We’re officially done with our first 12 months of managing capital, marking our 1-year anniversary on July 11th. There’s been a bit more turmoil in merger arbitrage during 2024, but we’ve now strung together two back-to-back positive months to round out the first year with 8 total positive months. During that time, we’ve tracked 182 transactions with signed merger agreements. 58 of those transactions are currently ongoing, while 124 transactions have come to their conclusion. Out of these 124 concluded transactions, we’ve invested in 102 of them, with 97 of our invested-in transactions ultimately being completed.
Of the 124 concluded transactions, there were 7 deals in total that failed to be completed. We invested in 5 of those 7 failed transactions with what we believe was high-quality risk management, as our largest negative realized loss, as a percentage of equity, came from the iRobot transaction with Amazon. We lost approximately -1.15% of our total equity in that transaction, and here’s how all of our losses from failed deals stack up2:
In our opinion, this is a good representation of our risk management systems and overall ability to analyze transactions. Additionally, we invested in deals with a completion rate of 95.1% during our first year, showing our ability to build a strong portfolio of deals. Net returns after fees came to approximately +3.85%, even though the first 6 months of 2024 have been relatively difficult for merger arbitrageurs. Nonetheless, over the first year, we have found some successes.
For additional perspective, this is how our top 5 realized gains on completed transactions compare2:
Just a note, we have talked about every one of these 10 transactions in our letters, except for the gain in SGEN, and I personally think that’s a testament to our intention of being transparent and sharing with you, as investors, what we believe to be most important. It’s easy to talk about positive performance, but it’s much more difficult to discuss the negative. We’re trying to do both to ensure you have the full picture of how your investment is being managed at VH Standard.
As we look to the next 12 months, we believe the merger arbitrage landscape is more attractive today than it was 12 months ago. Deal spreads are more attractive now than they were last year. The potential impacts from the election, the interest rate environment, and potential regulatory changes could also spur new deal activity as we look ahead. If the deal activity does pick up, we would essentially be able to diversify our risk across additional uncorrelated transactions, while maintaining our hurdle rate for an investment’s inclusion in the portfolio; this would skew the risk/reward of the portfolio to our benefit and yours as investors. Another change, which we will discuss in a future letter, is the impact from the Chevron Deference ruling by the Supreme Court; we believe this could have a positive impact on the expected timelines for deals, enabling us to recycle capital and compound completed deals more quickly.
We look forward to discussing more with you in the months ahead.
If you’d like to have a conversation, please feel free to reach out.
“Great things are done by a series of small things brought together.” – Van Gogh
Disclosures
This Presentation (the “Presentation”) is for informational purposes only and is intended solely for the persons receiving it; any reproduction or distribution is prohibited. This document does not constitute an offer of securities. Such an offer may only be made by means of a private placement memorandum. The information contained in this summary is not complete and is qualified in its entirety by the reference to the more detailed information contained in the Confidential Private Placement Memorandum of the Fund. An investment in the Fund subject to a variety of risks and is speculative. There is no assurance that the Fund will achieve its investment objectives. Prior performance is no guarantee of future returns.
All information provided in the presentation are as of June 30, 2024, unless stated otherwise.
2 The tables shown in this monthly letter referring to the Top 5 Gains (% of AUM) and Top 5 Losses (% of AUM) are the top P&Ls segmented by specific M&A transactions, only including M&A transactions that have come to a conclusion, either successfully being completed or failing to be completed with the merger contract being terminated. The gains & losses are shown as a percentage of the assets under management (“AUM”) to represent the contribution to the portfolio of any particular investment, regardless of position sizing, as contribution to the portfolio is a better representation of the risk under our approach to any given merger arbitrage situation. The calculation for Gain (% of AUM) and Losses (% of AUM) is the profit & loss of the investment(s) in that Deal Target/Deal Acquirer’s securities divided by the AUM at the beginning of the month that the M&A transaction came to conclusion.
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