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Compelling conditions for Asian event driven investing

By Alexander Ellerby (pictured), UCITS Research Analyst, Kepler Absolute Hedge – It’s a common instinct in investing: applying assumptions about the US market to other regions is something investors across asset classes and strategies have a habit of doing. The latest victim? Asian merger arbitrage strategies.


By Alexander Ellerby
UCITS Research Analyst, Kepler Absolute Hedge

It’s a common instinct in investing: applying assumptions about the US market to other regions is something investors across asset classes and strategies have a habit of doing. The latest victim? Asian merger arbitrage strategies.

Asian M&A deals have long executed on much wider spreads than the US, averaging 10-12% on a net annualized basis against the latter’s 4.5-5.5% rate between 2009 and 2021. This can be attributed in large part to the increased complexity of Asian transactions, which often span multiple jurisdictions, and, as a result, a market with significantly less participation. Yet, deal completion rates between the two markets were effectively identical over the ’09-’21 period.

Since global markets entered something of a tailspin in late 2021, the risk free rate has shot up in Asia – and with it, spreads have widened even further. In fact, their widening has outpaced the rise in the risk free rate, despite the broader context not changing. This suggests that an idiosyncratic opportunity may have opened up, due in large part to a misalignment between market assumptions and on-the-ground reality.

Keppler graph

Source: Bloomberg

US market faces ongoing challenges

While spreads have also widened in the US, trading volumes have fallen dramatically, in large part due to transactions in the US being majority funded by balance sheet expansion or PE (a dynamic must less prevalent in Asia). As a result, the US market, already crowded due to its well-understood nature, is seeing further crowding into the few successful deals that remain.

An additional challenge for investors into US merger arbitrage is the growing antitrust regulatory intervention which has plagued deals over the last couple of years. Indeed, some of the largest deals announced in 2022 have come under unprecedented scrutiny from the Federal Trade Community and other federal agencies.

The second quarter of 2023 in particular has seen maybe the most material regulatory intervention in US transactions in a generation, leading to significant spread expansion and strategy derisking.  Asian spreads have been influenced by this pattern, despite these deals being on the whole unaffected by the changes, bar some intervention in the highly sensitive semiconductor space, where material historic consolidation and significant policy sensitivity in China in particular have introduced a well-defined element of risk. While this does not spill across to other sectors, it arguably adds to the overall risk premium applied by the market to Asian merger arbitrage transactions. Indeed, Asian regulatory protocols have otherwise remained relatively stable over the near term.

Clear catalysts for Asian dealmaking

As the US market remains subdued in a high interest rate environment, several factors are proving tailwinds for the Asian M&A market. The reopening of the Chinese economy, and the subsequent rebounding of its market, coupled with a renewed governmental focus on economic growth should provide a fertile pool of acquirers seeking regional expansion. This should also furnish the market with a more diverse and attractive set of deals, as mature acquirers that have withstood the economic shutdown look to deploy cash on their balance sheets.

More broadly, the more significant diversity of the underlying M&A markets in Asia, where deals in the core markets of greater China, Australia, Japan, South-East Asia, and India are subject to significantly diverse and uncorrelated drivers, have historically led to much less peak to trough transactional levels.  We are seeing this again in the near term, with significant and idiosyncratic deal activity across these markets leading to broad opportunities at a time of heightened risk premium and overall decreased market participation in spread opportunities.

A further catalyst comes from the delisting and reshoring of US-listed Chinese firms, especially ADRs. Some of these are opting for going private, and with US valuations so depressed, there is a potential arbitrage opportunity in evidence.

Finally, the continued volatility of financial markets including in Asia lends itself to ongoing unusual spread behaviour, with a further widening of spreads possible. Certainly, volatility will play a role in keeping this opportunity set interesting in the near future.

Building from experience

The KLS Athos Event Driven fund contains around 55 M&A transactions, diversified across a range of Asian geographies. The team that manages the fund’s investments have deep experience in event-driven investing, and the fund focuses on short-dated and liquid hard-catalyst events in Asia Pacific.

Their focus is strategic, for example maintaining a long-term emphasis on smaller deals even as Asian mega M&A transactions have declined. These deals are less impacted by the broader market context and have provided a steady stream of opportunities for the Athos team.

Indeed, the fund has maintained its number of positions over the last three years, reflecting the growth in listed companies in Asia and the relative resilience of the Asian M&A market in a challenging period for global markets as a whole.

Alexander Ellerby, UCITS Research Analyst, Kepler Absolute Hedge – Alex joined Kepler Partners in September 2019 as a fund research analyst covering the alternative UCITS space. Prior to Kepler, Alex worked at QIC Global and Waverton Investment Management. Alex graduated from Newcastle University in 2016 with a BA in Politics and is a CFA charterholder.

Important Information

Kepler Partners LLP is retained by Athos Capital Ltd for specialist marketing services. This report has been approved under section 21 of the Financial Services and Markets Act 2000 by Kepler Partners LLP for communication only to eligible counterparties and professional clients as defined by the Financial Conduct Authority. Its contents are not directed at, may not be suitable for and should not be relied on by retail clients or private persons. This is non-independent research which has been prepared in accordance with COBS 12.2. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, subject to restrictions imposed by internal rules. This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell. Any prices or quotations contained herein are indicative only. The information in this report is believed to be correct, but its accuracy or completeness cannot be guaranteed. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Please remember that past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. Independent financial advice should be taken before entering into any financial transaction. Kepler Partners LLP is a limited liability partnership registered in England and Wales at 70 Conduit Street, London, W1S 2GF with registered number OC334771. Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority.

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