Carmignac Merger Arbitrage: Letter from the Portfolio Managers

Dear investors,

Across all asset classes, investors experienced one of their worst quarters since 2022. In a geopolitical environment that has changed abruptly, our Merger Arbitrage strategy has shown solid resilience.

Trump's announcement of the US tariff war against the rest of the world, followed by Germany's massive investment plan, thus renouncing its restrictive debt policy, has truly marked a regime change in the financial markets.

Thus, during the first quarter of 2025, investors experienced:

• A fall of 10.1% on the S&P 500 and 13.4% on the Nasdaq between the peak and trough¹.
• A fall of 1.3% on the US High Yield index between the peak and trough².
• A historic rise of almost 50bp in the German 10-year rate³.
• A major sector rotation with a 33% rebound in defensive stocks compared to cyclical stocks in the US after more than 4 years of underperformance⁴.
• An unexpected geographical rotation with Europe outperforming the US by 15%⁵.
• A rotation in investment style with a 10% outperformance of ‘Value’ compared to ‘Growth’ after 2 years of underperformance⁶.

In this particularly complicated environment, Carmignac Portfolio Merger Arbitrage Plus stands out for:

• A positive performance of 1.05% (I EUR shareclass) since the beginning of the year.
• Stable volatility of less than 2.0%.
• A clear decorrelation from equities and credit (correlation coefficient of 0.2 since the beginning of the year compared to the SPX Index and IBOXHY Index).
• Limited drawdowns: -51bp from 24/01 to 31/01 and -32bp from 03/03 to 11/03.

Despite turbulent stock markets, M&A activity has remained fairly strong at the beginning of the year, albeit with a strong geographical disparity.

Indeed, at the global level, 93 new transactions were announced during the quarter, a slight increase of 1% compared to the same period last year, for a total of $285 billion, a decrease of 6%. While the US saw a decline of around 20% in both volume and value, Europe and Asia recorded a sharp rebound, up 47% and 26% respectively in value. In Europe, as usual, most of the growth came from the UK, followed this quarter by Italy.

Among the most significant deals announced this quarter, we note: in the US, Walgreens Boots Alliance ($39 billion) Mr Cooper Group ($21 billion) and Intra-Cellular Therapies ($14 billion), and, in Europe, Mediobanca di Credito Finanziario ($14 billion), Subsea 7 ($6 billion) and Just Eat Takeaway.com ($5 billion).

Finally, we should emphasise the rise of private equity funds, which are taking advantage of the fall in interest rates to deploy their capital more aggressively. During the first quarter of 2025, financial buyers accounted for 30% of acquirers, compared with only 20% in the same period last year.

Behind the good quarterly performance of our Merger Arbitrage strategy lies a simple idea: during an officially announced M&A transaction, if a Merger Arbitrage fund is effectively invested in equities, it essentially holds contracts between the acquirer and the target, the clauses of which do not depend on market conditions.

Therefore, a Merger Arbitrage portfolio can be analysed as a set of idiosyncratic risks. It follows that a Merger Arbitrage fund is not impacted by fluctuations in the equities and credit markets or by sectoral, geographical or investment style rotations.

During this 1^st quarter, we have benefited from good news that has contributed positively to performance:

• A nice increase in the bid from Herc Holdings for the industrial equipment company H&E Equipment Services, with a price 20% higher than the initial offer from United Rentals.
• The approval by the American antitrust authorities of the acquisition of HashiCorp ($6bn) by IBM, which was still subject to some uncertainty.
• The completion of a large number of transactions: Altair Engineering, Arcadium Lithium, DS Smith, Intra-Cellular Therapies and Shinko Electric Industries.
• The narrowing of spreads that had been under pressure at the end of last year: Enstar Group, Hess, Kellanova and Spirent Communications.

On a more negative note, the FTC has blocked two transactions:

• The acquisition of Juniper by Hewlett Packard Enterprise for $13 billion. The case is now before an American judge, whose decision is expected in September. The first drawdown in January can be explained mainly by this event, which was not anticipated by most arbitrageurs.
• The acquisition of a small medical equipment company, Surmodics ($600m), by a private equity group. In this case too, the operation has entered a legal phase, but there is a possibility of divestment, which would resolve the competition issues raised by the FTC before the judge's final decision.

Finally, a few spreads proved more volatile than average, also contributing negatively to the quarterly performance. These included Discover Financial, Banco BPM, Verallia and Despegar.com.

We believe that 2025 is shaping up to be much more promising thanks to an antitrust environment more favourable to M&A activity worldwide:

• In the US, following Trump's election, a new administration should result in a reset of antitrust policy in certain economic sectors.
• In Europe, a change in doctrine with the publication of the Draghi report recommending the emergence of national champions to face global competition, regulator.
• In the United Kingdom, the new government is pushing the competition authorities to take greater account of economic considerations in their decisions.
• In Japan, the opening up of capital markets to foreign investors is continuing.

The fall in short-term rates should also drive M&A activity in the coming quarters.

Under these conditions, the continuation of the M&A cycle that began at the end of 2023 should strengthen. We should thus be in a position to deploy more capital in Merger Arbitrage, while controlling the risks thanks to good diversification in the funds.

Merger Arbitrage Team