During the first quarter of 2021, our merger arbitrage funds performed well, with the Picton Mahoney Fortified Arbitrage Alternative Fund (Class F) returning 2.53% and the Picton Mahoney Fortified Arbitrage Alternative Plus Fund (Class F) returning 4.20% during the quarter.
Special Purpose Acquisition Companies (SPACs)
The first quarter of 2021 was uncharacteristically volatile for the arbitrage strategies. The turbulence was driven by the SPAC strategy as we saw the SPAC euphoria of 2020 fade and more rational expectations and pricing take hold.
The quarter was really a tale of two halves; up until mid-February the SPAC market continued the strong performance that we saw in 2020. New SPAC IPO activity was blistering, and new de-SPAC announcements continued to be met with strong price appreciation. With this backdrop, SPACs traded to the highest premium to trust in our recollection (5% for common shares with no announced transaction). SPACs trading at a premium to trust introduces risk in the strategy and we commensurately reduced our SPAC weight by approximately a third.
In the second half of the quarter, we saw general weakness in the US tech market and dramatic weakness in highly speculative areas like electric vehicles. A switch flipped in the SPAC market and new business combination announcements were met with skepticism and heavy selling, often immediately trading at or slightly below trust. With no enthusiasm for new announcements, we quickly saw the air come out of the SPAC market: SPACs seeking deals repriced from a premium to a discount to trust (i.e., back to “normal”). With recently IPOed SPAC units trading below $10.00, there was little to no appetite for new issues (why buy IPOs at $10.00 when one can buy units in the market at $9.90) and so we have finally seen supply of new SPACs abate.
By the end of the quarter, SPACs were trading at wide discounts to trust (levels last seen in March of 2020) and no new SPACs were being raised. Importantly, we are continuing to see business combinations announced with fully committed PIPEs (private investment in public equity). Deals are still getting done. While the share price reaction to these announcements has been modest (by 2020 standards), the SPAC market feels like it has found a healthy equilibrium after a turbulent adjustment over the quarter.
On the M&A side, the merger arbitrage universe continues to be attractively priced with wider spreads than we saw in the 2015–2019-time frame. Activity is picking up as well, notable with two of the largest Canadian transactions in history: Rogers Communications Inc. acquiring Shaw Communications Inc. and Canadian Pacific Railway Limited buying Kansas City Southern. With the attractive spread levels, we are selectively looking for places to increase our allocation to merger arbitrage.
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