SPVs vs. Structured Notes: Which is the better option?

  |   For  |  0 Comentarios

SPVs vs Notas estructuradas
Unsplash

Managing modern portfolios demands flexible and diversified financial instruments that enable the maximization of returns while managing risks efficiently. Two widely used instruments in this context are structured notes and special purpose vehicles (SPVs). While both serve specific purposes, their applications vary depending on project needs, portfolio structure, and investor risk profiles, explained the specialized firm FlexFunds.

To choose the most suitable instrument, portfolio managers must deeply understand the characteristics, uses, and risks associated with each tool, ensuring they align with their clients’ objectives and needs. Below, we examine the specifics of each option.

Structured notes

Structured notes are customized financial instruments that combine fixed-income elements with derivatives, offering managers potential returns tied to underlying assets like stocks, indices, or commodities.

When to use a structured note:

  1. Risk-adjusted return optimization
    Structured notes enable tailored risk-return profiles. They are valuable for managing portfolios focused on capital preservation while capturing moderate returns.
  2. Access to complex assets
    Portfolios seeking exposure to hard-to-trade or replicate assets (e.g., custom indices or baskets of stocks) can use structured notes as an efficient solution.
  3. Risk hedging
    These instruments allow for hedging strategies, such as market downturn protection, often at a lower cost than directly trading derivatives.
  4. Cash flow management
    Structured notes offer flexibility in terms of maturity and coupon payments, facilitating integration into portfolios with specific liquidity needs.

Risks:

  1. Counterparty risk: They rely on the issuer’s solvency, typically banks or financial institutions. If the issuer defaults, the investment could be lost.
  2. Illiquidity: These notes are illiquid and challenging to sell before maturity.
  3. Complexity and transparency: Their structure can be difficult to understand, and associated fees may lack transparency, potentially negatively impacting the investor.

SPVs (Special Purpose Vehicles)

An SPV is a separate legal entity created to manage specific assets or risks, isolating these operations from the parent company. These structures are commonly used in asset securitization and specific projects.

When to use an SPV:

  1. Risk isolation: SPVs separate risks associated with specific assets from the parent company’s general balance sheet, protecting both investors and the parent company.
  2. Financial flexibility: They enable capital raising through tailored instruments, such as bonds or structured investment vehicles.
  3. Risk distribution: Funded by multiple investors, SPVs distribute risks among participants.
  4. Cost efficiency: Depending on the jurisdiction, SPVs may be more cost-effective to establish compared to other alternatives.
  5. Management of complex assets: For portfolios including illiquid or high-risk assets, SPVs simplify the repackaging, valuation, and sale of these assets.

Risks:

  1. Operational complexity: Structuring and managing an SPV can be complicated and require technical expertise.
  2. Transparency issues: Legal separation does not always fully eliminate reputational or financial risks to the parent company.
  3. Market exposure: SPV performance depends on the assets it manages; if these assets underperform, investors may face losses.

Both instruments offer significant benefits, but the choice depends on portfolio objectives and strategies. Structured notes are suitable for managers seeking diversification with some level of protection, while SPVs are ideal for specific projects or asset structuring. The key is to carefully evaluate the risks, costs, and benefits of each option before making investment decisions. The table below summarizes the main differences between these instruments.

 

As a leader in creating investment vehicles through Irish SPVs, FlexFunds simplifies a process traditionally seen as complex and costly. Thanks to our expertise and innovative approach, we enable portfolio managers to design investment structures tailored to their strategies, achieving faster and more cost-efficient execution.

By combining the advantages of structured notes and SPVs, FlexFunds offers customized solutions that maximize efficiency in capital raising and distribution. These solutions are also cost efficient, as they can be issued in half the time and cost associated with conventional alternatives.

To explore how FlexFunds can enhance your investment strategy in international capital markets, don’t hesitate to contact our specialists at info@flexfunds.com

Prosegur Crypto Opens the First Cold Storage Custody Bunker for Crypto Assets in Argentina

  |   For  |  0 Comentarios

Prosegur Crypto Argentina

Prosegur Crypto, the institutional digital asset custody service of Prosegur Cash, has announced the inauguration of Argentina’s first crypto cold storage custody bunker and the second in Latin America, according to a statement from the security company.

The facility is a cold storage vault for crypto assets, offering a high level of security using cutting-edge technology to safeguard institutional digital assets offline. It is the second of its kind in Latin America, following the opening of a similar facility in Brazil.

Online hacking or theft losses can often reach millions of dollars, making professional custody of these assets essential. Prosegur Crypto built the cold storage vault in Buenos Aires, similar to those it launched in Madrid, Spain, in 2021, and São Paulo, Brazil, in 2023. This positions Prosegur Crypto as the first global security company to enter the digital asset market, offering a comprehensive service and model. The company has already received authorization from the National Securities Commission (CNV) to operate in the Argentine market.

The crypto asset vault, also referred to as a bunker due to its high security, is based on patented cold storage technologies. This solution ensures high levels of security, reliability, and availability for high-value digital assets. These assets are stored entirely in cold wallets, keeping clients’ private keys offline and disconnected from the internet. The bunker is equipped with over 100 protection measures distributed across six layers of security to safeguard the custody chain of digital assets. Clients’ assets are not used or moved for any purpose other than custody. Additionally, the facility includes technological mechanisms for quickly and securely making crypto assets available to clients in an automated manner.

“This new crypto bunker marks a significant milestone for our company as it expands our digital asset custody offering to Latin America, maintaining the same excellence and expertise of our traditional custody service. Our priority is to guarantee the security of assets, ensuring they are never used for purposes other than custody,” said José Ángel Fernández, Executive Chairman of Prosegur Crypto and Corporate Innovation Director of Prosegur Cash.

With these new crypto custody facilities, Prosegur Crypto promotes and facilitates the digitalization of financial assets in the country by creating an integrated institutional buy-sell and custody offering that includes regulation, technology, operations, and compliance. The company is also prepared for the tokenization of capital market instruments and real assets, such as gold, real estate, or the agricultural industry. Furthermore, it provides a platform for maintaining positions in digital assets for governmental entities and includes an asset seizure platform for law enforcement.

Additionally, Prosegur Crypto aims to offer financial institutions, government agencies, investment funds and managers, family offices, and exchanges a secure process for managing their digital assets, including submitting transactions to the blockchain without direct internet connectivity, thus maximizing protection against cyberattacks.

Vanguard: This Year Has Also Been a Record Year for ETFs in Latin America

  |   For  |  0 Comentarios

Vanguard ETFs récord América Latina

According to a report by ETFGI, this year will be historic for the global ETF sector. By the end of August, the industry reached a new all-time high of $13.99 billion in assets under management, surpassing the previous record of $13.61 billion.

In the emerging markets of Latin America, the trend is similar, driven by increased liquidity in the region. This is particularly evident among the largest pension funds, whose managers have long used ETFs as one of their preferred tools to diversify portfolios and maximize returns, according to Vanguard.

Juan Hernández, Director for Latin America at the firm, spoke with Funds Society about the performance of the ETF market in Latin America.

“It has been a record year globally for the ETF industry, which has benefited us because Vanguard is leading the market in ETF flows worldwide. For us, Latin America has been no exception. In the region, we have reported increasingly better results,” he noted.

That said, Hernández emphasizes that the performance of the ETF market in the region is not a temporary trend or a passing fad.

“This is not just about this year or a circumstantial issue; it is a structural matter. The Afores in Mexico and AFPs in South America were the first managers to adopt ETFs to diversify their portfolios, but today, more and more retail investors and intermediaries, such as banks and asset managers, are using ETFs to build diversified international portfolios. This trend has continued this year,” he explained.

According to Juan Hernández, investors recognize Vanguard’s long-standing development of the ETF market, starting with the introduction of the first indexed fund for individual investors in the United States in 1976. The firm has built a reputation for strict index tracking, rigorous risk controls, and low costs.

“For example, indexed ETFs are designed to function as part of a core indexing strategy that targets major asset classes,” the executive explained.

In this sense, institutional investors like Mexico’s Afores have taken advantage of the benefits of investing in ETFs, although they are just one example, as these investment vehicles are increasingly in demand.

“The Afores in Mexico, which represent the largest pension system in the region, began investing outside of Mexico in foreign securities via ETFs. They are very accustomed to using this instrument,” he added.

“Investors like the Afores have adapted to modularity, using ETFs to invest in the U.S. stock market, European stock markets, the Japanese market, emerging markets, treasury bonds, corporate bonds—there are many ways to invest. Afores now use ETFs as one of their preferred investment mechanisms,” he noted.

Liquidity: A Driving Factor

The increase in liquidity, both in Mexico and other countries in the region, has played a key role in the growth of ETF trading, Juan Hernández explained.

“In Mexico, the 2020 pension reform generated more inflows into the Afores. They now have more liquidity and, therefore, greater needs to invest in foreign securities. ETFs are their preferred choice over mandates or active funds by far,” he explained, adding that this is due to the advantages ETFs offer in “transparency, cost, liquidity, and modularity, allowing investment in different asset classes.”

“In Colombia, a pension reform was recently approved, and managers are already analyzing how and where they will invest that additional 6%. Similarly, in Chile, a pension reform is under discussion, including how resources will be invested. ETFs are at the forefront for all the advantages we have mentioned,” he concluded.

J.P. Morgan Asset Management Wants to Be a Key Provider of Active ETFs for Afores

  |   For  |  0 Comentarios

J.P. Morgan ETFs Afores

J.P. Morgan Asset Management Sets Out to Leverage Opportunities Offered by the Legislative Change Announced by Consar on November 21, 2024, Allowing Mexico’s Afores to Invest in Active ETFs

“The approval of active ETFs for Afores in Mexico is a significant milestone for the country’s pension system. J.P. Morgan Asset Management aspires to be a valuable resource for the investment teams of Afores, showcasing our success as an active manager and the breadth and depth of our global ETF offering,” said Giuliano De Marchi, Head of Latin America at J.P. Morgan Asset Management, in a statement.

“Afores will benefit from J.P. Morgan’s experienced investment team, its investment expertise, strategic approach, and the flexibility and agility that come with actively managed ETFs,” he added.

The ETF industry has expanded rapidly, currently representing $14.3 trillion in assets, with projections to reach $30 trillion by 2030. While the U.S. market has been the dominant force in this expansion, there has been significant positive momentum in markets around the world in recent years.

Today, there are 5,700 ETFs listed globally, comprising approximately 3,900 index-tracking ETFs and over 1,800 active ETFs. The gap between these two types of ETFs has been narrowing quickly: while index-tracking ETFs have grown at a compound annual growth rate (CAGR) of nearly 20%, active ETFs have grown at a CAGR of about 50% over the past five years.

J.P. Morgan AM launched its first ETF in the United States in 2014 and listed its first ETF in Mexico in 2018. Over the past decade, the firm’s global ETF platform has expanded significantly. Today, it is the second-largest provider of active ETFs by assets under management, with over $215 billion in AUM and more than 100 ETFs across various asset classes.

“As a leading global active manager, we are excited to bring our top-tier active management capabilities to the Afores, and this is just the beginning. We have been serving these clients in Mexico for more than 10 years, and this approval marks a significant milestone, allowing us to offer Mexican pension funds the many advantages of active ETFs while striving to deliver the highest quality investment capabilities to our clients,” said Juan Pablo Medina Mora, Head of Mexico at J.P. Morgan Asset Management.

Carlos Brito, Head of ETFs for J.P. Morgan Asset Management in Latin America, added: “We are particularly proud of the success of active ETFs in other markets. Active ETFs offer a range of benefits that make them an attractive investment option for many investors. They are managed by portfolio managers who actively select and adjust the ETF holdings to capitalize on market opportunities. This active management can potentially lead to higher returns, as managers can respond to market changes, economic trends, and company-specific events. Additionally, active ETFs provide investors with greater flexibility and diversification, allowing access to a broad range of investment strategies and specific outcomes.”

J.P. Morgan Asset Management currently manages $3.5 trillion in assets (as of September 30, 2024). The company offers global investment management across equities, fixed income, real estate, hedge funds, private equity, and liquidity.

The Outlook for Financial Markets

  |   For  |  0 Comentarios

Perspectivas de mercados financieros
Image generated with AI

The Republican party’s sweep of the US election is likely to boost equity markets, particularly those in the US, if the pattern of the first Trump administration is any guide. The risks are that either growth accelerates by too much and the US economy overheats, or that large tax cuts prompt a negative reaction from the bond market. We will have to wait until there is more clarity, not only on any policy proposals, but also on what can actually be implemented.

Aside from political developments, developed market central banks are cutting policy rates. This should boost both equities – as shorter-term financing costs fall – and fixed income, as the policy rate component of bond yields declines. Of course, anticipating the reaction of markets is not as simple as that because the other, arguably more important, factor driving asset prices is economic growth.

Investors should initially be circumspect in anticipating positive equity returns during a rate-cutting cycle given that four out of the last five such cycles in the US coincided with a recession. Not surprisingly, the onset of a recession led to negative returns in equities alongside gains for government bonds.

The critical consideration in anticipating returns for next year is whether 2025 will be exceptional in not having a recession.

A preference for US equities

The consensus view has been that the US will indeed see a soft landing – that growth will slow, but remain positive as core inflation moves back towards the US Federal Reserve’s 2% target. Europe has already had a slowdown, but we believe 2025 should see a modest rebound. Economic growth would be supportive of equity markets and earnings, leading to price gains in the year ahead.

Our regional preference remains the US. Enthusiasm for artificial intelligence was the primary driver of rising earnings in 2024; the bulk of earnings derived from the types of stocks making up the tech-heavy NASDAQ 100 index, while the rest of the market saw barely positive growth.

In 2025, the distribution is expected to be more balanced, even if NASDAQ earnings growth is still superior (see Exhibit 1).

 

European equities should also see market gains, but once again lag most other major markets. The region remains hindered by the overhang of geopolitics and structural challenges facing its largest economy, Germany.

Consumer demand in Europe will need to rebound much more strongly than we anticipate for consumer-linked sectors to thrive. Exporters will benefit from robust US growth, though tariffs remain a worry. China is unlikely to pull in European products the way it has in the past as growth in China slows.

The potential for superior returns in China will depend primarily on actions from the central authorities. China remains distinct in its dependence on government policy to drive economic growth and hence corporate profits.

While we anticipate more stimulus from Beijing, it does not look likely there will be a major change in economic policy; Beijing will probably continue to focus on investment in new, developing industries rather than nurturing household consumption or bailing out property developers.

We question whether these privileged sectors will be able to generate growth for the whole economy at the rate the authorities would like. Without a stronger rebound in the property market, consumer sentiment is likely to remain depressed. Looking to exports to make up the slack may also prove insufficient due to rising global protectionism.

Chinese earnings should nonetheless rise, at more than 10% year-on-year if consensus estimates are correct, though this is not that much more than Europe at 9%. Valuations are low relative to history, but there may now be a permanent discount to multiples versus the past, meaning  price-earnings ratios will not necessarily revert to the mean.

Fixed income – Opportunities and concerns

The risk to market expectations for short-term rates in the US comes from the potentially inflationary impact of the new Trump administration’s policies (tighter immigration, tariffs, tax cuts). At this point, however, one can only speculate on what will actually be implemented.

Longer-term Treasury yields could rise to reflect the uncertainty about the outlook for inflation, to say nothing of the US budget deficit. An extension or expansion of tax cuts would only lead to a further deterioration in the fiscal outlook.

As always, however, it is unclear if and when the market will decide to fully price in these risks. We would anticipate ongoing support for gold prices as investors look for alternative safe haven assets.

Investment-grade credit should provide superior returns relative to government bonds as spreads remain contained alongside steady economic growth.

While spreads are narrow – both in the US and in the eurozone, and both for investment-grade and high-yield – they are relatively better for eurozone investment-grade credit, and we see this asset class as offering the best risk-adjusted returns.

Daniel Morris, Chief Market Strategist at BNP Paribas AM

J.P. Morgan Asset Management Partners with CAIS to Expand Access to Alternatives

  |   For  |  0 Comentarios

The alternative investment platform for independent financial advisors, CAIS, announced a partnership with J.P. Morgan Asset Management to provide advisors with access to its alternative investment strategies.

“As demand for alternative asset classes accelerates, we are committed to offering the most robust technology and operating system to streamline the alternative investment lifecycle for advisors and managers,” said Brad Walker, Chief Product and Client Development Officer at CAIS, as stated in the firm’s press release.

An evergreen private equity vehicle focused on small and mid-market secondaries and co-investments is currently available on CAIS Marketplace, with plans underway to scale the partnership and add additional J.P. Morgan strategies to the platform over time.

Funds listed on CAIS have undergone third-party due diligence conducted by Mercer, a global leader in institutional investment and operational due diligence, according to the firm’s statement.

“Expanding access to alternative investments is an undeniable trend reshaping the investment landscape,” said Shawn Khazzam, Head of Private Wealth Alternatives at J.P. Morgan Asset Management.

Interest in this asset class continues to grow as a means for investors to diversify and strengthen their portfolios, Khazzam added, emphasizing that “it is crucial to equip advisors with access to our innovative products, enabling them to craft strategies aligned with their clients’ evolving needs and goals.”

J.P. Morgan Asset Management will also gain access to CAIS’s online training platform, CAIS IQ, digital marketing support, and integrations with leading custodians, reporting providers, and fund administrators.

Additionally, the firm will benefit from a customized analytics dashboard designed to optimize its platform engagement, opportunity management, and sales efforts, the statement adds.

J.P. Morgan’s quarterly Alternatives Guide, which recently celebrated its fifth anniversary, will also be available on the platform. J.P. Morgan Asset Management is the latest in a series of new managers incorporating alternative strategies into the CAIS platform, following nearly 20 new and expanded partnerships with alternative asset managers in 2024.

Insigneo Appoints Virginia López as Director of Platform Capabilities

  |   For  |  0 Comentarios

Virginia López has been appointed as Director of Platform Capabilities within Insigneo’s Investment Solutions Group.

López will be based in Montevideo, where she will oversee the enhancement and adoption of the company’s platform offerings and work closely with investment professionals across all regions to deliver tailored solutions for clients, according to the statement from the independent advisor network.

In her new role, reporting to Mirko Joldzic, Head of Investment Solutions at Insigneo, López will focus on optimizing Insigneo’s suite of products.

Her role will be centered on “ensuring alignment with client needs, and her responsibilities will include leading educational initiatives for investment teams, integrating new technologies, and identifying strategic opportunities to enhance the platform,” adds the company’s statement shared with Funds Society.

“This is an incredible opportunity to join a firm like Insigneo, renowned for combining a global perspective with a client-focused approach. I am looking forward to collaborating with its talented professionals to continue innovating and delivering excellence to our clients,” said López.

López brings two decades of experience in the financial sector, having held executive positions at renowned firms such as BlackRock, Merrill Lynch, and Lord Abbett. Her expertise spans investment consulting, platform optimization, and client engagement. Born in Uruguay, López has also worked in several Latin American countries, including Argentina and Chile, and has developed a strong reputation for her strategic thinking and ability to drive innovation, the company’s statement adds.

“Virginia’s extensive experience and leadership in platform optimization and investment management are incredibly valuable assets,” stated Joldzic.

Leadership Change at Bci: Ignacio Yarur Takes Over as Group President

  |   For  |  0 Comentarios

(cedida) Ignacio Yarur, presidente de Bci

The Chilean financial group Bci is entering a new chapter as its president, Luis Enrique Yarur Rey, hands over the chairmanship of the board to his son, Ignacio Yarur Arrasate, after 33 years in the role. This transition also brings changes to the Yarur family holdings—Empresas Juan Yarur and Empresas JY—and the Bci Asset Management fund manager.

The firm announced the leadership change in a filing with the Financial Market Commission (CMF), noting that Luis Enrique Yarur will remain a member of the board. This shift is part of a succession plan aimed at securing the firm’s future. The change—pending shareholder approval at the next annual meeting—will take effect on January 1, 2025.

Ignacio Yarur, a 50-year-old lawyer, has been part of the family company since 2004, following his tenure at the legal firm Carey y Cia. During his 20 years with the bank, he has held various roles, leading key areas such as retail banking, wholesale banking, private banking, digital transformation, the fintech MACH, innovation, and data analytics. He also spent a year at City National Bank of Florida, Bci’s U.S. subsidiary.

“His leadership has been marked by initiatives in innovation, the deployment of new technologies, and data analysis as key business drivers. Ignacio Yarur served on the board from 2010 to 2011 and will rejoin it on January 1, 2024,” the firm highlighted in a statement.

Ignacio Yarur praised his father’s leadership, stating: “When he took over as chairman, this was a small bank in a small country. He made it grow multiple times over, transforming it into a company recognized for its reputation and as a great place to work.”

He emphasized the bank’s “successful internationalization and digitization process,” which has helped it surpass 6 million clients.

Bci operates in Chile, the United States—where it has acquired City National Bank of Florida, Totalbank, and Executive National Bank—and Peru, with representative offices in Brazil, Colombia, Mexico, and China. Today, 37% of Bci’s assets are located abroad, mainly in the U.S. and Peru.

Under Luis Enrique Yarur’s leadership, which began in 1975, the bank experienced exponential growth: profits increased 58 times, assets 66 times, loans 73 times, staff 4 times, and equity 99 times.

The Yarur family holding companies are also undergoing transitions. The presidency of the board has been passed to another of Luis Enrique Yarur’s sons, Diego Yarur Arrasate.

Currently serving as Corporate and International Development Division Manager at Bci, Diego Yarur will leave his position on January 1, 2025, to lead the family business. He will head both the financial arm, Empresas Juan Yarur, which controls the bank and its subsidiaries, and the non-financial arm, Empresas JY, which oversees assets like Salcobrand Pharmacies and Viña Morandé.

Luis Enrique Yarur will remain a board member of both entities.

In his new role, Diego Yarur, a 48-year-old commercial engineer with 18 years of experience in the financial sector, aims to “continue fostering a strong business culture centered on people, a hallmark of the Yarur family, while driving a strategy focused on innovation and advanced technology,” the bank stated.

Before joining Bci in 2006, Diego Yarur worked as a corporate finance analyst at American Express Bank and Santander Investment. Since 2016, he has led Bci’s Corporate and International Development Division.

A few days prior to these announcements, Bci revealed changes to the board of its Chilean asset management arm, Bci Asset Management (BAM).

Pedro Atria and María Eugenia Norambuena have joined as president and director, respectively.

Both bring extensive experience in the local financial industry. Atria spent a decade at AFP Cuprum, serving as president and CEO, as well as president of the Association of AFPs of Chile and Country Head of Principal. Norambuena has over 20 years at Principal Group, where she held roles including COO and general manager of Principal Vida Insurance.

These appointments aim to “strengthen BAM’s corporate governance” and follow the resignations of Abraham Romero and Gerardo Spoerer, the company announced in a press release.

Snowden Lane Partners Launches a New Retirement Program for Advisors

  |   For  |  0 Comentarios

Snowden Lane Partners retirement program advisors

Snowden Lane Partners announced the launch of its Practice Continuation Plan, a retirement and monetization program now available to Snowden Lane’s advisors.

“This new and dynamic program, designed for eligible senior advisors, offers retiring advisors the opportunity to receive an upfront, lump-sum payment upon entering the five-year program, accompanied by a revenue-sharing model for retiring and successor advisors. Through this program, retiring advisors can achieve an overall value of up to 250% of their trailing 12-month revenue,” the firm stated in its release.

Additionally, the program helps advisors organize an orderly succession plan, providing upfront liquidity and a five-year revenue stream for those nearing retirement, along with an acceleration of the profit-sharing model that is key to Snowden Lane’s compensation system. Successor advisors will receive a share of the revenue, which will revert to 100% by the end of the program.

The plan also includes a benefit in the event of the death of the retiring advisor, offering added security to retiring advisors and their families, the company’s statement adds.

“We introduced this program earlier this year, after discussions with several of our advisors who are looking to complete their careers at Snowden Lane, monetize their practices, and ensure business continuity for their clients. The response has been enthusiastic, as the program’s structure achieves these goals,” said Rob Mooney, Managing Partner and CEO of Snowden Lane.

“We are fully invested and bullish on the M&A environment in 2025 due to favorable tailwinds”

  |   For  |  0 Comentarios

GAB24 bullish M&A 2025
Photo courtesyFrom left to right: Willis Brucker, Paolo Vicinelli and Ralph Rocco, portfolio managers at Gabelli

Throughout the first three quarters of 2024, Global M&A activity totaled $2.3 trillion. The technology sector led in activity with a total volume of $375 billion, accounting for 16% of overall value, followed by Energy & Power at 16%/$374 billion and Financials at 12%/$308 billion. Drivers of M&A have recently been mixed, according to Gabelli Partners. Portfolio Managers Ralph Rocco, Willis Brucker and Paolo Vicinelli point out that there have been some headwinds in recent years, namely a hawkish regulatory environment fostered by aggressive anti-trust regulators in the US, who were suing deals based upon novel antitrust theories. “This aggression likely led to some management sitting on the M&A sideline. For those companies pursuing M&A, the aggressive regulators dissuaded some managements from pursuing deals after the deal deadline, caused spreads on other deals to widen, and were successful in blocking a few deals”. Nevertheless, the team points out that some tailwinds have emerged lately, leading to increased deal volumes, and have generally been positive drivers of performance.

Rocco, Brucker and Vicinelli are the portfolio managers leading the GAMCO Merger Arbitrage strategy, which has been in place since its launch in 1985 and has a UCTIS version, the GAMCO International Sicav GAMCO Merger Arbitrage UCTIS – Class I USD, launched in 2011. The investment process has remained unchanged over these 39 years, irrespective of whether the market environment was positive or negative. “We take what we believe is a conservative approach to M&A investing,” they say.

They tipically initiate deals with a small position size, which they may increase as deal hurdles and milestones are met. Position sizes are generally limited to ~5% of the total portfolio at cost, which contributes to the desired outcome of being diversified. Finally, they continuously monitor pending transactions for all the elements of potential risk, including: regulatory, terms, financing and shareholder approval. “We trust that our consistent approach will enable us to continue to earn positive risk-adjusted absolute returns for our clients”, PMs add.

 

Can you explain your approach to investing in M&A in the public markets?

The announcement of a deal is the beginning of our investment process. Simply stated, merger arbitrage is investing in a merger or acquisition target after the deal has been announced with the goal of generating a return from the spread between the trading price of the target company following the announcement and the deal price upon closing. This spread is usually relatively narrow, offering a modest nominal total return. Since deals generally close in much less than a year’s time, this modest total return translates into a much more attractive annualized return.

The objective of our merger arbitrage portfolios is to provide positive “absolute returns,” uncorrelated with the market. Returns are dependent on deal closures and are independent of the overall stock market movement. Deals complete in all types of market environments, including the recent 2022 market decline, which led to a +2.8% performance for the Merger Arbitrage strategy fund while the broader equity and fixed income markets were down double digits.

We have been managing dedicated merger arbitrage portfolios since 1985 as a natural extension of Gabelli’s Private Market Value with a CatalystTM methodology that is utilized in our value strategies. In 2011, we opened the strategy to European investors and have earned positive net returns for our clients in 13 consecutive years. The strategy is available in several currencies, including USD, EUR, GBP, and CHF.

We invest globally across a variety of listed, publicly announced merger transactions. Our portfolios are highly liquid, with low market correlation. Historically, the volatility is approximately 1/3 that of the S&P 500, and our beta is roughly 0.15. We watch and wait for transactions with high strategic and synergistic rationale in industries we know well, leveraging the fundamental research and collective knowledge of over 30 Gabelli industry analysts, who follow and analyze companies within our proprietary Private Market Value with a Catalyst investment methodology. They are experts in their areas of coverage. We comb through filings and merger agreements, and speak with management in order to outline a strong and clear path for deals to be completed.

 

You mentioned the aggressive anti-trust regulators impacted recent returns. Do you anticipate any changes in regulation under the Trump administration next year?

We believe the incoming Trump administration will usher in a much more deal friendly environment, with the expectation that there will be a change in leadership at both the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”). We have already seen an increase of new deals announced after President Trump’s successful election. With friendlier M&A regulators paired with lower interest rates, we anticipate a deal boom for 2025, which may continue over the next four years.

 

How is the Fed’s rate cutting cycle affecting M&A activity?

In 2023, the U.S. Federal Reserve ended its series of interest rate hikes. This helped provide acquiring company managements with certainty of financing cost, giving confidence to M&A. With rate cuts beginning in 2024 comes lower costs of financing, which further encourages managements. Additionally, the steep market decline in 2022 caused market price dislocations, which prompted targets and acquirers to come to new price understandings. This began to wear off in the second half of 2023 into 2024.

While we have no crystal ball into the Fed’s actions, its comments indicate, and the market anticipates, further rate cuts to follow in the new year. We believe that, with rate cuts, deal volume should increase, as acquirers will be able to take advantage of the lower costs to finance their acquisitions, and further bolster M&A activity in the year ahead.

 

How are you positioned into the near year?

Our process is sector agnostic. We approach each deal on a risk/reward basis, investing in deals that we believe have the highest likelihood of closing. Our sector exposure is generally indicative of where we see attractive deals.

We are fully invested and are bullish on the M&A environment in the coming year due to favorable tailwinds:

  • deal spreads are near the highest level in nearly a decade,
  • a more favorable anti-trust/regulatory environment,
  • prospect of further rate cuts, and
  • an expected increase in deal volume under the Trump administration

 

If you are interested in learning more about the potential benefits of investing in M&A in today’s markets, the Gabelli UCITS team is available at SICAVInfo@gabelli.com or by calling +1-914-921-5135. Please visit us at www.gabelli.com/sicav for more information on our UCITS funds.