A 1.750 billion for the first six months of the year, the global market for mergers and acquisitions, up 75% compared to the first half of 2013, is euphoric. A boon to the arbitrage strategy of the famous "hedge fund" John Paulson, which represents nearly a third of $ 21.6 billion of capital that it manages. In an exclusive interview to "Echo" on the occasion of his visit to France and the launch of a fund platform Gaia Schroders John Paulson speaks on the need for a very rigorous in analysis operations. A bad bet, and this is the performance of the fund may be permanently penalized. Employees Paulson have all gone through the major investment banks, where they refined their analysis of "records".
What is your feeling about the global economy?
The European economy is likely out of recession and shows moderate growth, which is a real plus. The risk of a sovereign debt crisis, the greatest fear of 2011 is very far: financing is readily available and yields on government bonds are much lower. In the United States, growth recovers and the economy seems in good condition. More generally, Western economies are not robust but growing at a modest pace, and this is what they probably got better since the last recession. Thus, the environment is more favorable, especially if you add generalized low rate (companies ...) and U.S. stocks are at their highest. I do not foresee any major risks in the markets.
What is the impact of the environment on your Arbitration M & A strategy?
Companies can now borrow at low rates and issue shares, which is "accretive" (1) for the companies that are buying. Therefore, it is not surprising that there are a lot of merger and acquisition. In general, the merger is "accretive" and strategic. The earnings per share of the predator grow faster thanks to the acquisition of the target. I must say that this is one of the best times of my career for the arbitrage strategy of mergers and acquisitions because it is one of the best periods for companies to grow through acquisitions. There has been bad in the past mergers, but this is less the case today. The risk of these operations depends on several factors, especially regulatory and policy aspects (the influence of government on the outcome of a takeover) and the component of funding the redemption.
You now have fewer competitors on this strategy. What for?
This activity within banks has been significantly reduced as a result of the Volcker Act [Editor's note: rule designed to limit speculative activity of banks]. Funds specializing in this strategy were in turn severely penalized by the failure of certain operations such as Hillshire Pinnacle-and-Pfizer, AstraZeneca, who have lost their money. But if the difference between the price desired by the buyer and the share price increases - the "spread" (2) - it should attract new players in the market. One must keep in mind that this "spread" is the maximum gain that you can get if all goes well. But if this is not the case, you are exposed to heavy losses. When you are working on transactions whose terms are announced, you must be right in 95% of cases to make money because the "spread" is very low compared to the risk of loss. When, however, you buy shares in anticipation of redemption, it is not necessary to be right all the time.
Do you expect a continuation of mergers?
Yes, because it occurs in a favorable corporate earnings context, and that these buybacks are strategic and "accretive". Companies are stronger as a result of these comparisons. Tax considerations could explain certain acquisitions of foreign companies by U.S. groups, but the tax is not the key determinant of the transactions between the two continents. In the future, we expect a wave of consolidation among independent U.S. oil producers in telecoms in Europe or in the health sector.
What is your opinion on activism?
Our fund is certainly not an activist. In general, we like to work with companies. We do not like to be their opponents. This succeeds we better financially when we are friendly rather than hostile. Activists can be beneficial to shareholders, as in Allergan-Valeant operation.
How do you see your "hedge fund" in the coming years?
Compared to "hedge funds" with assets of the same order, we are a small 'agile' shop with 126 employees, including nearly half dedicated to investment, and a very low turnover of our workforce. We are satisfied with this organization. We have a fairly comprehensive range of strategies (mergers and acquisitions, credit ...) and want to remain focused on our historical expertise. The United States and Europe are the two areas in which we operate exclusively. We are not yet in Asia, but we will in the future. This is a very attractive area, but also very demanding, you need to allocate a lot of resources to meet success.
How do you explain the many failures of young "hedge funds"? What are the qualities to succeed?
"Hedge funds" are supposed to provide investors with consistent, low volatility and low correlation to other markets returns while managing their risks well. It is very hard to meet all these requirements, especially for inexperienced managers. It is very easy to launch a "hedge fund" but very difficult to last in this business. You must be insightful, dedicated 100% to your funds, humble, patient and show independence of mind. Few managers have all these qualities. Unlike mergers in the industrial world, reconciliations between "hedge funds" do not make much sense because of the difficulties to reconcile and to cohabit individuals, cultures and different investment process. I am very independent and could not work for a shareholder who has a say on how I manage my funds. If I were to launch a new "hedge fund" today, I would do it the same way that there twenty years.