From Intern to Expert: Robert von Hoffmann on Building VH Standard and the Art of Merger Arbitrage
HustleMania: This month we had the exciting opportunity to sit down with the Portfolio Manager of VH Standard Asset Management, Robert von Hoffmann. VH Standard Asset Management is an investment firm specializing in merger arbitrage, founded in 2023, with the aim of bringing the long-term benefits of a merger arbitrage strategy to more portfolios. Robert, thank you for taking the time to talk with us today, we are eager to learn more. Can you share your journey into the finance industry and what led you to specialize in merger arbitrage? What experiences have shaped your investment philosophy?
Robert von Hoffmann: Thanks for having me. I’ve been following what you’re doing here at Hustlemania and it’s an honor to be considered alongside some great interviews. Truly unique what you’re offering to readers, and it’s awesome you see you give a platform for so many interesting people to tell their story.
As for my journey, I was fortunate to work as an intern at a place called Alpine Associates right out of college, which gave me an introduction to the merger arbitrage world at such a young age. Not many people know about Alpine Associates, but they’ve been around for almost 50 years and are one of the best in the world to do M&A arbitrage, in my opinion. So, naturally being a sponge and open minded as a young kid, this was a great opportunity for me. It really shaped my view of markets. I found out early on that there are niche investment strategies everywhere. Most of them you don’t ever see or notice their impact, but they exist. This kind of helped me grasp the idea that the efficient market is a multitude of competing investment strategies, culminating in a larger market pricing mechanism – which you need to understand to be a good merger arbitrageur.
After that, I spent some time going back to school and really diving in headfirst, learning about different investment strategies and philosophies. I did a summer interning for a fund that focused on value-oriented growth investments and fundamental research, then a period at a sell-side broker with ties to special situations doing M&A, spin-offs, restructurings, that kind of analysis. And finally working for a real estate developer on acquisitions and financial modeling before returning to Alpine for my longer 7-year stint.
I’ve seen a lot of different investment strategies throughout my life, and I think it helps me view merger arbitrage through a different lens than most of the competing investors who have taken the more traditional road.
That all led me to starting VH Standard Asset Management and specializing in merger arbitrage, taking what I believe to be a unique approach that brings together this whole background.
HustleMania: Thank you for sharing your journey on how you got here. Before we dive into VH Standard. As some of our readers may not be as versed, can you give us a basic explanation of what is Merger Arbitrage?
Robert: Sure, not a problem. This is a question we get all the time. Not a lot of people have heard of it outside of the investment community. Merger arbitrage is essentially an investment strategy that aims to make money investing in the securities that are going through some type of M&A transaction. When one company announces it’s buying another, the stock price of the target usually goes up, but it doesn’t jump all the way up to the final buyout price. This is the typical situation. That gap, though, between the price of the deal and where it currently trades is where the opportunity is. An investor would buy shares of the company being acquired, with the expectation that the deal will likely go through and then make a profit if it closes. Typically, the profit is small because the odds of a normal deal closing are so high. Historically, around 95% of transactions announced with a signed agreement will end up being completed. This is what makes risk management so incredibly important – you have to manage how much you lose in the 5% that are terminated, and there are a lot of risks like regulatory approvals and shareholder votes, among other factors. It sounds simple, but it takes a lot of experience and expertise to invest in merger arbitrage deals successfully over a long period of time. At its core, this is what VH Standard does in the merger arbitrage fund. We take a very detailed approach to analyzing deals and the risks involved, looking to produce a somewhat steady return stream over a long-time horizon.
HustleMania: Thank you for breaking that down. Now turning the focus to VH Standard, how does your fund identify and evaluate potential merger arbitrage opportunities? What specific criteria do you use to assess the risks and rewards associated with these deals?
Robert: Yeah, that’s a great question. Everyone in this field has their own approach. A lot of funds evolve from a traditional background in M&A Investment Banking. They might do a very deep analysis of only a few transactions and pick a handful from that group. On the other hand, I have experience analyzing over 1,000 M&A transactions, and that number isn’t slowing down anytime soon. At any given time, I could be monitoring 75 to 100 deal situations and they turn over relatively quickly. So, I naturally have a very different approach - it’s what I learned at Alpine Associates. There’s a level of shorthand work that I do whenever a new transaction is announced. I can pick up quickly on areas of focus and where the risks might be - issues I need to spend my time on. This is sort of an evolution from being a downside-focused analyst at Alpine, where I had to know the risks in every public deal out there, but also from being a one-man shop, where I need to wear a lot of hats in the research process.
When it comes to finding the best opportunities, I tend to identify them in a pretty natural way, rather than too systematic. Obviously, the pipeline that I’ve built around ingesting new deals is pretty systematic – it has to be in order to see every new announced transaction; however, every once in a while, I have to source a transaction through a different avenue, like the Whole Earth Brands transaction in 2024. We talked about this deal in our initial letter to investors back in August of 2023. It was announced through a 13-D filed by Martin Franklin, where he made a proposal to buy the whole company at the very end of the filing, somewhat hidden. This is definitely not the typical route for that kind of announcement, but it’s good to see that there are many ways to go about this. Outside the oddities, I have a morning routine starting early where I run through all new transactions before the family wakes up.
In terms of criteria, everything I do is geared towards analyzing the risks. There’s only a small portion of our analysis that’s aimed at the reward, which is really just asking the question of “what price are we okay with?” We don’t think it makes much sense to buy into a transaction to make less than we would with treasuries while taking on all the risks that might come with a deal. Maybe you can make the case that treasuries aren’t the “risk-free” investment they once were, but that’s not a part of our strategy.
To go a little deeper for your interested readers - whenever a deal is announced, I look at the basic stuff. First, I get an idea about who the parties are in the transaction. It seems obvious, but I like to get a grasp on the target, the acquirer, the legal advisors, the financial advisors, the management teams, the board members, and any significant shareholders involved - these are the players on the field. If there is a significant regulatory review process, I need to know which agencies are covering the transaction - that’s the ref. I need to have a view on where the securities might trade in the case of a broken transaction down the line. That’s the basics. The terms of the deal might come next, which would be price or compensation structure, and then I start to focus on the specialty things – this could be the likelihood of a regulatory block and what remedies are available, the shareholder vote threshold, or financing conditions, etc. I had a deal break once because of a condition to closing that was a definition in the contract called “Adverse Japanese Tax Ruling.” Effectively, this was a regulatory approval process around how the acquirer would recognize a taxable gain at closing – it’s hard to template these situations out. You need to have experience to invest in these types of transactions, or you might end up taking a huge unforeseeable loss.
Bringing it all back together on a portfolio level, it’s helpful for investors to conceptually understand what VH Standard is by thinking about it like an insurance company. That’s the lens I look through every day. Very few transactions end with a termination once they’ve been signed, so that’s our catastrophe event – I build our portfolio around that risk and making sure that we’re not exposing too much equity to one situation.
Ideally, we would compound over time through a low-risk approach. Very similar to how an insurance company would ideally grow. Some can do this successfully, which is what I hope we are able to do.
HustleMania: That seems like a great strategy for VH Standard. Given the recent economic developments and regulatory changes, how do you view the current landscape for merger arbitrage? What challenges and opportunities do you foresee in the near future?
Robert: That’s an interesting question because the regulatory landscape is currently shifting, and it feels like these shifts have become more volatile over the last decade. Going from the previous administration, who was very aggressive in reviewing transactions, to this current administration has felt like a major change from my perspective. Although the current regulators have publicly expressed their commitment to continuing the approach of the previous administration with slight changes, there have been a number of indications that this isn’t entirely the truth. The current regulators have seemed more open to finding a solution that both allows the transaction to go ahead and protects the public from monopolistic or anti-competitive practices, while the previous regulators seemed to be more in the camp of stalling transactions as much as possible and deterring any potentially anti-competitive transactions before they ever get announced. Just for context, some examples of this change are the results of the Discover-CapitalOne deal, the Redfin transaction with Rocket Mortgage, and the DoJ settlement with Juniper Networks and Hewlett Packard on behavioral remedies to closing. It’s a slight difference, but one where my experience tells me the current environment is more friendly to business transactions, which ultimately helps investors in M&A arbitrage. I should say, there’s some uncertainty about which direction this is all headed because of the uncertainty around the economic backdrop and a slowing GDP would typically mean less M&A activity, so it’s important to remain focused on risk.
That said, our basic view is that M&A activity will begin to ramp up significantly over the next four years and that the consensus view of transaction uncertainty is likely to take a backseat, as CEOs become more comfortable with the current set of regulators. I plan to talk about this in more detail in our 2Q letter, which should be available by early August on the VH Standard website.
Overall, I believe this current landscape is an incredible opportunity to find excess returns and build wealth for our investors through a route not commonly used by many.
HustleMania: Sounds like current environment is ideal for VH Standard to grow and have successes. In what ways does your fund differentiate itself from others in the merger arbitrage sector? How do you ensure that your strategies remain competitive and effective in a crowded market?
Robert: One of the challenges that most arbs find is the strategy’s reliance on M&A activity. When activity dries up, they find it hard to pick opportunities and end up increasing the risk of exposure to poor transactions. A key advantage that we’ve found protects us a little bit is through our ability to analyze the companies involved from a fundamental, value-oriented perspective. There are not many fundamental investors that understand M&A arbitrage at the level we do, and the same goes for merger arbs analyzing the fundamentals of a company - this gives us a unique approach to recognizing opportunities for additional upside as well as an ability to assess when the risk may have changed during the lifetime of a deal.
One thing I have to credit for this uniqueness is the environment I grew up in. My dad was constantly quoting Warren Buffett in our household and telling us stories about the great value investors from his generation. He worked at First Manhattan in the 80’s before switching over to JP Morgan and then Merrill Lynch during the 90s, so he was always bringing home incredible experience that he tried to share with us - even though we didn’t always listen.. But over time, it started to take hold and, for me personally, I started to realize at a young age how much I loved the concepts around general investing.
This could be why we view our portfolio so differently. Like I said earlier, we see ourselves closer to an insurance company that individuals can invest in, rather than a hedge fund. Structurally, we’re a hedge fund and we invest mostly in public equities, but the equities we invest in are mostly uncorrelated to the markets, so they’re unique in that sense. Each investment is marked-to-market, but the securities trade hands based on the expected completion of the deal, not other market factors, for the most part. There’s an advantage to this that we like. The obvious one is that it’s a liquid strategy. Our investments all trade daily, generally, so we can liquidate positions fairly quickly. The other is the opportunistic nature of investing in public markets. There are instances like we had in April where spreads widen out due to factors unrelated to the deals. We were able to buy securities in a handful of transactions that traded for unreasonable prices. The correlation to public markets is typically low, but stress moments still offer opportunities for us to take advantage of amazing prices. Our approach to how we manage these advantages is what makes us different in our view.
There are a few different ways that we gear our portfolio to enhance the benefits of merger arbitrage. First, we typically use no leverage. That allows us to take advantage of the opportunistic nature of public markets during stress periods. When we invest during those moments, we’re essentially using our balance sheet (really, our portfolio structure) to take on the risk from competitors who need to de-risk. And they need to give us good prices to do that. So, we like that approach. It has the added benefit of being conservative, which we like for compounding over the long term. I’m not a fan of taking on highly risky situations, so this approach blends nicely with my natural mindset. I try to limit my investments down to one or two truly risky possibilities that I can know inside and out - if there is a plethora of possible outcomes and the risks are hard to define, it’s not a good situation for me. Over a long period of time, I think this operation is much more likely to succeed.
We’re not trying to outperform the firm next to us, we’re trying to outlast them. We believe that will result in high quality compounding over the years.
HustleMania: Seems like you have done your homework in many ways to prepare for this scenario now. Love that it runs in the blood too, your dad sounds like a legend. How does your fund give back or support the community? Can you share any initiatives or strategies that your firm has implemented to create a positive social or economic impact?
Robert: On the business side, the fund is still so small, but we’d like to find ways to bring the benefits of merger arbitrage to more portfolios. It’s somewhat cliche right now, but normal people have limited access to sophisticated strategies like ours. As we get larger, it’ll be easier to provide access to this type of strategy. Right now, there is just too much red tape and expenses associated with doing this. So, one of our main goals is getting to a size where we can build on this.
In terms of supporting the community, my family owns a small business wine store in my hometown. I’ve seen what small businesses mean to local communities and how much of a role they play in the identity of a town. Over the years, I’ve been active with the business association that my family’s store is a member of. It allows me to give back a little of my time, instead of just donating money and not really seeing the impact firsthand, which I love. The crew that runs the association does a great job of managing small business events around holidays or overseeing special events supporting local fairs that give community artisans a chance to display their crafts. I had a ton of fun at these events as a kid, and it’s been pretty fulfilling helping on the other side of that, so I’m planning to do more with my local community in the future.
HustleMania: Amazing. As we echo here constantly, small business and entrepreneurs are the backbone of our society and we champion them. We want to thank you for taking the time to join us and share this amazing story. We are rooting for your success. We will add your information below so anyone interested in learning more can contact you guys.
Robert: Thanks for having me. I appreciate the time. Again, I love what you’re doing here with Hustlemania. It’s great to see and I look forward to reading your future interviews. Keep up the good work!
Connect with VH Standard Asset Management
If you'd like learn more, feel free to email Robert at rvonhoffmann@vhstandard.com.
Please note that only accredited investors are eligible. To see if you meet the criteria, click here to view the SEC’s definition.
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🌐 Website: www.vhstandard.com
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