P. Schoenfeld Asset Management is bullish on deals.
The event-driven-oriented hedge fund firm has sharply ramped up its exposure to merger arbitrage opportunities.
The firm, founded in 1997 by Peter Schoenfeld, emphasizes three strategies: merger investments, credit — including distressed and stressed obligations — and special situations. It sometimes launches activist campaigns when necessary.
PSAM’s exposure to M&A has steadily increased throughout the year, accounting for 70 percent of the weighting of his PSAM WorldArb Fund as of the end of June. This is more than double the 37 percent weighting in February and 32 percent in June 2018.
Throughout this period, its exposure to credit has remained roughly the same — straddling 40 percent — while special situations took a big hit, dropping to just 13 percent of its exposure from 37 percent a year earlier.
“The first half of 2019 represented the third best global start for M&A volume,” the firm told clients in its second-quarter letter, noting that deal volume exceeded $20 billion.
The volume was driven by the industrial, technology and healthcare sectors, the hedge fund pointed out.
North America’s share of global volume is at a 20-year high due to Brexit-related uncertainty, Italy’s political turmoil, and weakness in the German economy, the letter added.
“We believe M&A activity will continue at a healthy clip as companies take advantage of cheap financing, look to acquire growth late in the cycle and position themselves for the inevitable recession and changing regulatory environments,” PSAM told clients in the letter.
At the same time, private equity and buyout funds are sitting on a record amount of dry powder eager to do deals, it added.
“Companies across all sectors and industries continue to scramble as technological disruption is inspiring cross-sector deal activity,” the hedge fund elaborated.
PSAM’s participation, however, has not come without controversy. It told clients it has participated in a number of mergers that experienced unusual criticism from institutional investors in the acquiring firms.
“In most instances the acquiring firm succeeded in overcoming opposition either by achieving the vote or re-engineering the transaction terms to circumvent a vote,” it added.
PSAM manages a total of $2.4 billion.
The PSAM WorldArb Fund added 6.15 percent for the year through July, according to a document from HSBC that chronicles hedge fund returns. It gained 2 percent in 2018 and 13 percent the previous year.
In the second quarter, PSAM benefited when AbbVie agreed to acquire drug giant Allergan for $63 million in cash and stock. The hedge fund firm said that at the time, it held Allergan as a special situation, figuring the company would split up. After the merger announcement, it transferred the position to its M&A team and added to exposure “to capture the deal spread.”
In fact, in the second quarter PSAM boosted its stake by nearly six times, making it the firm’s sixth-largest U.S. long position, according to a regulatory filing.
Two of its three largest new positions in the second quarter were deal stocks. It took an initial stake in Anadarko Petroleum, which instantly became its largest U.S. long. In August energy giant Occidental Petroleum completed its acquisition of Anadarko for $55 billion, including the assumption of Anadarko’s debt.
Software company Red Hat was Schoenfeld’s third-largest long after it established a new position in the second quarter. The hedge fund took its initial position in the fourth quarter of 2018 and then liquidated it the following period. In early July, IBM completed its acquisition of Red Hat for $34 billion.
Media giant Tribune, PSAM’s second-largest long at the end of the second quarter, is currently awaiting government approval for Nexstar Media Group to complete its proposed $6.4 billion acquisition.
The most significant new credit investment this year is in the senior notes of Pacific Gas & Electric, California’s largest utility that is currently in Chapter 11, according to the letter.
“The PG&E investment embodies many of the investment characteristics we look for,” PSAM explained. “Our ability to play an active role has generally had a positive correlation to both investment outcome and impact to our portfolio.”