acquisitions. The environment is very reminiscent of the first half of 2009: lower than normal M&A activity but much wider arbitrage spreads. This was a very fruitful environment for merger arbitrage returns then, and we expect it to be this cycle as well. While our overall risk exposure in M&A has been fairly constant, we have been more active in taking advantage of credit market dislocations where bonds that are involved in M&A are offering meaningfully better risk/reward than the equity spreads. We have also had some success on the short side where we think the market is underpricing the risk of certain M&A transactions.
Special Purpose Acquisition Companies (SPACs)
The resurgence in SPACs this quarter was unprecedented. In March we were buying SPACs at 5-10% discounts to trust values. By May/June, after an abundance of successful deSPAC announcements, we were able to sell some SPACs at prices ranging from $15 to $40 (recall SPACs IPO at $10 and put their IPO proceeds into treasury bills, ensuring the return of capital at maturity).
As we have positive outcomes from successful SPACs, we have been able to redeploy the capital into new SPAC IPOs that are led by some of the most well-known investors and/or management teams in the U.S. These include Goldman Sachs, Chamath Palihapitiya, Barry Sternlicht, William Foley, Chinh Chu, and Bill Ackman (forthcoming). With these high-profile sponsors, we look forward to the opportunity to participate in any exciting deal flow they can generate while retaining the option to get our IPO price back with interest.
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