case study
Definitive Health Care
Overview
The Definitive Healthcare (“DH”) and the Palantir Technologies (“PLTR”) block trades represent ACI’s ability to bridge the public and private markets, using block trades to offer liquidity to shareholders who are in a “lockup period” after an initial public offering (IPO).
In both cases, ACI purchased discounted stock through preferred counterparties and captured a spread using the liquidity, volatility and options offered in the market. ACI was able to optimize trading profits utilizing margin, short-selling, and derivatives. As a result, these trades produced very high IRRs given the velocity of capital returns. The risk carried by ACI was low as hedging is used to eliminate large portions of risk. ACI has been less active with these types of trades since early 2022 given late-stage companies and the IPO market slowdown. However, favorable risk/reward profiles enable ACI to leverage relationships to execute these trades throughout market cycles. This business has synergies with our private market investing business, as we get visibility IPO market sentiments.
Thesis
At the time of these trades in 2021, markets were highly liquid, high volume, and IPOs were active at a level that had not been seen for several years.
Both recent IPOs, these names were trading actively, allowing ACI to obtain a borrow (ability to short sell), and an active derivatives market (ability to hedge) to trade these positions optimally. ACI’s robust relationships allowed us to see these opportunities, as the frequency of the transactions and strong hedging markets allowed us to prepare to take advantage of future opportunities. The ability to consistently source shares at a below-market rate, effectively hedge downside risk and capture upside potential create a strong backdrop for ACI’s consistent execution of these investments. The thought process behind DH was to hedge out the deep discount ACI purchased shares at immediately. PLTR, on the other hand, was purchased at what ACI felt was a strong potential discount to the eventual IPO price (information we’d piece together through our network of bankers and shareholders). DH would be executed as an arbitrage play, while PLTR had more potential to appreciate in price before gains were locked in.
Structure
In both cases, we executed the purchase of shares at a discount to market trading prices, given the large block-nature of these purchases.
DH was purchased at a 17% discount, PLTR was purchased at a 4.5% discount. The DH investment duration was over 110 days with an IRR of over 50%, and PLTR duration was only around 21 days producing an IRR of over 90%.
Return Profile
The Edge
Both the Definitive Healthcare and the Palantir Technologies block trades are representative of how we can capitalize on our relationships and private/public market sourcing capabilities to find, analyze, and execute very profitable trades with very attractive risk profiles.
We look forward to the market dynamics and our network to once again provide us these types of opportunities going forward.