Pershing Square Holdings (PSH) fund manager Bill Ackman has assured shareholders they will see the benefits of the double flotation of his investment management company and its new US hedge fund in New York, even though their shares slumped on their first day of trading this week.
Pershing Square US (PSUS), a “mirror fund” that will closely resemble the concentrated 13-stock US portfolio of the £7.2bn PSH, raised $5bn (£3.7bn), a world record for a new listed investment company, despite Ackman initially setting his sights on attracting over $10bn.
On a call with UK journalists last night, Ackman said the presence of PSUS would eventually eliminate the 16% performance fee PSH shareholders pay his firm, narrow the chronically wide discount at which its shares trade and improve transparency around its investments.
However, shares in PSUS flopped at their debut on Wednesday, opening at $42 or 16% below their $50 offer price before closing the day at $40.90, a steep discount to net asset value of $49.
Ackman, a Donald Trump supporting value investor with 2.1m followers on X, admitted to mistakes in the retail offer.
He said many of the private investors who subscribed for $750m of PSUS shares were surprised to get their “full fill” while institutional investors’ applications were cut back to $1.45bn.
These sums were in addition to the $2.8bn the closed-end fund had already raised in a placing with family offices, pension funds, insurers and “ultra”-rich individuals.
Ackman said he believed retail investors had “over-committed” to the initial public offer (IPO) of PSUS believing they would be scaled back like the institutions. When they realised they would have to pay more than they expected on the following day to settle their purchase, they immediately sold some shares. The late start to dealing in the stock at 1.55pm in the US had exacerbated the selling pressure. “They had two hours to sell them or have to pay for them the next day,” Ackman said.
Pershing Square Inc (PS), his fund management group whose shares were distributed as a “bonus” holding to PSUS investors, also dropped to $23.79 below its $32 IPO price.
Both stocks partly recovered on Thursday. PS closed at $28 to value the company at $11.2bn, and PSUS reached $42.71.
Ackman said the “anchor” investors in the $2.8bn placing had come out 6% ahead when the 30 bonus PS shares they received for every 100 PSUS shares were included.
Investors in the IPO, who received 20 PS shares for every 100 PSUS, had ended yesterday 1.8% down on their investment.
Ackman was confident PSUS investors would eventually do well from their shares if he and his team at Pershing Square Capital Management continued to outperform the US stock market. PSH had generated an average annual underlying investment return of 24.7% in its eight years in London.
He was bullish on Wall Street’s prospects once the US-led war with Iran was resolved which he believed was a “weeks’ but not many months phenomenon”. He predicted the US economy would have a strong second half buoyed by the huge sums being spent on the rollout of artificial intelligence (AI) and a wave of infrastructure spending coming through from legislation passed under the former Biden administration. An ebbing in inflation as oil prices subsided would enable the Federal Reserve to cut US interest rates.
“We think putting money to work now is a good idea,” Ackman said.
Ackman, who had to fly to Montreal to hold the call with UK media to avoid breaking US regulations which prohibit the promotion of overseas investment companies, said he had long wanted a US-based fund.
Pershing Square had launched PSH in Amsterdam in 2014 before moving it to London three years later, so it could charge a performance fee to help his firm hire the best investment managers.
However, Ackman said it had “outgrown” the market and the inability to market the fund to its natural base of US investors had contributed to its current 32% discount. The gap between the shares and the value of its investments had recently widened from 27% as some US institutions had sold their shares to buy PSUS instead. The shares have fallen 15% this year reducing their five-year total sterling return to 62%, behind the 88% of the S&P 500 index.
Ackman believed PSUS would benefit from much better liquidity given the “world class” board he had assembled and his team’s long-term performance record. This should see the shares trade much closer to net asset value (NAV) which in time would narrow PSH’s discount as the market sought to remove the anomaly of two similar portfolios standing on different valuations.
On costs, Ackman said PSH would see a $20m reduction in this year’s performance fee given the rebate it will receive from 20% of the fee income his firm earns on PSUS’s 2% annual management charge (AMC). PSH’s AMC is 1.5% but it also pays 16% of NAV growth to Pershing Square Capital Management, subject to a “high water” mark to avoid paying twice for the same gains. Last year PSH paid $489.2m in performance fees but still delivered a net 20.9% return after all expenses.
As his business grows and launches more funds – with another expected in the next 12 months – the PSH performance fee would ultimately fall to zero to make it the cheapest hedge fund in the world, Ackman claimed.
Lastly, PSH shareholders would benefit from improved disclosure. Ackman said PSUS would publish detailed quarterly updates with earnings calls with investors and media that UK investors could use to read across to their investment.
Although Ackman said the weightings of holdings could vary between the two, PSUS would be very similar to PSH, which includes positions in Google-owner Alphabet, Amazon, Facebook and Instagram operator Meta, Uber and Universal Music Group, the Amsterdam-listed recording giant for which Pershing Square Capital Management made a £48bn bid last month.
The main differences would be that PSUS would not hold Hertz, the car rental group where Ackman disclosed a 19.8% stake last year, or Howard Hughes, the real estate firm that he is using as a holding company to buy stakes in other firms to make it a “modern-day Berkshire Hathaway”. Berkshire Hathaway is the investment conglomerate established by world famous value investor Warren Buffett which “ambitious” Ackman wants to emulate.
In a statement this morning, PSH chair Rupert Morley said: “Thanks to the 2024 IMA [investment management agreement] amendment that introduced a new performance fee offset based on management fees from PSUS and other PS funds, the fees generated by PSUS will enable PSH to generate higher long-term returns, an alignment that grows more valuable as Pershing Square’s AUM grows over time.”
Ackman added: “We believe our newly public management company, PS, has the potential to serve as a platform for other new funds to be launched in the future, which could yield further reductions in PSH’s performance fees.”
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