December 30, 2020- Accelerate Financial Technologies Inc. launched its exchange-traded merger arbitrage fund in April as financial markets whipsawed from the effects of COVID-19. The timing proved to be much better than that would seem.
Arbitrage is the method of profiting from share-price movements in corporate buyouts, and traditional merger activity dried up amid the uncertainty. But the launch of the ETF by the Calgary-based fund manager also coincided with a boom in special-purpose acquisition companies (SPACs). They have become its bread and butter.
Since the ETF went live on the Toronto Stock Exchange in early April as a way for retail investors to take part in what is usually an area for sophisticated financial players, it is up 32 per cent. That is largely on the strength of SPACs, also known as “blank-cheque” companies, which are set up to acquire private corporations and get them listed on stock exchanges.
By contrast, the S&P/TSX composite index is up 29 per cent in the same period, while the S&P Merger Arbitrage Index is up nearly 8 per cent. The index tracks price changes for a global selection of publicly announced mergers, acquisitions and other corporate reorganizations.
This year, SPACs became a go-to method for listing companies as an alternative to traditional initial public offerings, and have been sponsored by some of the biggest names in investing, such as Bill Ackman and Daniel Och.
Recent ones have included Quebec-based electric vehicle maker Lion Electric Co.’s US$500-million takeover by Northern Genesis Acquisition Corp., and RMG Acquisition Corp.’s US$933-million merger with lithium-ion battery manufacturer Romeo Power.
Accelerate founder and chief executive officer Julian Klymochko says SPACs were part of his strategy from the start, given they are a relatively low-risk way for investors to profit from takeover activity. But then the market exploded, largely in the United States.
In 2019, there were US$13-billion worth of SPAC initial public offerings, and this year the figure has topped US$80-billion. The ETF now has 151 of them.
“Did I envision that we’d be 85-per-cent SPACs? No, but it’s incredibility difficult to allocate to merger arbitrage these days when SPACs are so darn lucrative, especially given the risks that you take,” Mr. Klymochko says. “It really has been an evolution given the upside available.”
SPACs raise capital through an IPO of units priced at US$10 each. The units include one common share and a warrant that will trade separately. The cash sits in trust collecting interest until the SPAC buys a private operating company.
Once a SPAC lists, it usually must buy a company within two years. If not, the management team loses its own investment to set up the SPAC and the investors get their money back plus accrued interest. These investors must also approve a merger, but those who don’t can get their cash back with interest.
The arbitrage ETF sells the shares before the shareholders vote to approve the acquisition to lock in gains, and new investors buy in based on the company’s long-term prospects.
Now, more traditional merger and acquisition activity is heating up again in numerous sectors after several big deals fell through or ended up in dispute, such as the LVMH takeover of Tiffany & Co. Shareholders of the famous jeweller approved LVMH’s US$15.8-billion offer on Wednesday, after the deal nearly fell through before being priced down.
Shareholders of mall owner Taubman Centers blessed the company’s takeover by Simon Property Group in a priced-down offer that prevented what was shaping up to be a lengthy court battle over Simon’s decision to rescind its initial bid, made before lockdowns began in the spring.
Mergers and acquisitions are getting back to more normal levels, but the blank cheque companies will remain a focus for the ETF, Mr. Klymochko says. “SPACs used to be a fraction of the M&A deals, and now they’re a multiple to outstanding M&A deals, so the roles have been reversed,” he says.