Lutetia Capital was founded in 2009 by Jean-François Comte (CIO) and Fabrice Seiman (CEO) and across its two offices in Paris and London the team manages approximately USD1.1 billion in assets.
Lutetia operates the Lutetia Patrimoine Fund, a UCITS-compliant “pure” merger arbitrage strategy that focuses on North America and Europe combining qualitative and proprietary quantitative research in the investment process.
In addition, it also manages the Lutetia Merger Arbitrage Fund, an Irish ICAV offered to global investors with monthly liquidity terms. The aim of this fund, which launched in December 2017, is to deliver enhanced returns by using 3x exposure. It runs pari passu to the UCITS fund.
“Merger arbitrage is all about compounding positive returns over time,” says Comte (pictured), when discussing Lutetia’s investment philosophy. “It is the only yield strategy in the equity space. Our mission is to maximise this yield for investors while lowering the risk through diversification. We do not believe in concentrated portfolios. Moreover, we stay away from event driven situations that naturally bring market correlation and take away the yield visibility from a merger arbitrage portfolio.”
Lutetia uses a number of proprietary quantitative tools internally that allow the team to automate a number of traditional M&A analyses and assess the strengths and weaknesses of M&A deals. “Behind these models and quantitative macros are also a number of proprietary databases that we have built over time to access clean, reliable data,” adds Comte.
Once a deal is selected based on Lutetia’s preliminary analyses, an in-depth review follows, during which the team monitors the deal timeline through closing, in order to accurately assess idiosyncratic and external deal risks. Typically, the portfolio holds 40 to 60 positions, with an average deal duration of 80 to 120 days. The minimum deal size for consideration is USD500 million.
Looking back at 2018, Comte says there was more visibility on regulatory issues after a period of uncertainty that started with the new US administration, and was also marked by a change of cycle in market volatility.
“Higher volatility levels helped increase M&A arbitrage spreads,” says Comte, “which is the key performance driver for the strategy. Also, the fourth quarter of 2018 provided a “stress test” for absolute return strategies and an opportunity to prove their resilience. We managed to keep our returns in line with our objectives, achieving close to double-digit net returns with a limited volatility.”
The investment strategy focuses predominantly on North America (75 per cent) with Europe making up the remaining 25 per cent. With respect to liquidity management, 95 per cent of the portfolio can be unwound within a month.
“Risk management is at the heart of a merger arbitrage strategy, also called risk arbitrage. It is very much like an insurance business – you want to select and invest in the safest deals, while cashing in a healthy risk premium. The obvious requirement is an absolute discipline with respect to the sizing of the risk (i.e. potential downside on each position) and the sizing of the positions – which should be limited by a maximum budget of risk per position,” says Comte, when discussing Lutetia’s approach to active risk management.
On winning this year’s award, Comte comments: “We are delighted to receive this award for the Lutetia Merger Arbitrage ICAV. It rewards our core historical merger arbitrage strategy in a newer fund format that allows us to target enhanced returns.” n
