The Picton Mahoney Fortified Arbitrage Alternative Fund Cl F returned 0.79%, and Picton Mahoney Fortified Arbitrage Plus Alternative Fund Cl F returned 0.84% in the second quarter of 2024.
It was a relatively slow quarter for arbitrage strategies. Several mergers received second requests, thereby lengthening their deal timelines and reducing merger arbitrage returns. The most significant regulatory action in the quarter was the Federal Trade Commission (FTC)’s decision to block Tapestry Inc.’s acquisition of Capri Holdings Ltd. This merger would combine three players in the handbag market: Coach and Kate Spade from Tapestry Inc., and Michael Kors from Capri Holdings Ltd. While the handbag market is large and competitive, the FTC is narrowly defining the market as “accessible luxury.” Under this definition, these three brands do have significant market shares. Although we disagree with the FTC’s market definition, this is a more standard antitrust challenge compared to the novel “hipster antitrust” arguments we saw last year (e.g., against pharmaceutical manufacturers with no competing drugs). Due to the possibility of this challenge and the potential emergence of “hot docs” at trial (i.e., emails between executives that might indicate a plan to raise prices), we maintained a small position in the deal fully protected by downside puts. As a result, we kept the loss small (~5-10 bps) and are left with effectively a call option position if the companies prevail in court.
New deal activity picked up towards the end of the quarter, notably in Canada where we had three significant deals announced: Park Lawn Corp, Canadian Western Bank (“CWB”), and Copperleaf Technologies Inc. We find CWB particularly interesting as the complexities of Canadian banking regulation tend to keep our U.S. arbitrage competitors away. We estimate the arbitrage spread in CWB to be approximately 15% annualized.
Following the first presidential debate, the likelihood of a Trump presidency has increased to the point where it is starting to be priced into some politically sensitive arbitrage spreads. For example, the acquisition of Discover Financial Services by Capital One Financial Corporation has seen its spread roughly halve in recent weeks. Setting aside all other political views, a second Trump administration would likely be positive for merger arbitrage strategies as we would expect the leadership of the FTC and Department of Justice antitrust division to be replaced and a return to a much more predictable antitrust enforcement framework.
For the first time in a long time, the Special Purpose Acquisition Company (“SPAC”) market saw net growth in Q2. Ten SPACs were issued, raising US$1.8 billion, roughly double the activity of the last few quarters. The new SPACs are typically led by teams that are repeat sponsors who have successfully closed past deals. While it’s great to see new SPAC issuance, the market is generally taking a “show me” approach to valuing the potential optionality as warrant values remain quite depressed.
| 1M (%) | 3M (%) | 6M (%) | 1YR (%) | 3YR (%)* | 5YR (%)* | Since Inception* | |
| Picton Mahoney Fortified Arbitrage Alternative Fund (Class F) | 0.24 | 0.79 | 1.76 | 4.61 | 2.24 | 5.75 | 5.40 (Jan. 3, 2019) |
| Picton Mahoney Fortified Arbitrage Plus Alternative Fund (Class F) | 0.20 | 0.84 | 2.23 | 7.01 | 3.05 | 10.25 | 9.49 (Jan. 3, 2019) |
(*) refers to average annualized performance
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