Tag: investing

We’ve been here before.

Maxam Diversified Strategies – Q4 2022 Commentary

Dear fellow investors,

The Maxam Diversified Strategies Fund¹ gained +2.8% in the fourth quarter and declined -7.4% in 2022.

The market environment faced downward pressure in 2022 from a multitude of factors – including high inflation, rising interest rates, recession fears and geopolitical tensions. The most dominant factor was the relentless efforts by central banks to crush surging inflation via tightening monetary policy. Most notably, the U.S. Federal Reserve raised interest rates seven times during 2022, taking the federal funds target rate to its highest level since 2007.

The consistent march towards higher interest rates took no prisoners. Rising rates are a negative for short duration bonds, and even worse for bonds with longer duration – which were hit the hardest as inflation reached levels not seen since the early 1980s. In addition, many growth stocks and speculative companies fell precipitously after reaching nonsensical heights following the deluge of Covid-19 pandemic stimulus, which included central banks flooding the markets with liquidity and reducing interest rates to near-zero levels.

Déjà vu? Yes.

Despite there being almost nowhere to hide in 2022, we’re not pleased anytime we have a negative annual return. However, we have been here before.

In almost every bear market we hear the argument that it’s different this time. While there is no denying the challenges facing economies and markets today, we believe it is important to remind investors – and ourselves – that we have faced similar challenges many times throughout history: world wars, high interest rates, high inflation, technology bubbles, real estate bubbles, debt defaults, double digit unemployment, corporate scandals, and multiple bear markets.

One thing all crises have in common is that they end. Another is that they always unveil compelling opportunities. And we’ve historically done some of our best work during periods of elevated market volatiility and after market declines.

Since the inception of the Maxam Diversified Strategies Fund in 2009, the S&P/TSX Composite Index (the “TSX”) has had three negative calendar year returns besides 2022. Per the table below, our fund was down in two of those years, and positive in one.

During each of these previous market declines we took advantage of attractive investment opportunities. And each decline also represented an opportunity for our investors. The fund’s returns over the next couple of years were very strong. History doesn’t always repeat exactly, but it often rhymes.

Today, like 2011, 2015 and 2018, we believe we have attractive value in our current holdings, and we are excited about the opportunities we are taking advantage of.

Exposures.

As at the end of the quarter, the fund was invested across all 11 industry sectors with no sector weight larger than 20% of net exposure (excluding arbitrage). From a strategy perspective, the fund is invested in long positions where we believe we have identified value and catalyst, as well as special situations, arbitrage, and short investments.

Notable positive contributors to fund performance during the fourth quarter included H20 Innovation Inc, Vecima Networks, Chemtrade Logistics, Guardian Capital Group and TransAlta Corp. Individual holdings detracting from results in the quarter included Nutrien Ltd, Polaris Renewable Energy and Winpak Ltd.

The fund’s arbitrage strategy, 31% at year end, was a positive contributor to fund performance in 2022. This market neutral strategy demonstrated its value as a low-risk source of returns with low-correlation to traditional equities and bonds³.

During the fourth quarter we reduced short exposure from 13% to just under 3% – taking some profits and acting to increase the fund’s net exposure, excluding arbitrage, to 81% at year end.

We expect to continue to increase the fund’s net exposure as we selectively take advantage of compelling value and special situations-oriented investments in the current market environment.

The shift is just getting started.

In recent communications we have been highlighting our view that the market is in the early stages of transitioning away from an environment that has favoured high-multiple, growth-at-any-price, speculative stocks – towards an environment where companies with current and tangible revenues and growing bottom lines will be increasingly rewarded.

The current market structure and set-up reminds us of the post-technology stock bubble period between 2001-2005. During this period, value outperformed growth, and small/mid-caps outperformed large caps – there was a stealth bull market beneath the surface of the bellwether indices which didn’t really go anywhere. We are beginning to see the onset of similar dynamics over the last few months.

Part of this shift is being driven by many of the previous market leaders becoming overvalued or overbought and no longer representing attractive investments. And perhaps equally as important and consequential, is that capital has a cost again – which should bring some rationality back to valuations. This is not good news for the former high-flying growth darlings that relied on easy money to fund their losses and prop up their stock prices (many still remain unattractively valued today in our opinion). Conversely, it is good news for companies with solid balance sheets and positive bottom lines, that are trading at attractive valuations.

While a single month should not be extrapolated into the future, the fund finished 2022 on a positive note, gaining +0.7% in December whereas the S&P/TSX Composite, S&P500 and NASDAQ Composite declined -5.2%, -5.9% and -8.7% respectively. Perhaps some of the above dynamics at play.

Said it once before but it bears repeating now⁴.

In our Q3 commentary we wrote that: a challenging and shifting market environment always delivers and unveils compelling opportunities. With security prices down significantly, it has most certainly become a more fertile investment environment.

We don’t want to diminish today’s challenges, but we’re mindful that throughout history successful investors have prospered through selective and opportunistic buying during bear markets. We believe that market volatility will remain elevated in the near term and that investors will remain broadly cautious and prone to emotional decisions – this is a recipe for opportunity.

And, as we showed in the table above, we have historically done some of our best work during periods of elevated market volatility and after market declines. This is an attractive environment for our investment style and strategy in our opinion – one that we believe increasingly favours our value-oriented and active approach.

We are excited about the prospects for 2023 and beyond – as much as we have been in several years.

Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

¹ Maxam Diversified Strategies Fund, Series F, net of fees and expenses. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com

² Maxam Diversified Strategies Fund, Series X, net of fees and expenses. Series X is displayed in this table because it represents the funds oldest class of units. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com

³ Arbitrage is a low-risk, consistent and absolute return-oriented strategy. We manage the Maxam Arbitrage Fund which focuses exclusively on arbitrage strategies.

⁴’Said it once before but it bears repeating now’ are lyrics from the 2001 hit song “Fell in Love with a Girl” by the American garage rock band the White Stripes.  https://en.wikipedia.org/wiki/Fell_in_Love_with_a_Girl

This information is intended to provide you with information about the Maxam Diversified Strategies Fund and is not an offer to sell or solicit. Disclosed performance is based on Class X, A and F units and is net of all fees and expenses. Inception date for Class X is June 30, 2009; Class A is December 31, 2012 and; Class F is January 31, 2013. The performance fees on Class X units are subject to a 5% annualized hurdle. Important information about the Fund is contained in the Simplified Prospectus and Fund Facts which should be read carefully before investing. Prior to August 24, 2022 this Fund was offered via Offering Memorandum only and was not a reporting issuer. Historical audited financial statements for this period are archived here. The expenses of the Fund would have been higher during such period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer. Prior to becoming a reporting issuer, the Fund was not subject to the investment restrictions and practices in NI 81-102. Important information about the Fund is contained in the Fund’s Simplified Prospectus, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. The securities of the Fund are sold only through IIROC registered dealers in those jurisdictions where it may be lawfully offered for sale. Accredited investors or certain other qualified investors may also purchase securities through Maxam Capital Management Ltd in reliance on certain prospectus exemptions available in National Instrument 45-106. Investors should consult with their own investment advisor and obtain a copy of our applicable Simplified Prospectus and Fund Facts documents before investing in the Fund. Investors should seek advice on the risks of investing in the Fund before investing. This document may contain forward-looking statements. These forward-looking statements are based upon the reasonable beliefs of Maxam Capital Management Ltd. at the time they are made and are not guarantees of future performance, are subject to numerous assumptions, and involve risks and uncertainties about general economic factors which may change over time. Maxam assumes no duty, and does not undertake, to update any forward-looking statement and cautions you not to place undue reliance on these statements as actual events or results may differ materially from those expressed or implied in any forward-looking statements made. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This document is not intended to provide legal, accounting, tax or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Diversified Strategies Fund prior to investing.

Low risk and diversification via an alternative source of returns.

Maxam Arbitrage Fund – Q4 2022 Commentary

Dear fellow investors,

Equities and bonds faced significant pressure throughout 2022 from high inflation, rising interest rates, supply chain issues, recession fears and ongoing geopolitical tensions. It has been described as one of those “nowhere to hide” years – and was one of the worst years ever for the traditional balanced portfolio, as evidenced by a Bloomberg index tracking a global 60/40 portfolio mix declining -17.0% in 2022¹.

Given the challenging environment, we are pleased that the Maxam Arbitrage Fund had a positive year. Our nimble and systematic approach, bolstered by our risk management focused process, held us in good stead. Moreover, the strategy showed the value it can add to modern diversified portfolios – low risk and diversification via an alternative source of returns.

M&A in 2022: Like a good Netflix drama… a few plot twists, but a happy ending.

It was a challenging year for merger arbitrage as evidenced by the S&P Merger Arbitrage Index declining -4.2%.

In addition to the risk-off capital markets, arbitrage spreads and deal timelines were pressured by the steady rise in interest rates, reduced credit availability for leveraged buyouts, and the increased scrutiny that U.S. and some foreign regulators are applying to select transactions.

Increased regulatory reviews – typically focused on larger cap companies in industries deemed more sensitive to competition concerns – have resulted in some lengthened deal timelines, however success from the regulators’ perspective has been mixed. In a positive sign for arbitrageurs, and as we noted in our Q3 commentary, the U.S. Department of Justice lost their attempt to block two transactions: UnitedHealth’s acquisition of Change Healthcare, and U.S. Sugar’s acquisition of Imperial Sugar.

Meanwhile up here in Canada… although the Rogers Communications acquisition of Shaw Communications has not yet cleared its final hurdle, Canada’s Competition Tribunal recently ruled against the Competition Bureau’s attempt to block the merger on grounds that it is anti-competitive.

Another much-watched deal in 2022 was Elon Musk’s acquisition of social media messaging platform, Twitter. This transaction wasn’t notable for any regulatory challenges, but rather for Elon being Elon. After reaching an agreement to purchase Twitter for $54.20 per share in April, Musk seemingly had second thoughts and sought to back out of the deal, sending a deal termination letter in July. However, Musk had signed a definitive merger agreement that significantly limited his ability to back out – he couldn’t simply choose to terminate the transaction by paying a break fee. Musk completed the acquisition of Twitter at the contracted price in late October. Score a victory for contract law.

Despite the challenging environment in 2022, M&A transactions continued to close on terms and, apart from some of the largest cap deals, generally within expected timelines.

State of the arb market.

Existing transactions and new deal announcements during the fourth quarter continued to provide us with a robust opportunity set of attractive deals to arbitrage.

Of note, the risk-free rate can be considered as a component of the arbitrage spread, with arbitrageurs being incrementally compensated for deal risk. Following the steady rise in interest rates throughout 2022, we are seeing higher spreads to deploy capital into today. Arbitrage returns have historically improved when rates have risen – and that is the environment we are in now.

The fund participated in 14 new deals during the quarter, had 32 successful deal closures and experienced one deal break. As of year-end, the fund held 25 merger arbitrage positions, diversified across market cap, deal type and industry.

Owned deals that successfully closed during the quarter included³: Avalara Inc; Global Blood Therapeutics; Ping Identity Holding Corp; Recipe Unlimited; Great Bear Resources; Taal Distributed Information Technologies; Hill International; BTRS Holdings; Switch Inc; Turquoise Hill Resources; and Evergreen Gaming.

SPACs: You’ve got to know when to hold ‘em, know when to fold ‘em⁴.

The fourth quarter of 2022 was a busy one in the SPAC sector with plenty of activity and new developments to manage. Continuing the recent trend, new SPAC issuance was slow in the last quarter of 2022 with only eight, relative to 166 in Q4 2021⁵.

In our Q3 commentary we wrote that we expected SPAC liquidations to accelerate through the end of the year due to high SPAC redemption rates, an increasingly difficult market for PIPE financings and uncertainty if the new 1% excise tax on U.S. companies buying back their shares would apply to SPAC liquidations and redemptions.

Undoubtedly concerned with the application of the excise tax, many SPAC sponsors moved to liquidate early. 119 SPACs were liquidated in the fourth quarter, with 87 in December alone – those numbers compare to only 23 liquidations through the first three quarters of 2022⁵. The U.S. Treasury Department and Internal Revenue Service issued guidance⁶ on December 27^th that SPAC liquidations would not be subject to the excise tax. Welcome news indeed, but a little late for some sponsors.

We were able to complement our systematic SPAC arbitrage process with some success in identifying and owning SPACs that moved to liquidate early. The pulling forward of liquidation dates is beneficial to a SPAC arbitrageur’s annualized returns – in that we get capital back sooner and can redeploy into new opportunities.

SPAC redemption rates – the percentage of SPAC common shares redeemed by shareholders for the cash plus interest held in trust – continued to be high during the fourth quarter at an average of 89%, compared to 66% in the last quarter of 2021⁵. High redemption rates and liquidations have wreaked havoc on SPAC warrants – recall that SPAC warrants expire worthless in a liquidation scenario.

We’ve continued to largely avoid exposure to SPAC warrants, certainly not purchasing them in the recent environment. When we’ve owned them post unit split, we’ve acted to harvest their value expediently, rather than hoping a deal the market likes might be completed. Kenny Rogers-style ⁴.

And the SPAC liquidation cliff continues to creep ever closer. At year end there were 533 listed SPACs, 226 of which have liquidation dates prior to the end of Q1 2023⁵. As their SPAC liquidation dates approach, sponsors are faced with either winding up or extending – if they choose to extend, the sponsor typically offers an incentive to shareholders by topping up the trust account.

The SPAC market environment has evolved significantly over the last few years, but it continues to present us with an attractive set-up for our systematic and quantitative approach to harvesting SPAC yields. And given the current dynamics at play with liquidations, redemptions, and extensions, we also expect some unique opportunities to generate attractive and low risk returns.

As of December 31, the fund was well-diversified across 106 SPACs.

Looking ahead.

2022 was a negative year for almost all strategies, and on that note we are pleased that the Maxam Arbitrage Fund was able to demonstrate its value as an alternative and non-correlated source of returns.

While we believe we are likely closer to the end of this rate hiking cycle than we are to the beginning, central bankers continue to signal additional interest rate hikes ahead. Rising interest rates are a clear negative for bonds, and broadly a headwind for equities, however higher rates can be a positive for arbitrage investors.

Arbitrage is a low duration strategy due to deals typically completing within 3-6 months, which allows an arbitrageur to reinvest deal proceeds into new attractive transactions. And, as mentioned above, higher interest rates lead to higher arbitrage spreads.

Maintaining a nimble approach is an advantage in terms of both seeking returns and managing risk. We enjoy the flexibility and advantage of investing across the capitalization spectrum, providing us with a larger opportunity set. And while every merger deal is different, we look favourably on certain mid and smaller capitalization transactions in the current environment because regulatory risks are typically lower, and the deal timelines are shorter. Regardless of deal size, we are always focused on transactions that we believe will reach successful completion.

Risk management is central to our quantitative, data-centric and disciplined investment process as we deploy capital into the arbitrage opportunity set. We are excited about capitalizing on opportunities in the current environment and the year ahead.

Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

Sincerely,

Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.

¹Bloomberg Global EQ:FI 60:40 Index is designed to measure cross-asset market performance globally. The index rebalances monthly to 60% equities and 40% fixed income. The equities and fixed income are represented by Bloomberg Developed Markets Large & Mid Cap Total Return Index (DMTR) and Bloomberg Global Aggregate Index (LEGATRUU) respectively. (BMADM64 Index).

² Maxam Arbitrage Fund, Class F, net of fees and expenses. Inception date October 1, 2020. Please contact us regarding other series of fund units or visit our website www.maxamcm.com

³ Notable owned deals successfully closing during the fourth quarter is not an exhaustive list.

⁴ The Gambler, by Kenny Rogers – it’s a famous song, check it out. Merger and SPAC arbitrage isn’t about gambling; it’s about capitalizing on specific and definitive corporate actions and events. But you do have to know when to hold ‘em, and when to fold ‘em, because prices and opportunities change. https://en.wikipedia.org/wiki/The_Gambler_(song)

⁵ Source: SPAC Research – Year in Review : 2022. https://www.spacresearch.com/

⁶https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-corporate-stock-repurchase-excise-tax-in-advance-of-forthcoming-regulations

Maxam Capital Management Ltd. is the manager for the Maxam Arbitrage Fund. Important information about the Fund is contained in the Fund’s Simplified Prospectus, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. Disclosed historical returns for periods greater than one year are annualized unless otherwise noted and are net of fees and expenses. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. This document is not intended to provide legal, accounting, tax, or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Arbitrage Fund prior to investing. Please contact us for more information at: (604) 685-0201 info@maxamcm.com www.maxamcm.com

Challenging markets always unveil significant opportunities.

Maxam Diversified Strategies Fund – Q3 2022 Commentary

Dear fellow investors,

The current investment environment continues to be dominated by high inflation, rising interest rates, ongoing supply chain issues, fears of a recession, an energy crisis in Europe and geopolitical tensions. As a result, both equity and bond markets have declined in unison through the first three quarters of 2022 – a rare occurrence that has wreaked havoc on the traditional “60/40” balanced portfolio.

Equities and bonds did stage a summer rally through mid-August before turning south for the final six weeks of the third quarter. Central banks, notably the U.S. Federal Reserve (the “Fed”), threw cold water on investors by reiterating that they will be steadfast in their efforts to break the back of inflation. With no “Fed put” or “Fed Pivot”¹ currently in sight, market participants seem to be coming to terms with the Fed’s resolve.

A challenging and shifting market environment always delivers and unveils compelling opportunities. With security prices down significantly, it has most certainly become a more fertile investment environment.

The Maxam Diversified Strategies Fund² declined -0.91% in the third quarter of 2022. Here is the tale of the tape for September, Q3 and year-to-date:

Exposures.

We believe the fund’s exposures position us well to take advantage of the current environment.

Exposure is diversified across sectors, strategies, and individual securities. As at the end of the third quarter the fund was invested across all 11 sectors with no sector weight larger than 14% of net exposure (excluding arbitrage), and the fund’s top 10 holdings accounted for 27% of assets.

The fund’s net allocation to arbitrage was 28%. In addition to providing a stable return profile that exhibits low correlation with the general market, the fund’s arbitrage allocation is highly liquid and can be used to opportunistically take advantage of value and special situations-oriented investments as they arise in a volatile market.

Shorts and hedging exposure was 13% as at the end of the quarter, consisting primarily of single-stock shorts in companies that we think are likely to decline due to company-specific reasons or market dynamics. We also have some market hedge exposure expressed via put and VIX call spreads that should help provide some protection against a general market decline.

The fund’s allocation to arbitrage, a market neutral strategy, has provided some protection relative to the decline in equity markets, as has the fund’s short exposure.

Notable positive contributors to the fund during the third quarter included water infrastructure and technology company H20 Innovation Inc, financial services company Westaim Corp, and high-quality fashion retailer Aritzia. Individual holdings detracting from results included HLS Therapeutics, Superior Plus and VitalHub.

Balance sheet analysis is often a starting point for us, and it is a particularly key consideration today during an environment characterized by higher rates and deteriorating credit availability. We also like to invest in businesses where leaders have real skin in the game and strong alignment with shareholders – even better if we see recent insider buying.

For example, we are currently buying shares in a financial services company that is trading at less than 6x next year’s earnings, is demonstrating accelerating revenue growth and has a well-covered dividend of approximately 4%. Oh, and insiders have been buying recently as well.

The significant decline in equity markets has undeniably created a more fertile investment landscape for us and, as value-oriented and flexible investors, we find our opportunity set has greatly expanded.

Looking ahead.

Sometimes it is worthwhile to look backwards to look forward.

We’ve experienced and invested through more than a few market declines and events over the years. From the bursting of the tech bubble in 2000, the financial crisis in 2008-09, the sovereign debt and Eurozone crisis in 2010-11, the growth scare and trade wars in 2018, the Covid crash in early 2020, and more.

Our experience and knowledge grew through those challenging markets and, I believe, we emerged as better investors. Investing requires constant learning and humility – without hubris.

We have also studied previous investment periods and regimes, the 1970’s (energy, conflicts) and the early 1980’s (inflation and rapid interest rate hikes) come to mind.

Each of the aforementioned market events and periods were different in their own right, but they all presented substantial and unique investment opportunities. And this time will be no different. As we have said in previous communications, “there are no bells and whistles at market tops or bottoms”. Today’s fears and concerns will eventually become yesterday’s opportunities.

This is an attractive environment for our investment style and strategy in our opinion – one that we believe increasingly favours our value-oriented and active approach.

We’re excited about deploying capital, selectively and patiently.

Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

Sincerely,

Travis Dowle, CFA

President & Fund Manager

Maxam Capital Management Ltd.

¹ From Investopedia.com: 1) The term “Fed put,” a play on the option term “put,” is the market belief that the Fed would step in and implement policies to limit the stock market’s decline beyond a certain threshold. 2) A Fed pivot occurs when the Federal Reserve, which is the U.S. central bank, reverses its policy outlook and changes course from expansionary (loose) to contractionary (tight) monetary policy—or, conversely, from contractionary to expansionary. A Fed pivot typically happens when economic conditions have fundamentally changed in such a way that the Fed can no longer continue its prior policy stance.

² Maxam Diversified Strategies Fund, Series F, net of fees and expenses. Please contact us regarding other classes of fund units or visit our website www.maxamcm.com

Maxam Capital Management Ltd. is the manager for the Maxam Arbitrage Fund. Important information about the Fund is contained in the Fund’s Simplified Prospect us, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. Disclosed historical returns for periods greater than one year are annualized unless otherwise noted and are net of fees and expenses. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. This document is not intended to provide legal, accounting, tax, or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Arbitrage Fund prior to investing. Please contact us for more information at: (604) 685 0201 info@maxamcm.com www.maxamcm.com

Stability for your portfolio.

Maxam Arbitrage Fund – Q3 2022 Commentary

Dear fellow investors,

The Maxam Arbitrage Fund¹ gained +0.24% in the third quarter of 2022.

Following a risk-on rally from mid-July to mid-August, equity markets (and bonds) had a terrible final six weeks of the quarter after central banks, notably the U.S. Federal Reserve, threw cold water on investors by reiterating their commitment to keep raising interest rates to battle stubborn inflation.

Arbitrage again held up very well relative to the equity and bond market weakness – demonstrating its value as an alternative source of returns and a portfolio diversifier. We continue to see attractive arbitrage spreads to deploy capital into.

State of the arb market.

The challenging investment environment continued to impact merger arbitrage with spreads on existing deals generally moving wider during the quarter on average. Higher interest rates are taking their toll on the credit markets and impacting spreads on deals requiring financing, most notably leveraged buyout transactions.

Also continuing to impact arbitrage spreads and deal timelines is the increased scrutiny that U.S. and some foreign regulators are applying to select transactions – typically involving larger cap companies in industries deemed more sensitive to competition concerns. However, in late September we saw one of the U.S. antitrust agencies, the Department of Justice (the “DOJ”), lose their attempt to block two transactions: UnitedHealth’s acquisition of Change Healthcare and U.S. Sugar’s acquisition of Imperial Sugar. A positive sign for arbitrageurs.

Despite the challenging environment we continue to see transactions close on terms and generally within expected timelines. Notable closings occurred in some of the arb community’s most-watched deals, including: Vista Equity Partners leading a consortium in a leveraged buyout of Citrix Systems; Ali Group’s acquisition of Welbilt Inc; and Thoma Bravo’s leveraged buyout of Sailpoint Technologies.

Existing transactions and new deal announcements during the third quarter continued to provide us with a robust opportunity set to invest in – highlighted by attractive merger arbitrage yields of near 13% annualized on average².

The fund invested in 22 new deals during the quarter, had 15 successful deal closures and experienced no deal breaks. As of September 30, the fund held 39 merger arbitrage positions, diversified across market cap, deal type and industry.

Owned deals that successfully closed during the quarter included³: Citrix Systems; Welbilt Inc; Sailpoint Technologies; FAX Capital Corp; GTY Technology Holdings; Points International; and Redline Communications.

Some new positions initiated during the second quarter included³: Global Blood Therapeutics; Great Bear Royalties; Sierra Wireless; Hill International; Avalara Inc; Ping Identity Holdings; and Recipe Unlimited.

SPAC’s – a lot going on!

New SPAC issuance continued to slow with only eight new IPOs in the third quarter. Through the first three quarters of 2022 there have been 77 SPAC IPOs, a far cry from 447 over the same period last year⁴.

The dramatic slowdown in new SPAC issuance is due to more than a few factors: the risk-off market environment, the uncertainty caused by the SEC’s proposed rule changes⁵ and SPAC redemption rates – the percentage of SPAC common shares redeemed for the cash held in trust – continuing to be high, at over 80%, during the third quarter⁶.

A high SPAC redemption rate and a more difficult market for PIPE transactions means less cash retained by the continuing public company at merger close, which, combined with other factors, has likely contributed to the uptick in SPAC liquidations. Recall that SPAC warrants expire worthless in a liquidation scenario, which is why we continue to employ a conservative approach to SPAC warrants, routinely harvesting them post unit split, rather than hoping a deal the market likes will be completed.

SPAC liquidations, which occur when a SPAC does not consummate a deal and returns all of the capital held in trust to investors, totaled 21 during the third quarter, a marked increase over just eight through the first two quarters of the year⁴.

We expect the SPAC liquidation trend to continue and even accelerate through the balance of the year. In addition to the factors mentioned above, the United States’ new Inflation Reduction Act includes a 1% excise tax on U.S. companies buying back their shares starting on January 1, 2023. While likely not intended to be the case, the excise tax is thought to apply to U.S. SPAC liquidations and redemptions. Prevailing opinion is that SPAC sponsors will be responsible for the tax and not SPAC investors from funds held in trust, however we think liquidations are likely to accelerate before year end in the face of such uncertainty.

We have acted to shift our SPAC exposure accordingly, and we have benefited from identifying and owning some SPACs that have moved to liquidate early. All else being equal, the pulling forward of liquidation dates can be beneficial to a SPAC arbitrageur’s annualized returns.

The SPAC liquidation cliff is getting closer. Approximately 72% of listed SPACs have liquidation dates prior to the end of Q1 2023². This presents us with an attractive set-up for our systematic and quantitative approach to harvesting SPAC yields.

There is a lot going on in the world of SPACs, and we continue to deploy capital into what we think is a very attractive reward-to-risk set-up. Unlevered SPAC yields are near 7% annualized on average⁷ – a return that is backed by short-term government securities (i.e. T-bills) held in trust.

As of September 30, the fund was well-diversified across 122 SPACs.

Looking ahead.

With central bankers continuing to signal additional interest rate hikes ahead, the case for arbitrage remains particularly attractive.

Rising interest rates are a clear negative for bonds, however they can act as a tailwind for arbitrage because of the low duration nature of the strategy due to deals typically completing within 3-6 months. And arbitrage returns are generated by investing in specific and definitive corporate events and transactions – such as the completion of announced mergers and acquisitions, and the redemption or liquidation of SPACs – differentiating the return profile from traditional equities.

Risk management is central to our quantitative, data-centric and disciplined investment process as we deploy capital into the arbitrage opportunity set.

Maintaining a nimble approach is an advantage in terms of both seeking returns and managing risk. We enjoy the flexibility and advantage of investing across the capitalization spectrum, providing us with a larger opportunity set. And while every merger deal is different, we look favourably on certain mid and smaller capitalization transactions in the current environment because regulatory risks are typically lower, and the deal timelines are shorter. Regardless of deal size, we are always focused on transactions that we believe will reach successful completion.

Thank you for your trust and confidence. Please don’t hesitate to reach out with any questions.

Sincerely,

Travis Dowle, CFA
President & Fund Manager
Maxam Capital Management Ltd.

¹ Maxam Arbitrage Fund, Class F, net of fees and expenses. Inception date October 1, 2020. Please contact us regarding other series of fund units or visit our website www.maxamcm.com

² Maxam internal database.

³ Notable owned deals successfully closing, and new positions initiated, during the third quarter is not an exhaustive list.

⁴ Source: https://spacinsider.com/2022/10/03/third-quarter-2022-spac-ipo-review/

⁵ We discussed the SEC’s proposed rule changes for SPACs in our Q1 commentary: www.maxamcm.com/maxam-arbitrage-fund-q1-2022/

⁶ ICR SPAC Market Update and Outlook, Q3 2022.

⁷ Maxam internal database and https://spacinsider.com/stats/

Maxam Capital Management Ltd. is the manager for the Maxam Arbitrage Fund. Important information about the Fund is contained in the Fund’s Simplified Prospect us, which should be read before investing. This presentation is neither an offer to sell securities nor a solicitation to sell securities. Disclosed historical returns for periods greater than one year are annualized unless otherwise noted and are net of fees and expenses. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the Simplified Prospectus before investing. Any indicated rates of return are the historical annual total returns including changes in value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. This document is not intended to provide legal, accounting, tax, or investment advice. Please consult an investment advisor and read the prospectus for the Maxam Arbitrage Fund prior to investing. Please contact us for more information at: (604) 685 0201 info@maxamcm.com www.maxamcm.com