PSUS II
The basic problem with the initial public offering of Bill
Ackman’s proposed US closed-end fund, Pershing Square USA, was
that he couldn’t give investors a discount. The fundraising
pitch for PSUS was that you’d pay $50 for a share, and Ackman
would invest that $50 (minus some underwriting fees) for you,
in a portfolio of mostly large-cap US stocks but also some
derivatives bets. It is entirely possible that $50 of Bill
Ackman investments is worth more than $50; he has a good track
record.
But it is also entirely possible that $50 of Bill Ackman
investments is worth less than $50: Many closed-end funds, including Ackman’s
own European fund, trade at a discount to net asset value. So
when Ackman pitched his new fund to investors, they might
reasonably have said: “Yes, sure, I would love to have you
invest $50 for me. But I’d like to pay $45 for that. And
judging by history, I’ll be able to pay $45 for a share a week
after the IPO, so I’ll just wait and do that.” If everyone
thinks that, then the IPO can’t get done: He needs to sell the
shares at $50 before they can trade down to $45. And,
crucially, he can’t sell the
shares at $45: The point of the IPO is to raise the $50 to put
in the pot, and selling the shares for less than $50 doesn’t
accomplish that.
We talked about all of this a few weeks ago,
when Ackman postponed the PSUS IPO, saying that the main
question was “Would investors be better served waiting to
invest in the aftermarket than in the IPO” and promising “to
reevaluate PSUS’s structure to make the IPO investment
decision a straightforward one.”
There are roughly three ways to think about how to restructure
the IPO to effectively give the investors a discount to net
asset value. The simplest way is: Put some cash in for them.
The mechanism is something like:
-
You buy a share for $45.
-
Ackman puts in $5 of his own money, on your behalf, for
free.
-
Your share represents $50 of the pot that he invests:
$45 from you and $5 from him.
“You can probably spot the objections
to this structure,” I wrote, but it’s actually not crazy.
Ackman has a lot of money, so he could afford to do this. And
in various ways a successful launch of PSUS would make him
more money. (He will eventually charge fees on the PSUS
assets, and he has plans to take the Pershing Square
management company public; the more money PSUS manages, the
better that IPO will go.) Just donating a billion dollars of his own money to the PSUS
fund could be a positive-expected-value trade, for him.
You could play with that structure a bit more: Instead of
putting in the $5 for free, Ackman could put in the $5 and get
back long-term out-of-the-money warrants that pay him, like,
$10 if PSUS does really well over the next two years. You pay
$45 and get most of the returns on the $50, so you get a discount to
net asset value, but you give him back some of the returns if
he does really well.
Another way to restructure the IPO would be to put something else in the pot:
-
You buy a share for $50.
-
Ackman donates some asset to the pot.
-
Your share represents $50 of cash that he invests,
plus your share of the asset that he donates.
The most obvious asset here is Pershing Square itself, that is, the hedge fund and
closed-end-fund management company that Ackman runs. Pershing
Square recently sold 10% of itself at a $10.5
billion valuation and plans to go public as soon as next year.
Ackman could give investors in PSUS a stake in the management
company as an incentive to buy PSUS.
This approach has some advantages over using cash. For one
thing, it doesn’t require cash; Pershing Square can just issue
shares of itself. It arguably aligns incentives nicely: By
owning part of the management company, PSUS investors are
effectively getting back some of the fees that they pay. Also,
this creates some room for differences of opinion about the
value of Pershing Square. It turns out that not a lot of
people think that $50 in a pot managed by Ackman is worth $55,
and there is only so much Ackman can do to persuade them
otherwise. But some people think that the value of Pershing
Square is $10 billion; putting the management company in the
pot gives you something more subjective to market.
A third way to restructure the IPO is just literal structure. Like:
-
You buy a share for $50.
-
You also get a free warrant to buy another share for
$50.
-
If the value of a share goes up to $70, you get to
buy another one at a discount.
This strikes me as the least compelling option. For one thing,
you are not really getting a discount to net asset value; you
are just getting some different slicing of the same pot. For
another thing, the mechanism of the warrant is something like
“if all goes well, PSUS will sell more shares in the future at
a discount to net asset value, diluting its shareholders,”
which is maybe not what you want to sign up for.1
Anyway here’s an update from the Financial Times:
|
Ackman has discussed several options
for the new structure, one of which would gift early investors
in Pershing Square USA the right to buy extra shares in the
vehicle in the future at a fixed price through warrants, two
people familiar with the matter said.
However the real prize for investors
in Pershing Square USA is likely to be rights to buy into the
eventual IPO of his hedge fund, Pershing Square Capital
Management, which manages investments for both the proposed US
vehicle and his existing European fund. ...
Under the previous plans for the IPO,
Ackman had sought to lure investors by waiving management fees
for the fund’s first year of trading.
However during the marketing process,
Ackman met resistance from investors who sought further
incentives to invest in the IPO rather than waiting to buy
shares after the launch, when such funds often trade at a
discount. If warrants were issued alongside the Pershing
Square USA stock, the structure might no longer include such a
waiver, one of the people said. ...
Separately, two people close to the
hedge fund said they expected Ackman to bring the Pershing
Square IPO back to the market before the end of this year to
keep up perceived momentum.
|
They seem to be landing on a combination of my second and
third approaches: warrants, but perhaps warrants to buy the
management company rather than just warrants to buy more
shares of PSUS. And if the deal does include a slice of the
management company, then the fee waiver is arguably less
compelling: After all, the more money Pershing Square makes,
the more valuable it is, and PSUS investors would share in
that value.
* * *
