01 Nov 2012 Michael Gebelli et al., Merger Arbitrage team, GAMCO Investors
GAMCO Investors, Inc. is a publicly traded Asset Management company (NYSE: GBL) founded in 1977 by Mario Gabelli.
LUXHEDGE: What is the background to your company and funds?
MICHAEL GABELLI – MANAGING DIRECTOR AI: GAMCO Investors, Inc. is a publicly traded Asset Management company (NYSE: GBL) founded in 1977 by Mario Gabelli. As of 30th September 2012 the firm manages approximately $37 billion in absolute return portfolios through fund companies, segregated accounts, and hedge funds. GAMCO is recognized for its proprietary “Private Market Value (PMV) plus a Catalyst” investment methodology which we define as the price a strategic acquirer would be willing to pay for the entire enterprise. We always look for a catalyst, be it company specific or macro, that will help the company realize its value. The ultimate catalyst is a merger so Merger Arbitrage is a natural extension of this investment methodology. In our Merger Arbitrage portfolios we focus on announced transactions, by well-financed, strategic corporate acquirers, in industries that we know well. Our research conducted by more than 36 analysts helps us understand industry and company specific dynamics and puts us in a position to provide our clients with attractive risk adjusted returns.
LH: Why did GAMCO Investors, Inc choose Luxembourg?
MG: We wanted to package our flagship strategies into regulated and widely distributed investment vehicles. The first fund we launched, GAMCO Strategic Value uses our “PMV + Catalyst” methodology which we have employed since 1977 in separately managed accounts and where we have returned 15.8% versus 11.3% for the S&P. We have been managing dedicated Merger Arbitrage portfolios since 1985. In our offshore fund we have annualized returns of 7.88% with 3.30% volatility, and in October 2011 we launched a fund which is managed pari passu to these portfolios – GAMCO Merger Arbitrage.
LH: And this is precisely why we are there to-day!
MG: Yes indeed! GAMCO Merger Arbitrage should be a component of your main LuxHedge index and also of your event-driven index, as it is truly a Luxembourg-based alternative UCITS with assets as of end of September of USD 69 Million. The fund is offered with 6 different classes for institutional and retail investors. It offers the investor a well-diversified portfolio of about 50 to 60 positions, the top 10 of them representing 40% and the top 30 about 50% to 60%. It invests globally but with a focus on North America and Europe which is where our core competencies lie.
LH: How would you briefly characterise your merger arbitrage investment process and how are you able to generate ideas for this sub-fund?
RALPH ROCCO – PORFOLIO MANAGER: Sure! The objective of the GAMCO Merger Arbitrage Fund is to achieve long-term capital growth by investing primarily, in “announced” equity merger and acquisition transactions while maintaining a diversified portfolio. Essentially, we seek to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts and other types of corporate reorganisations. We analyse and continuously monitor each pending transaction for all the elements of potential risk, including anti-trust, deal terms, financing, and shareholder approval. The position size will typically increase as our team gains clarity on the outcome of the various deal “hurdles”. We have a strong preference for cash transactions, by well financed strategic acquirers in industries where we have a core competence. We rely on a team of 36 analysts in 7 industries including aerospace & capital goods, consumer, health & wellness, energy & utilities, media & telecom, natural resources and financial services.
LH: What are your primary risks when you make an investment?
And could you refer to a specific one that you have in the portfolio right now and explain how you manage those risks?
RR: When we make an investment, our primary risk is related to the consummation of that transaction, as opposed to the market risk. The variables that compose deal risk are measurable and quantifiable. Please keep in mind that the portfolio is well-diversified. We review the portfolio risk internally on a weekly basis by a risk committee comprised of officers and managers of the firm. Policies, procedures and monitoring of investment limits are in place and extensive compliance measures are monitored daily.
LH: Who are your key service providers?
MG: We have engaged J.P. Morgan Bank Luxembourg as custodian, administrator and transfer & registrar agent. Arendt & Medernach has been retained as legal advisor. Compliance and risk management functions are monitored by MDO Management Company.
LH: How would you assess the impact of the recent global financial crisis and economic downturn on your particular field of expertise?
Is it a good time to invest in merger arbitrage?
What opportunities are you looking at right now?
PAOLO VICINELLI – DEDICATED ANALYST: In spite of the on-going global financial crisis, the drivers for vibrant M&A activity remain in place in North America, the U.K. and Continental Europe and also in Asia. Companies are holding record levels of cash, credit markets are becoming healthier with financing available at historically low rates, and corporate executives continue to express a strong desire to expand business lines and extend geographies. Our outlook for M&A activity and consequently, merger arbitrage returns, remain positive. We continue to find pockets of opportunity and we remain well positioned. We had one deal close in September as Dell completed its acquisition of Quest Software. The software developer agreed to be acquired by a private equity group supported by Quest founder & CEO, Vincent Smith, for USD 23 cash per share. The agreement contained a “go-shop” clause during which Quest solicited superior bids, which led to a back-and-forth between Dell and Mr Smith’s bidding group, and Quest’s agreement to be acquired by Dell for USD 28 cash per share, or about USD 2.5 Billion. The nature of the transaction was friendly. We have also taken the opportunity of investing in the announced Medicis Pharmaceutical and Xstrata deals.
LH: How and where do you distribute the funds? What is the profile of your client base?
MG: Our assets under management for this Merger Arbitrage sub-fund of GAMCO International SICAV amounted as I indicated to USD 69 Million keeping in mind that our total hedged arbitrage assets under management for the firm as a whole amount to over USD 700 Million. The investors in the SICAV’sub-fund originate from around Europe and consist of private banking arms of various banks, portfolio managers, managers of fund of funds, private wealthy individuals, etc…
LH: Would you have a few words perhaps on your performance (+2.77% in Q4-2011 followed by +0.49% for the first three quarters of 2012)?
The sub-fund has just celebrated its first anniversary. How do you see the next 12 months?
RR: Yes indeed, the sub-fund exhibits a total return of +3.27% net of fees after its first year of existence. The whole industry suffered from a decline in M&A activity with year-to-date deal-making activity at USD 1.7 Trillion versus USD 2 Trillion in the comparable period of 2011. We think that this is still a good performance given the context and in comparison to our competitors. We believe that the second year of the Sub-Fund will be characterised by a strong M&A activity for several reasons: record level of corporate cash, healthier credit markets, low financing rates, strong desires from executives to expand business lines implying growing opportunities to materialise basically everywhere in the world.
LH: What differentiates you from other managers in your sector?
Why are you so shy to invest in Western Europe and the U.K.?
And do you see interesting merger arbitrage opportunities in emerging market?
PV: Our investment team at Gabelli has developed a consistent and repeatable process which can be applied globally. The “PMV plus a Catalyst” is research intensive so that we can invest with conviction. And this explains why many institutional clients have selected us. The Arbitrage team has an average of 20+ years experience and the firm has 34+ year experience in the strategy. The investment team for our Merger Arbitrage funds, including our UCITS fund, is composed of Ralph Rocco who has been with the firm since 1994, Mario J. Gabelli himself, Eugene Bernadin, the dedicated trader who has been trading merger arbitrage for about 35 years and two senior analysts including myself. We can count on 36 research analysts who often have been following the company before the deal is announced so we can get a thorough understanding of the implications of the deal. We tend to like deals in the UK because the Takeover Code is quite strict there.
LH: How do you view the environment for fundraising over the coming 12 months?
MG: We sincerely think that thanks to our professionalism, long-track record gained in a similar, Cayman-based, vehicle that, the appetite from European investors for the GAMCO Merger Arbitrage SICAV in particular can only grow. We understand from your database that the number of event-driven and merger arbitrage investment managers is growing and we reckon to be quite well positioned both in terms of net returns and risk-adjusted returns.