Bernheim, Dreyfus & Co prepares to ride Europe’s M&A wave
French boutique Bernheim, Dreyfus & Co launched in 2006, just before the financial crisis and then took a brave decision to move onshore to Paris from Switzerland. The team is therefore used to bucking trends and is now set to ride an expected wave of European M&A activity.
Bernheim, Dreyfus & Co (BD&Co) is a relatively small hedge fund firm, but in the five years since its inception by Lionel Melka and Amit Shabi (pictured), it has acquired a big reputation.
BD&Co has a distinctly contrarian ethos, which usually unnerves traditionally conservative investors, but the judgements it makes have won the confidence of some very demanding clients.
The firm is registered with France’s Autorité des Marchés Financiers (AMF) and it is also a member of the Association Française de Gestion Financière (AFG). Share capital is held entirely by the co-founders.
Activity centres on event-driven merger arbitrage via the $160m Diva Synergy fund, which not only survived the crisis, but also managed not to lose any money.
Shabi explains: “We have no gates and there is monthly liquidity. In difficult times, what is important is to keep talking to the investors so they understand what is going on.”
A simple strategy, perhaps, but one many competitors failed to adopt, often with fatal consequences.
Shabi and Melka moved BD&Co onshore and into a heavily regulated market at a point when many other hedge funds were exploring how best to escape further scrutiny. The firm is committed to transparency at a frequency and level that astonishes rivals.
Melka says: “We do what we say and we say what we do. We invest only in very liquid stocks (in Europe and North America) and we publish a 20-page commentary every month. Investors are entitled to know what we are doing.”
Now part of Paris’s small community of about 20 hedge funds, only half of which have more than €100m under management, BD&Co finds its style in demand.
Investors want well-regulated onshore funds, but they also want consistent performance, liquidity and communication, says Shabi. “They need to understand the how and why of their position, as well as the potential returns.”
So a French-registered Ucits III (Newcits) version of the two-class (euro and dollar) Diva Synergy fund is planned in Q2 2011, aimed at institutional investors and funds of funds.
It will be distributed via third parties, as well as companies and banks with which BD&Co has arrangements, notably in Sweden where institutional investors are more prepared to contemplate smaller funds. The minimum stake is €100,000, or equivalent.
M&A activity in the US has risen over the past 18 months, and investor demand for exposure to it is quite strong. But typically, BD&Co has its own take on how to play the market.
Shabi says more deals are coming up across a variety of sectors, from big pharma, which have plenty of cash and face patent expirations, to technology and luxury goods.
“Valuations are reasonable, but you need to be bold. And to be bold you have to be confident of your own cash flows. Then you can address those of your neighbour,” he explains.
The European M&A market still lags the US, remaining relatively subdued as evidenced by confidence indicators. But a number of drivers for a sustained upturn are in place. Among these are cost cutting, capital raising and debt refinancing among many firms, ensuring balance sheets are strong enough to allow opportunistic deals.
The hangover from the recession will ensure most firms focus on core activities and spin off anything else. Cash levels are rebuilding and interest rates remain low, even if the European Central Bank (ECB) increases the key rate again this year. Valuations remain attractive in Europe, and acquisition may be a more effective expansion strategy at the moment than trying to grow business and market share organically, given the modest pace of economic growth anticipated in mature markets in the short- to medium-term.
Shabi says BD&Co has a maximum target capacity of $1bn for all its funds, so it has room to grow. He intends to expand the Paris team of four senior managers with two or three more. Research comes in from a variety of sources but the managers do not rely on it.
Melka says: “It has to be done in house. Our job is to be very careful contract readers. We will always speak to specialists and experts, but this is our kitchen.”
He acknowledges a degree of market scepticism, due to the bruising experience many French investors endured during their first engagement with alternative managers four years ago. “Last time, many started engaging with alternatives too late. They bought right at the top of the market, not early enough to make money, so it will take longer for them to come back.
Longer due diligence
“Some claimed they were market neutral funds, but then lost 40% to 50% in the crisis, so investors don’t believe that jargon any more. Another consequence is that the due diligence process on any fund, and especially smaller funds, is longer. But the old argument that bigger players are safer no longer holds. And of course, the bigger funds find it much harder to produce performance.”