Hi everyone,
I hope you're all well. I had a quick question for you; I currently work for a Special Situations fund, and have an interview with a PM for a HF focused on Merger/Risk Arbitrage. I did a quick search on the strategy and found some threads, but was hoping for a bit more insight. Specifically, I was hoping for answers to the following questions:
-Are Merger/Risk Arb funds specifically focused on M&A or do strategies also include spin-offs, restructurings, etc. (for the most part)?
-From my understanding, DD is more qualitative than quantitative. Is this true? What type of valuation is utilized, given that this is the case?
-How is work life-balance at these kinds of funds? Typical hours? What would comp look like on average?
-Potentially the most pressing question I have is what are the exit opps? I read on another thread that M&A IB/Sell-Side are exits, and the strategy is a good segway into other event-driven funds, but how transferable is the skill set? My concern is that after a year or two I may become pigeon-holed as "Merger Arb guy". What would be other potential exits? Would a jump into distressed/other event-driven strategies be feasible? How about a transition into a fundamental L/S fund?
I sincerely appreciate your insights and help in advance, and any feedback you can provide is greatly appreciated.
Bump? Anyone?
Bump- would be curious about this as well.
-Are Merger/Risk Arb funds specifically focused on M&A or do strategies also include spin-offs, restructurings, etc. (for the most part)?
I would say a majority of the merger arb funds I come across run both hard catalyst and soft catalyst books within their portfolio. I think this ties into your exit opps questions, with soft catalysts (possible M&A, upcoming catalyst) you will doing a lot of fundamental analysis on these underlying companies trying to find what the floor is if an event doesnt happen and bull scenario cases. I think this type of analysis lends itself to a number of exit opps
As stated above, you have guys who only do announced deals (less risk, less reward) and guys who do pre-announced and announced deals. You tend to see the big blow ups in the funds that do a lot of pre-announced stuff, Paulson & Co comes to mind. Arb spreads are getting tighter and tighter and the strategy is not as lucrative as it once was back in the good old days when you had double-digit spreads on easy to understand deals. Many of the deals with juicy spreads today have serious anti-trust issues and are very binary in outcome.
In terms of the analysis, you tend to do the following stuff: (i) value the target company to see if the bid is a fair bid and also to quantify downside risk in the event that the deal breaks. This is standard valuation stuff using DCF's and multiples. (ii) You spend a lot of time talking to lawyers and other experts on trying to find out if a deal is likely to get blocked on anti-trust issues. This Sprint/TMUS or Bayer/Monsanto right now. (iii) if the deal has a stock component, you need to take a view on the value of the merged entity so you will do some M&A modelling to look at accretion & dilution analysis.
In terms of hours and work life, it varries by fund and also by how much risk the manager wants to take. A fund with 50-60 post-announced positions will likely have a lot lower stress than a fund with 10-20 pre-announed positions.
Comp varries again by fund but an experienced analyst should be able to make USD 350-500k all in and much more if the P&L structure is good and your PM is generous. Some PM's just want an analyst to cruch the numbers while they focus on the soft factors like anti trust so in that case your value add is much lower and comp might be at the low end of 300k all in. A good analyst/PM running the full process would see mugh more upside and into the 7 figure range.
Exits are likely into other equity strategies but I don't really see many guys moving as arb seems to attract a certain type of guy who likes thinking it terms of odds and binary outcomes. I would be surprised to see an arb guy move into distressed debt for example.
@mp11932 and @Ovechkin08" Thank you both for your incredibly detailed, thoughtful, and insightful replies. Very helpful and sincerely appreciated.
From what I've seen, you could move into other event driven such as distressed. The risk arbs I know play in both anyway. We always discuss Puerto Rico positions when we catch up. Know that some risk arb has a diversified approach, which is inherently more quantitative. Honestly I see the exit to M&A being a bit more tricky pending one's tenure. You mentioned working in Special Situations now; could you elaborate on that a bit?
Valuation is based on the spread that will be closed if the deal closes. You have to account for stock vs cash deals, collars, time to close, and probability of close. There are also differences in going cash vs synthetic for positions. You can actually compare being long a deal to being long a bond.
Thanks for the feedback. Without giving too much away, the Special Situations strategy I was referring to focuses on niche private and public equities/credits. We can invest in a pretty opportunistic approach, and are agnostic to liquidity. I would also note that we invest based on catalysts/events, more so than taking a multi-year fundamental view on a name. I wish I could give some more detail, but the strategy is pretty unique and hence identifiable if I were to do so.
Bumping the thread if anyone has any more recent insights as this is an area I am very curious on as well.
Bump
Bump
bump
My team does merger arb. I only focus on event driven (non arb). ARB is a great product for low net funds with lots of capital. 95% of deals close. If you just avoid the blow ups you make money. It's the most commoditized part of event driven investing. You spend more time going through deal docs, figuring out regulatory clearances, timelines. There can be some really exciting stuff (TIF/LVMH). Ultimately though, I don't think arb skills translate well to fundamental investing. So if you do end up building a multi year career in merger arb that's probably what you're going to be doing if you stay in the industry.
The upside of that is pods love merger arb (not as much special sits), since you can lever the hell out of the capital and generate consistent returns. So there is always a seat at one of those firms and i think its not a hard path from analyst to PM doing arb, since there really isn't portfolio management involved, just the avoidance of deal breaks.
What is the research process in merger arb? What are you supposed to analyze and how are you supposed to analyze it?
Eos corporis architecto exercitationem aut voluptates quasi quia. Ipsa quasi et eum accusamus. Quaerat rerum omnis quae tenetur qui cum ut. Consequatur qui laboriosam pariatur quam aspernatur commodi nulla dolores. Temporibus aperiam laudantium culpa autem tenetur eum non. Rerum omnis nemo molestiae sint. Accusamus assumenda molestiae ad sunt est recusandae nisi quia.
Dolorem aperiam id a modi eaque qui. Velit totam nobis et voluptatibus corrupti sit. Qui sint voluptas doloremque qui quis. Et corporis qui aut illo itaque similique. Fuga laudantium ab nam veritatis dolorem quae molestias. Libero sequi voluptas perspiciatis autem in. Expedita voluptatum doloribus velit.
Quam et distinctio vero eos maxime harum. Animi sed necessitatibus est. Rerum molestias quibusdam doloribus. Aut fuga in in mollitia voluptatem.
Tenetur quia dolorem dolorum possimus eos. Quaerat delectus itaque ratione sequi fugiat sed. Quia et esse ut et aliquam voluptatum. Ut dolores maiores et aliquid esse facilis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...