Trends Watch: Event-Driven Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.

This week, Elana talks with Alex Gavrish, Founder, Etalon Capital.

What is your outlook for event-driven investing?

Compared to secondary markets, corporate change and fundraising are at the core of the capital market. The niche image of event-driven investing stems from the fact that many investors perceive it as merger arbitrage strategy only. In truth, the opportunity set for those willing to take a broader approach is much more interesting than a narrow focus on merger spreads.

Presently we are at a stage that makes me believe the opportunity set for event-driven investing will be robust going into 2024 and beyond. There are a few reasons for this positive outlook.

First, the significant drop in private equity deals in 2023 left private equity firms with record amounts of cash reserves. At the same time, a large amount of ageing deals and companies to exit also adds to the “pipeline” of future transactions.

Second, the long-term trend of growth and popularity of passive index or ETF-based investing -- until recently, it paid off well. But there is the other side of the coin here. Investors understand that a purely passive approach is not enough. We saw this vividly in the aftermath of 2008 credit crisis when a large wave of shareholder activists appeared.

Winston Churchill once said: “It is better to be making the news than taking it, to be an actor rather than a critic.” As long as passive investing stays with us, there will be a need for a counterbalancing force. Activist investing should continue to grow, especially given the fact that capital allocated to activist firms is tiny compared to overall equity assets under management. Activist campaigns are often focused on strategic alternatives, M&A or other corporate change strategies; all of this creates events.

Third, there are many uncertainties in such areas as interest rates, macroeconomy and geopolitics. As a consequence, corporations might have smaller ambitions and instead of planning for growth there will be more and more focus on managing current situation. But as with the passive investing trend mentioned above, there is the other side of the coin here as well. While companies will be focused on navigating these turbulent times, they will aim to optimize their businesses, and this also often means corporate transactions such as spin-offs, sale of non-core assets, share buybacks, etc.

Where do you see the greatest opportunities and why?

I am a generalist and don’t have a specific sector focus. I look at opportunities through the prism of different event types.

One of the “purest” subsegments of a broader event-driven space, and the area where I find a lot of opportunities, are spin-offs. The very nature of a spin-off transaction is the ideal “creation,” so to speak, for investors. It creates a turning point in a company’s lifecycle and forces the market to revalue shares, and there are inefficiencies related to index inclusion and size of the companies and further, there is an issue of perception by investors of new companies as pure plays or not, etc. Because of all of these reasons, spin-offs provide a great area for event-driven investors.

Another example of an area where I find many possibilities for active trading are activist shareholder campaigns. When activists become involved in the company, similarly to spin-offs, they create a turning point and change the narrative around the company. Communicating their investment thesis to the general public, they often tell a story: about a struggling business, a corrupt CEO or management team, a restructuring process that failed or is not reflected in the share price yet, a strategy for improving business and a myriad of other types of stories. Activists tell these stories with intrigue, with drama, with conflict, with struggle, with emotions. In parallel with a change in perception by investors, activist campaigns often include corporate change strategies, creating events.

What are the greatest challenges you face and why?

Managing a diversified portfolio of equities with an emphasis on events poses two challenges. Many of these situations are idiosyncratic in nature and often have lower correlations to market. It is therefore important to achieve the right balance if one wants to hedge market risk, for example.

The second challenge is that although being rather large, the event-driven opportunity set is still a small fraction of the overall market. It is still a niche, and the number of opportunities fluctuates. For obvious reasons, when there are large dislocations in general market, the opportunities in the event-driven space are even more attractive. But during more normal periods, the number of events keeps fluctuating. So, one has to find a balance between taking advantage of current opportunities while remaining opportunistic for even better trades.

What keeps you up at night?

Charlie Munger considered investing and stock picking to be a “subdivision of the art of worldly wisdom.” As a social science, investing is a profession that is “integrated” with life overall. Just as in other areas of life, in investing it is possible to achieve operational success without attaining scientific knowledge. For me, this idea is very important: To retain a balance between science and art and remain creative in investing and in other areas of life. As Pablo Picasso said, “Art is a lie that makes us realize the truth.”

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.