Dear Unitholders,
“We remain optimistic on the outlook for small and mid-cap M&A going into the second half of 2024.”
For the first time since 2022, there was a month over month increase in the trust value for all outstanding SPACs in June as the value raised in SPACs through new issuance outpaced the decline in value from SPACs closing deals or liquidating. This is a notable inflection as it suggests that the SPAC sector may finally have achieved an equilibrium with balanced demand and supply for SPACs. With the market for IPOs experiencing fits and starts of activity this year with an elusive IPO window, private companies desperate for capital are seeking partnerships with SPACs who have capital ready to deploy. We do not anticipate this renewed growth in SPAC issuance will be anything like the 2020-2021 SPAC bubble but we are investing in the odd SPAC IPO when the deal terms are favorable.
June was a strong month for Fund performance as several key deals held in the Fund closed during the month after gaining their final approvals. This included some of the Fund’s largest positions such as: Indigo Books & Music Inc., Shockwave Medical, Inc., Model N, Inc and Secure Energy Services. In the weeks prior to quarter-end, several other active merger deals closed with the capital received from those deals being recycled by arbitrage investors into other deals held by the Fund tightening those spreads. During the month, the Fund initiated positions in 13 new merger deals with 11 deals held within the Fund closing. We are actively finding new opportunities in which to redeploy capital with a mix of attractive financial and strategic mergers announced over the past several weeks. Our investment focus remains in high quality, small and mid-cap merger deals which offer shorter duration and a greater potential for mispricing. We are also seeing more opportunities for SPAC arbitrage both in the new issuance market with several SPAC IPOs which we have participated in and in SPAC redemption and liquidation activity as SPAC expirations pickup in the summer months. Given this improved investing environment for SPACs with low-risk, short duration and high yield returns, the SPAC exposure in the Fund is likely to increase in the short-term
A key benefit of our focus on small and mid-cap merger deals is our ability to take advantage of organic deal flow from Pender’s equity portfolios and leverage Pender’s existing insights, analysis and trade execution competencies in small and mid-cap equities. This was demonstrated during the month with the Fund initiating a position in Copperleaf Technologies Inc (TSX: CPLF). Copperleaf has been a key holding in several Pender equity funds since the company went public in October 2021. It was also privately held by Pender’s venture funds prior to its IPO and has been followed by current Pender employees since 2011. Needless to say, over that period the firm has built up a significant amount of knowledge on the company and have developed a thorough understanding of its valuation and its value to a potential acquirer. On June 11, 2024 the company announced they had accepted an offer to be acquired by Swiss enterprise software company IFS AB for $12.00 per share. Leveraging our models and insights we were able to quickly build a position in what we believe is a high-quality deal with a potential short duration to closing. The arbitrage fund will continue to leverage Pender’s existing insights, analysis and trade execution competencies in small and mid-cap equities, tactically adding value when opportunities are presented. At the end of June 2024, the Fund had 40 investments in small cap deals under $2 billion, 29 of which were valued at under $1 billion.
Equities continued their positive streak through June with the S&P 500 advancing 3.6% and 15.3% through the first two quarters of the year while the NASDAQ surged by 6%. The US economy continues to fire as technology and the MAG 7 companies continue to lead equity market returns. US treasury yields fell during the month as May CPI indicated that prices were flat as inflation loosened its grip on the economy. The Fed has remained cautious as the labour market remains strong with the US unemployment rate at 4%. In Canada the S&P/TSX Composite (CAD) was down 1.4% as the economy showed mixed signs with unemployment increasing while CPI was increased driven by higher service costs.
We remain optimistic on the outlook for small and mid-cap M&A going into the second half of 2024. As evident in the acquisition in Copperleaf, acquirers are circling many high quality small-cap companies and as the gap between buyer and seller expectations narrows there is increased potential for a definitive deal to be struck. Our equity funds are involved with several companies with activists actively seeking to unlock value in the shares and urging management and boards to run a process to sell the company. As equity prices continue to rise and fixed income markets trade with tight spreads there is ample capital to finance deals. Shifting political dynamics with a US election this fall and Canadian election expected next year is also creating an incentive for acquirers to strike a deal at a bargain today given a more hostile regulatory environment on the hope that a change in the regulatory environment will allow that deal to be approved in the future.
Amar Pandya, CFA
18 July 2024