The wave of consolidation in the asset management is less attractive for merger arbitrage specialists due to the mergers often being done on equal terms, according to TIG Advisors’ Drew Figdor.
Figdor, who runs the Lyxor/Tiedemann Arbitrage Strategy, said asset management transactions are viewed like any other corporate change but have one notable drawback.
‘MOEs have less opportunity for us as, even if they fall apart, the lack of premium to either side means it is hard to monetise the event. We focus on complexity in merger transactions and the ability to extract alpha out of this complexity with research.
'However, this wave of M&A in the industry could mean that hedge funds over time can and should consolidate, as it is fairly inefficient to run thousands of sub-$1 billion hedge funds given the scale necessary.'
Figdor said the other unique feature of asset management transactions is that assets ‘walk out of the door’ on a daily basis.
'This makes competitive bid situations difficult to occur since potential interlopers cannot be confident they will be able to retain the key people, and thus risk destroying value with the deal.
'When performance declines or a merger causes uncertainty among clients, redemptions can become a vicious cycle as clients see redemptions and in turn, want to redeem.
'If that moves quickly enough, it increases MAC (a clause to protect the acquirer to from adverse changes between signing and closing a deal) risk/price renegotiation risk in a merger deal.'
Figdor said mergers in the asset management industry are unlikely to be part of the fund, but said there are always new opportunities arising in the market.
'For us, asset management deals are unlikely to be a focus for our fund given risks and lack of return opportunity that we have seen. If there is a competitive bid situation we would be interested, though that has yet to be seen.'
Over the three years to the end of March, the Lyxor/Tiedemann Arbitrage Strategy returned 2.8% in euro terms in the event-driven category. This compares with a loss of 1.7% sector by the average manager, over the same time period.