Chidem Kurdas
Betting on corporate mergers, acquisitions, bankruptcies and restructurings is a high-risk business that requires patience. February turned out to be a very good month for such strategies. Moreover, investors appear to be willing to brave the uncertainty and illiquidity these event-driven strategies involve.
Recovery in risk taking helped special situation funds – an event-driven subset that specialize in distressed businesses – gain almost 3.5% in February, according to Lyxor. Merger and arbitrage funds made money from megadeals—- including Time Warner, Verizon, Forest Laboratories.
Investors who shunned event strategies in the aftermath of the crisis – such portfolios lost as much as 30% or more in 2008 – are coming back. Some of them favor long-time players in this niche such as Nelson Peltz, a veteran activist who recently told PepsiCo to separate its snack and beverage divisions as two public companies, having invested $1.2 billion in the PepsiCo stock.
But a relative newcomer is also attracting interest. This is Senator Investment Group, started in 2008 by Alexander Klabin and Douglas Silverman. Despite the initially difficult capital-raising environment, they had assets of $6.7 billion as of last month. No doubt it helped that that Blackstone Group provided seed capital (and recently bought a minority stake in the firm).
The necessity of having to wait for events to happen makes the strategy illiquid. Thus investments in the Senator Global Opportunity Fund require a lock-up and, even after that is over, are subject to a gating provision that no more than 25% can be redeemed in any one quarter.
That adds to the risk – there is no quick exit should expectations be disappointed – and was one of the issues that discouraged clients. But conditions have changed and event-driven funds look attractive. So much so that managers not in this sector are planning to start their own event-driven funds.
It all adds up to a bullish picture, encouraged by a rising stock market and accommodative Federal Reserve. The longer-term question is whether it will look as good when the Fed ends its money printing operation, also known as quantitative easing.
Tags: Blackstone Group, Nelson Peltz, PepsiCo, Time Warner, Verizon
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