Bill Ackman is trying to square a difficult circle. To get an initial public offering of his Pershing Square USA fund off the ground, he needs to give early investors a sweetener. But if that comes at the expense of later investors, his new closed-end fund could struggle after it floats.
Ackman’s European-listed fund had strong returns in recent years. But the basket of stocks still traded at a 30 per cent discount. That gap has created a challenge in listing his US vehicle. Anyone interested in Ackman’s acumen would be better off waiting for the US fund to list, trade down from 100 cent of net asset value and buy in later.
Before he withdrew his first tilt at an IPO of Pershing Square USA in July, Ackman was set to buy $500mn of the vehicle’s shares. But he also wanted to earn a 2 per cent management fee. As he now tries to resurrect the flotation, his solution is to throw in some cookies for those willing to leap first. The puzzle is those goodies would, by definition, come out of the pockets of subsequent investors.
One new idea from Ackman is granting warrants to IPO investors, the Financial Times reports. These would allow them to purchase further shares in PSUS in the future at a fixed price. The option itself could trade and have positive value on the bet that PSUS would become far more valuable down the road. However, those new shares underlying the warrant would be dilutive for later PSUS shareholders who do not invest in the IPO.
Ackman is also considering as a reward the chance for IPO investors to buy into the eventual flotation of his Pershing Square asset manager, which collects the fees for managing money. Ackman recently sold a stake in that privately at a $10bn valuation — generous for a group that manages right now just around $20bn. Asset management stocks can be highly valued for their steadiness, yet the value of that equity would ultimately depend on what price Ackman is willing to give shares up at.
It is perfectly normal for investors who step up early to take price risk or other risk to be compensated in exchange. Flotations of operating companies typically are priced at a 10 to 15 per cent discount to mooted fair value given it is unknown how an IPO will trade. The trick is always to find the sweet spot between attracting both front-end and back-end investors. Ackman will have to work hard to find that balance.