Dear Unitholders,
When President Trump was elected in November, analysts and dealmakers were anticipating a rush of deal making following three years of stagnant activity. High interest rates, increased market volatility and a hostile regulatory environment previously weighed on M&A markets keeping many dealmakers on the sidelines waiting for a more conducive environment. With the Trump administration’s pro-growth and anti-regulation agenda, the market was optimistic that the tide had turned for M&A, with new appointees at key regulatory touting a pro-business agenda. However the Trump administration’s trade and tariff policy has quickly dampened those expectations with increased volatility, a lack of clarity on implementation and concerns that tariffs will lead to higher inflation, all creating an environment fraught with uncertainty. Strategic acquirers typically analyze a target company looking to determine the potential synergies that could be realized post integration, but that calculation is nearly impossible with shifting tariffs which might impact the target business. The market for deal financing is also struggling with the lenders of several leverage buyout deals who have committed to providing financing at a specific rate now unable to syndicate that debt, forcing them to hold them on their balance sheet and dampening the risk appetite for other lenders. With this added uncertainty in the markets, M&A activity has stalled, particularly for larger deals with global operations. However, for savvy dealmakers willing to deal with some uncertainty or make a bet on where tariff rates will ultimately settle, this is a buyers' market with bargains abound.
After an active February with a significant portion of the Fund turning over as deals closed and capital was recycled into new mergers, March was a slower month. The Fund initiated positions in nine new merger deals with five deals held within the Fund closing during the month. Spreads widened towards the end of the month, continuing through “Liberation Day” and into April as market volatility picked up materially. In this environment our focus will be on smaller merger deals with a preference for companies with largely domestic operations, not heavily reliant on imports or exports and with a solid strategic rationale for being acquired. The downside protection present in SPACs especially when purchasing a SPAC at a discount to the cash held in trust also represents another attractive investment for the Fund in this environment. At the end of March 2025, the Fund had 32 investments in small cap deals under $2 billion, 21 of which were valued at under $1 billion.
With a temporary cooling of new M&A activity we are focusing the Fund on high quality existing deals and adding to the Fund’s SPAC exposure. Key merger deals continue to progress and the new issuance market for SPACs remains highly active, providing numerous opportunities to deploy new and recycled capital. Larger deals and leveraged buyouts will likely see a longer pause as credit markets have been disrupted, making it more difficult to syndicate larger debt deals. The inflationary impact of tariffs is also adding to uncertainty with the Fed in a tough spot as growth expectations decline while the risk of higher prices becomes a key concern. In these volatile market environments, investors would benefit from adding non-correlated alternative exposure like merger arbitrage which can complement or be a substitute for fixed income exposure with better tax efficiency. While we believe that the Trump administration is likely to capitulate and roll-back disruptive tariffs, it may prove difficult to restore confidence and with erratic announcements and an uncertain end-goal markets could remain turbulent for the foreseeable future.
Amar Pandya, CFA
April 29, 2025