In what amounts to one of the largest money grabs of all time, Bill Ackman’s Pershing Square Capital Management on Tuesday launched marketing of a closed-end fund NYSE IPO that could see the activist hedge fund raise as much as US$25bn.
"Bill is hoping to get somewhere between US$20bn and US$25bn," one banker involved in the offering process said. "That is going to require a lot of retail money."
Bank of America, Citigroup, Jefferies and UBS, the global coordinators on a 29-strong syndicate of banks, had more than US$10bn in orders at launch. They expect to price the offering on July 29 after a nearly three-week roadshow.
Pershing Square USA plans to use the money to acquire large minority positions in 12–15 large-cap North American companies, investing alongside Pershing Square’s other funds or on a standalone basis. The new fund plans to use leverage and hedge macroeconomic and other exposure to protect on the downside.
Pershing Square USA is being sold at US$50 per share with a minimum required purchase of 100 shares for US$5,000.
Pershing Square Capital is waiving a 2% management fee for the first year and will not receive an incentive fee, typically 20% of the growth in the fund’s net asset value. It is also investing alongside the IPO, with US$450m in the form of common stock and US$50m in 7% preferred stock that will be locked up for 10 years.
The investment banks are splitting a flat 1.5% fee for all stock allocated to retail investors. On the institutional tranche, they will collect a 2% fee if up to US$1bn is placed institutionally, dropping to 1.5% for US$1bn–$1.5bn and 1% for US$1.5bn–$2bn, with a low of 0.1% above US$20bn.
Hence, the banks are incentivised to push the offering to retail, with Pershing Square Capital preferring to receive institutional investor dollars.
Any fees are friction against investable proceeds – assuming a US$15bn/US$5bn retail/institutional split, a US$20bn gross raise would net Pershing Square USA US$19.75bn, based on disclosed fees. Fee leakage is the central criticism of closed-end funds.
Unlike a traditional hedge fund, Pershing Square USA is permanent capital. The publicly traded stock can, of course, be sold but the money cannot be redeemed, making it a durable, sticky source of fees for Pershing Square Capital.
"Bill has been vocal about wanting to take [Pershing Square Capital] public as early as next year," said a second banker. "The closed-end fund provides him fee streams typical of private equity."
As a prelude, Ackman last month sold 10% of his hedge fund business for US$1.05bn to a group of institutional investors that included Bermudan insurer Arch Capital, Brazilian bank BTG Pactual, UK fund manager Consulta, US fund manager Iconiq Capital and Israeli insurer Menora Mivtachim.
That investment valued Pershing Square Capital at US$10.5bn, roughly half its US$19bn assets under management as of May 31.
Pershing Square USA would allow Ackman to super-charge investments, recycling investments into a publicly traded closed-end fund as has been done with the smaller Pershing Square Holdings that listed on Euronext Amsterdam in 2014 and has a market capitalisation of US$10bn. Pershing Square Holdings trades at 0.8 times NAV.
Pershing Square Capital’s concentrated investment strategy is led by a 10.2% stake in Universal Music worth US$5.3bn, Chipotle Mexican Grill (2.7%/US$2.2bn), Hilton Worldwide (3.7%/US$2bn) and Restaurant Brands International (7.4%/US$1.8bn), according to LSEG data, and all those are also held by Pershing Square Holdings.
“The manager believes that [Pershing Square USA] has the potential to be one of the largest, if not the largest, listed closed-end investment companies and expects that the manager’s brand name profile and broad retail following – along with a substantial media following – will drive substantial investor interest and liquidity in the secondary market,” Pershing Square USA said in its IPO filing.
In other words, Ackman is attempting to leverage reputation into free capital.
Mind of Bill
Ackman has a track record for pushing the boundaries on capital markets innovation and for not listening to investment banking advisers.
In 2020, he raised a record US$4bn from an IPO of Pershing Square Tontine SPAC, a blank-cheque company that used the tontine structure, popular a couple of hundred years ago, to incentivise investors to stay invested following a merger by embedding progressively higher economics for investors who remained.
Pershing Square Tontine’s agreement to purchase a 10% stake in Universal Music was toppled by a lawsuit, prompting Pershing Square Capital to purchase the stake directly.
Pershing Square SPARC is a newer innovation. Like a SPAC, SPARC targets a merger but gives investors a right to commit the capital required rather than making that commitment upfront. The SEC signed off on SPARC in September, providing Ackman with another potential form of funding.
Those tweaks were all about keeping investors' dollars engaged, which the simpler closed-end fund guarantees.
