PSAM was founded in 1997 by Peter Schoenfeld who has over 30 years of event driven investing experience. The firm manages over $2 billion and the investments are global, with New York and London offices housing 44 staff including 22 investment professionals. The funds at PSAM are managed by 5 PMs (including CIO Peter Schoenfeld) with average experience exceeding 20 years and who have all invested through multiple market cycles (four based in New York and one in London).
The broad PSAM perspective on event driven investing encompasses merger arbitrage; credit including distressed/stressed debt, bankruptcies, liquidations and insolvencies; and special situations such as splits, buybacks, litigation, sum of the parts trades or other significant transformational corporate events.
PSAM has a very disciplined investment process in that they only invest in situations where they expect a transformational event to occur. The investment horizon is tied to the event but typically varies between 3 months and 12-18 months. Allocations among these three strategies are mainly driven by bottom up opportunities. The PSAM team likes to look at these events as three interrelated strategies: their favourite investments are companies that they can follow through all three strategy buckets and touch multiple stages of a corporate life cycle.
At times the fund has swiftly redeployed capital from one area to another. For instance, in the summer of 2011 after the US AAA-rating was downgraded, PSAM anticipated increased market volatility. Enticing merger spreads incentivised a reshuffle (often the case due to the liquid nature of these type of investments). Special situations was cut back from 36% to 22% of the fund, and credit was sliced to 15% from 18%, releasing resources to bulk up the merger arbitrage bucket to 63% from 46%.
The teams have an easy time coordinating because capital at the firm is allocated according to where they see the best opportunity set at any point in time. PMs cover specific strategies but are entirely agnostic as to the weightings of their strategies in the Firm because they all have interests in PSAM, not in their specific silos.
In the merger space, PSAM likes to focus on more complex deals that tend to offer wider spreads, multiple trading opportunities and optionality. In 2012, Canadian natural resource transactions offered wide spreads where fears of regulatory vetoes proved unfounded.
In addition both the MedCo/Express Scripts and Google/Motorola Mobility transactions offered various entry points. Both in equities and in credit, PSAM will occasionally take an activist stance to defend their rights as shareholder and/or creditors.
PSAM is no stranger to running liquid vehicles, having for 10 years run liquid version of their flagship strategy on managed account platforms with improved liquidity. PSAM’s liquidity menu stretches from the weekly UCITS to the quarterly flagship fund. All of the products are fully integrated, and a trade allocation algorithm divides trades among them.
The UCITS does not contain any unique positions, but rather is a subset of the flagship portfolio. The UCITS avoids less liquid assets and will not invest in non eligible assets such as bank loans. Overall credit exposure is capped at 25%. Extra liquidity safeguards include not owning more than two days of average daily trading volume, and only going for credits issued by companies that have total enterprise values above $800 million.
When investing, PSAM sizes positions so that the maximum impact to NAV is anticipated not to top 1.5% of capital loss in the worst case scenario.
While some asset managers emphasise low tracking error between their UCITS and other hedge fund products, PSAM openly states that there is a trade off between performance and liquidity. Credit portfolio manager Jim Malley says candidly that PSAM’s investors were not surprised to see the flagship PSAM WorldArb fund deliver 11% while the UCITS made 6% in 2012. Malley points out that additional returns are available for taking on more liquidity risk, mainly in the credit space. He also mentions that some investors who get their first taste of PSAM via the UCITS will later migrate into the flagship.
PSAM chose to partner with the Morgan Stanley FundLogic Alternatives Platform for various reasons. FundLogic was able to assist with distribution, and helped to ensure that the UCITS was fully integrated with PSAM’s own operational platform. On top of the UCITS risk oversight, the fund has risk features including a hedge overlay programme, managed by a group of professionals including Chief Risk Officer Rick Weber, and designed to protect portfolio p&l impact in periods of market stress.
PSAM are enthusiastic about the outlook for all 3 of their strategies as they consider the world looks like one large “event driven stage”. Merger activity is seeing its best start since 2005, with Dell the largest LBO since 2008 and plenty of medium sized deals that appeal to PSAM.
In special situations, companies with inefficient balance sheets or illogical structures can unlock value through spinoffs and changes in capital policy, with Yahoo a good example. In 2012, there have been $1.3 trillion of corporate divestitures. Credit is also a rich source of opportunities, thanks to a number of companies going through liability management exercises, multi-billion size bankruptcies, and also, notably, some opportunities opening up on the short side.