AP alternative Assets (AAA:AMS) – Liquidation/Arbitrage – 8% upside

Current Price –$35.5

Offer Price - $38.5

Upside – 8%

Expiration Date - Q1 2018 (or earlier)

8% in a year might not sound overly attractive at first, but I consider this arbitrage opportunity to be close to risk free. The partnership will gradually distribute its only asset (which is ATH shares – large cap health insurer) to unitholders and then liquidate. AAA trades in Amsterdam and it is possible to purchase units using Interactive Brokers.

This idea was shared by one of the subscribers – thank you Tim.


Background

AP alternative Assets (AAA) is a partnership vehicle established by Appolo. Its only remaining asset is the investment in Athene (ATH) – health insurer that IPOed in Dec 2016. AAA is gradually liquidating its investment and already made two distributions of ATH shares to unitholders – one during the IPO (Dec 2016)  and the other one during secondary (March 2017). Partnership will distribute all of the ATH shares by March 2018 (or earlier) and then liquidate. From the information document:

Q11: What will AAA do with the remaining Athene Shares?

A11: AAA intends to distribute the remaining Athene Shares (or equivalent cash value) no later than the lock-up release dates, which expire on the earlier of (i) in three equal tranches, 225 days, 365 days and 450 days after the effective date of the IPO registration statement (which will occur shortly before the Athene Shares are distributed) and (ii) if and when the lock-up is waived. Such distributions will be made net of Athene Shares distributed or sold to cover AAA’s expenses or carried interest obligations.

Q12: What will happen after the final distribution of Athene Shares has been completed?

A12: Once all of the Athene Shares have been distributed, AAA intends to unwind and delist. AAA will hold back assets from the final distribution of assets by AAA to pay outstanding expenses, obligations and liabilities of AAA and any carried interest due in respect of the final liquidation of AAA’s assets. Any remaining assets after the payment of such expenses and carried interest will be distributed to AAA unitholders. “

So the last distribution will occur around 3rd of May 2018 (IPO+450 days) at the latest. It is also quite likely that the lock ups will be waived and distributions will happen earlier. E.g. the first post-IPO distribution was supposed to take place only in July 2017, however ATH waived the lock-up and 13.3m of shares (18% of the investment) were distributed at the end of March.


NAV Calculation

Following the latest distribution AAA holds a total of 61.2m of ATH shares. Some of these shares will be sold (or distributed in lieu of) to cover certain expenses before liquidation:

- Carried interest – on part of the ATH shares the partnership must share 20% of the realized gains with the general partner. As of Dec 2016 33,7m of the partnership’s ATH shares with a total cost basis of $351.9 million (cost basis per share $10.43) were subject to this carried interest provision. Since then another distribution took place and the number needs to be adjusted.  In Mar 2017 AAA sold 1.2m of ATH shares (at $48.5) in order to satisfy the carried interest. This suggests that a total of 6.1m of shares that had been subject to the carried interest provision were distributed. Thus, 27.6m of such shares remain resulting in expected payout of to the general partner of $230m or 4.4m of ATH shares at current $52 share price.

- Fund management expenses have been running at $1.5m-$2.5m per quarter and have increased in Q4 likely because of ATH IPO. To be conservative I assume these will continue to run at $2.5m per quarter for the next 5 quarters and then there will be another $2m expense to liquidate the partnership. This results in total of $14.5m expenses or 278k ATH shares at current prices.

- There were also balance sheet liabilities of $3.3m which will need to be covered either by selling or distributing ATH shares. This expense is equivalent to 63k of ATH shares at current prices.

Putting it all together:

- 61.2m of ATH shares on the AAA balance sheet currently;

- Less 4.4m of ATH shares to satisfy carried interest;

- Less 342k of ATH shares to satisfy current liabilities and future partnership management expenses;

- This results in 57.1m of ATH shares to be distributed for AAA unitholders;

- With 76.3m of AAA common units outstanding this is equivalent to 0.74 of ATH shares per AAA share or NAV of $38.5 vs current price of $35.5 (9.7% upside).


Risks

To realize the upside in this case one needs to hedge by shorting ATH – there is plenty of borrow available and currently I am being quoted 1% borrow fees. Assuming borrow fees remain unchanged (quite likely as ATH is large cap , only small part of the float is short) and liquidation takes one year this arbitrage should deliver 7% return.

Liquidation might take longer than currently planned although early March distribution (and lock up waiver) seems to suggest that if anything liquidation is likely to happen earlier. There also might be some opportunities to close out the position before the final liquidation date – e.g. right after March distribution the spread between AAA and ATH shares closed and then started widening again over the next few days. Similar opportunities might occur again.

14 COMMENTS

    1. dt

      These distributions are not dividends, therefore withholding taxes do not apply here.

  1. jason kravitz

    What is the ratio of shares to short i.e I buy 100 shares of AAA do I short 74 shares of ATH?

    1. dt

      Based on my calculations, AAA unitholders will eventually receive 0.74 shares of ATH for each unit. This ratio deviates slightly with changing ATH price, but the deviations seem to be insignificant (in the range of 0.735-0.745). So if these calculations are correct, then your suggested hedging ratio is spot on.

  2. Steven Emer

    I guess the biggest risk is you are holding AAA shares in Euros. If the the Euro depreciates by 7% versus the dollar by the time the distribution is complete, you would have lost all your profits. On the other hand, if the Euro appreciates……

    1. dt

      AAA is listed in USD, so no currency risk here.
      And even if it were in Euros, one would care only about the underlying assets which are in USD. So even in that case the exchange rate risk would be irrelevant.

  3. Fabrice Evangelista

    The spread narrowed to 4%…. Given the borrowing cost, did you close your position?

  4. dt

    The spread has narrowed to 2.6% and I have closed out the position. This resulted in 5% gain over 3 weeks.

    I might reopen the position again if the spread increases.

  5. dt

    Today AAA shares trade excluding another distribution. Spread is currently 1.8%, too narrow to initiate the position again.

  6. Fa

    Did you have a change to check the spread recently ?
    What should be the ratio according to your calculations?

    Thanks

  7. dt

    Based on my calculations current spread is only 0.6%. I do not think the spread will widen again as by now situation is widely known and followed.

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