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Research

Event-Driven Stays Alluring Despite the Spac Slowdown

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Event-Driven strategies saw exciting developments in recent quarters, in a context where global M&A volumes saw the strongest start to the year ever. Global M&A volumes, close to USD 1.5 trillion year-to-date, were fueled by a flurry of US acquisitions and SPAC (Special Purpose Acquisition Companies) mergers. The record start to the year was also driven by several mega deals, such as General Electric’s $30bn agreement to sell its aircraft leasing business. In Europe, M&A activity jumped compared to last year, but year-to-date volumes fall short of 2018 highs. Notable transactions involve the USD 23bn proposed merger of Suez with Veolia, after months of conflict.

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Event-Driven Stays Alluring Despite the Spac Slowdown
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In terms of performance, Event-Driven strategies outperformed year-to-date, up +3.9% as of April 23rd according to our estimates. Within Event-Driven, Special Situations were up +6.7% and Merger Arbitrage up +3.3%. The latter is less directional and volatile, hence it underperforms Special Situation strategies in good times.

In our view, Event-Driven strategies remain one of the most attractive in the hedge fund space. The Covid-19 increased margin pressure in a vast array of sectors and accelerated technological disruption. This is translating into huge corporate activity in Technology, Financials, Industrials and Health Care. Borrowing costs remain low and rising equity markets bolstered the purchasing power of companies paying for acquisitions with stock rather than cash. Such trends are expected to be a tailwind for Event-Driven going forward. Concerns related to SPACs, which saw a boom in recent quarters and cooled down recently, are overdone with regards to Event-Driven performance. Merger strategies are in a good position to take advantage of arbitrage opportunities in a market which has been oversupplied and exuberant. Recent weakness allowed to separate the wheat from the chaff and demonstrate that risk management is key to SPACs investing. As some market participants have probably exited the space, the exuberance dissipated, and the market was brought back to more normalized levels. Flows were also redirected towards classical merger arbitrage situations, having a positive impact on spreads.

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