Trends Watch: Event-Driven Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Thomas Kirchner, Portfolio Manager, Camelot Event-Driven Advisors.  

What is your outlook for event-driven investing?  

The outlook for event-driven investing is as strong as it has ever been. But as with many things, it depends on where you look. Event-driven investing is a strategy that focuses on investing in catalysts (or "events") that change the structure of a company and consequently unlock value. This includes mergers and takeovers, distressed, activist and special situations (such as conglomerate breakups or spin-offs). We are in the fortunate position to be able to allocate across the spectrum of such events, from traditional merger arbitrage to activist and special situations to debt restructurings. In our view, there will be plenty of corporate dealmaking and activity whether in boom or bust cycles, and therefore opportunities to capture an event arbitrage. 

Where do you see the greatest opportunities and why? 

There are a few areas that are notably exciting and perhaps experiencing a seminal shift. Shareholder activism continues to get stronger, more democratized, and more sophisticated. The recent investment by KKR in Henry Schein may be a breakthrough moment for private equity investing in public companies. And in Japan and South Korea, corporate governance frameworks are improving, which could enhance shareholder returns by further aligning corporate and shareholder interests. 

Merger arbitrage returns have been subdued in recent years and we expect them to continue on this path for the foreseeable future. Having said that, we do find pockets in the arbitrage space that offer highly attractive risk/return profiles, such as the occasional bidding war or mergers where there is the potential for additional upside by exercising appraisal rights. 

What are the greatest challenges you face and why? 

Event-driven investing has undergone significant changes during the last 20+ years since we began investing, and we expect to see more such changes during the next 20 years. During the mid-2000s, merger arbitrage could generate returns significantly above the risk-free rate. In recent years, these returns have shrunk to levels that are not very competitive or attractive versus the risk-free rate when you factor in regulatory vagaries and risks. Some event-driven investors have offset the low return of the underlying strategy by levering it up. Now that we have entered a new era of higher rates, we question if some of the players relying on leverage will eventually exit the space, opening opportunities for non-levered players. 

Regulatory and political risks remain significant challenges, and we anticipate these risks to become more prominent during the coming years as geopolitics has left its post-cold war hibernation and become relevant again.  

What keeps you up at night? 

Arguably, the biggest risk to event investing is the flow of credit. If financing dries up, then corporate events can come to a stop. In the past, this has happened temporarily. And when it happens and you're levered, you can get into trouble. That's one of many reasons why we run our strategy without borrowing. In times of market stress, it allows us to take advantage of opportunities that arise, while others spend their days desperately looking for liquidity. So even though this risk could keep us up at night, we still sleep well at night. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.