For a long time, betting that mergers would close was a pretty good business. Richard Perry built a business of merger arbitrage at Goldman Sachs in the 1980s. It was such a good deal, he decided he wanted to do it for himself. So 20 years ago he founded Perry Capital, which quickly became one of the leaders in in the world or arbitraguers.
As time went on, of course, the business got tougher because it got more crowded. The arbs quickly moved in and spreads narrowed. But there’s never been a tougher time for the arbs than the past year, when huge deals have cratered. Deal Journal’s Heidi Moore reports that Perry is greatly scaling back its equity arb business and going into credittrading.
As part of that effort, the firm is laying off 20 to 30 staffers, people familiar with the matter told Deal Journal. A person close to the situation said Perry also has made some hires to boost its standing in debt investing.
Here is Perry’s official statement, courtesy of a spokesman for the firm:
“The traditional long/short equity model is undergoing rethinking and Perry Capital has taken appropriate steps to restructure so that it may better capitalise on more appealing current investment opportunities. The firm remains a special situation equity investor, but it sees unprecedented opportunity in the global credit markets that requires fewer equity professionals. The nimble asset-allocation process that has been a hallmark of Perry Capital’s long-term success dictates such a realignment of its near-term investment focus.”
Perry Capital, like many other hedge funds, has been it hard by the plunging stock markets. The $11 billion Perry Fund was down 8.5% in the third quarter alone, a person familiar with the firm told Deal Journal.
Part of that hit has come from merger arbitrage, the now-dangerous business of betting that announced mergers will actually close. Mergers have been breaking up in increasing numbers since last year, leading one arb to complain in March, “I’m practically wearing a diaper to work.”
Casualties include the failed buyouts of student lender Sallie Mae, Penn National Gaming, Alliance Data Systems, and, more recently, dropped bids such as Waste Management’s walking away from its $6.5 billion offer for Republic Services. Those deals that haven’t fallen apart are on the rocks, like Apollo Management-owned Hexion Specialty Chemical’s litigious $6 billion bid for rival Huntsman.
Several hedge funds have closed or reduced their arbitrage desks. Perry hasn’t completely closed its arbitrage desk, with three junior-level analysts still working there, according to people familiar with the firm.
We can’t help but read this a bit like we read the story of so many big hedge funds going to cash. These have to be contrary-indicator right? If hedge funds are in cash, you know that eventually they’ll have to invest in something. So the game is figuring out where they are likely to invest when they get back in. Here, the exit of big names from equity arbitrage should create more pricing anomalies and arbitrage opportunities, right?