It’s not every day that a firm tells shareholders to disavow any and all comments from its parent company’s largest shareholder and CEO. But that’s exactly what Pershing Square USA, Ltd., did on Thursday when it threw Wall Street speculator Bill Ackman under the bus.
In a letter marketing his new closed-end activist hedge fund to investors, Ackman downplayed risks printed in black and white in its regulatory prospectus ahead of a planned initial public offering of shares under the ticker symbol PSUS.
“The Company specifically disclaims the statements made by Mr. Ackman,” it urged in a regulatory filing to the SEC. “You should not consider the statements in the communication attached as Appendix A in making your investment decision.”
The 58-year-old is best known his prescient bet against failed bond insurer MBIA during the subprime mortgage crisis as well as his battle of the billionaires over Herbalife—which that he ended up losing to rival Carl Icahn. In PSUS, Ackman had hoped to parlay his 1.3 million followers on social media, in which he has pushed an arch-conservative agenda, to create potentially the largest listed closed-end investment company on the market with $25 billion in assets.
What was Ackman not supposed to say?
His new fund’s regulatory filing referred specifically to an update sent by Ackman on Wednesday to his fellow co-owners in Pershing Square’s holding company. In it, he detailed some of the strategic decisions he was taking after investor road shows that would directly affect the upcoming IPO of this new fund he was marketing specifically to U.S. investors only.
Ackman argued among other things that PSUS could achieve a “sustained premium” to its net asset value in his belief—a big no-no since it had warned potential investors subscribing to the IPO that funds like itself “frequently trade at a discount from thei net asset value”.
He also played down concerns that his team managing the fund had a shallow bench, effectively consisting primarily of himself and his 39-year-old chief investment officer, Ryan Israel.
PSUS however had warned that the potential loss of Ackman—for whatever reason—could have a “material adverse effect” on its financial performance and trading price. It also corrected other comments he made that did not correspond to previous statements approved by regulators.
“Mr. Ackman sent [the letter] as an internal communication to the investors in Pershing Square Holdco, L.P. and therefore did not believe that it would require public disclosure.”
Where PSUS fits into Ackman’s Pershing Square empire
Somewhat confusingly, shares in PSUS do not confer ownership in Ackman’s highly successful hedge fund Pershing Square, LP, nor even in its Europe-listed fund Pershing Square Holdings, Ltd.
PSUS is an entirely new, separate activist hedge fund that functions similar to a Real Estate Investment Trust (REIT). It is structured such that it would not be subject to corporation tax, as at least 90% of its income would be distributed to its shareholders every year.
Investment decisions would be taken by Ackman’s eight-person team at Pershing Square Capital Management, which oversees assets worth a cumulative $19 billion, including $4.2 billion of Ackman & Co.’s own money.
Unlike most actively managed funds that only update their investors on a lagging monthly or quarterly basis, Ackman said PSUS would seek to be more transparent than peers by publishing a weekly list of the value of its net assets.
To ensure interests are aligned with shareholders, Ackman’s PSCM plans to invest $500 million in the fund, which would be locked up for a period of 10 years.
Some good old fashioned FOMO
Judging by the prospectus, Ackman is not only on the hunt for one holy grail, but a dozen. He aims to concentrate his fund’s firepower on 12-15 different companies with fortress balance sheets and formidable strategic moats shielding them from competitors.
They should also be attractively valued and largely impervious to the environment in which they operate—including, but not limited to, underlying macroeconomic conditions, interest rate volatility, commodity prices and regulatory risks.
Despite the heavy amount of research needed to identify those rare opportunities, Ackman said he would not impose any performance fee at all for his services. These can typically amount to 15%-30% of a hedge fund’s annual gains, realized or otherwise, and greatly diminish investor returns. Merely a management fee of 2% would be applied, which he would waive for the first 12 months.
Nonetheless, the pitch so far looks like it’s landing on deaf ears. Important houses like the Capital Group mutual fund companies have already taken a pass and Ackman looks like he will land well short of his $25 billion target. In the letter, he said he might only receive enough orders to fill $2.5 billion to $4 billion worth of shares.
Ackman told his co-owners he would therefore chum the waters a bit to create some good old fashioned FOMO.
“The typical approach is to show a small deal size to make market participants concerned that they will miss the deal if they don’t put their order in quickly,” he wrote.
That’s why the IPO of his SPAC company, Pershing Square Tontine, first only officially opened its books to collect orders for $1 billion worth of shares, before finally ending up with $4 billion by the time it listed in July 2020. (It failed to find a company looking to float and returned the money to investors two years later)
Here too, PSUS’s lawyers had a message for prospective investors that roughly translates to forget he ever said that. Ackman’s own account on X, meanwhile, was uncharacteristically silent.
