By Tom Richardson
The hedge fund king known for monster returns is set to market up to $US26 billion worth of shares to retail investors with zero fees for 12 months.
US investment king Bill Ackman is set to capitalise on his growing fame by shaking up the funds management industry with plans to raise a record-breaking $US26 billion ($39 billion) for a fund pitched to retail investors on a radical fee structure.
A prospectus lodged with the US Securities Exchange Commission last week shows the Pershing Square USA Fund will never charge performance fees, and zero management fees for its first 12 months, as it readies a New York Stock Exchange listing.
The billionaire founder of Pershing Capital, 58, will start to rake in profits when the fund’s unusually high 2 per cent management fees kick in after one year.
At that rate, Ackman could trouser more than a $US1 billion in fees over its first three years, with investors in the float banking on a repeat of the market-thumping returns Ackman has delivered to his high-net-worth investors that helped make his name.
“It’ll be an absolute cracker and the biggest closed-ended fund ever raised,” said Geoff Wilson, the founder and chairman of Wilson Asset Management. “His returns have been exceptional, and he’s a super-smart operator.”
Ackman already runs the $US15 billion Pershing Square Holdings close-ended fund traded on the London and Amsterdam stock exchanges, which returned an astonishing 31.2 per cent net of fees on an annualised basis for the five years to March 31.
His private investment fund Pershing Square has returned 25.7 per cent annualised over the five years to March 31, and hedge fund Pershing Square International has returned 23.8 per cent over the same period.
As the Pershing Square USA Fund’s prospectus asserts, there’s no assurance his latest mega-project achieves comparable returns. In fact, it could bomb, as no investment manager is bulletproof.
However, Ackman’s success trouncing the performance of almost every other manager globally explains his potential to raise $US26 billion in a tough IPO market, where investors are reluctant to commit capital if they can get risk-free returns on bonds and cash between 4 per cent and 5 per cent.
Pershing Capital’s monster valuation
In early June, Ackman sold 10 per cent of his investment management firm, Pershing Square Capital Management, to a group of US and international investors for $US1.05 billion. The deal was struck on a valuation of $US10.5 billion, or 64 per cent of its $US16 billion in funds under management.
Typically, an equities manager will trade on a valuation between 5 per cent and 10 per cent of FUM. The deal’s price at 64 per cent implies investors expect Pershing to pull off a raising that will more than double its FUM instantly. A successful raising is also almost certain to catapult the value of his empire, ahead of its own potential blockbuster IPO that could come in 2025.
In Australia by comparison, hot hedge fund group Phil King’s Regal Partners trades on around 6.8 per cent of FUM at a market value of $830 million, with activist target Magellan on just 2.4 per cent of its FUM at a market cap of $1.54 billion.
Closed-ended fund structure
Both Ackman and Wilson are evangelists of the closed-ended fund structure, which has fallen out of fashion with investors and financial advisers versus open-ended funds.
Closed-ended funds are attractive to activists like Ackman as they offer “permanent capital” to the manager, versus open-ended funds that may pressure stock pickers to involuntarily sell positions to raise cash if numerous unit holders want to redeem their money.
But, the infamous downside to the closed-ended structure is that the funds often end up trading at a discount to their net tangible asset (NTA) value. This is generally because shareholders or unitholders choose to sell at a price cheaper than NTA if there are insufficient buyers, and they have no alternative.
Ackman will hope to offset this liquidity challenge via his big reputation across social media and his profile in the financial media, alongside strength of returns.
The fund’s prospectus reveals it will own just 12 to 15 US stocks to leave it highly concentrated versus peers, which typically hold 20 to 100 stocks and target more modest risk-adjusted returns.
The prospectus adds Pershing may pursue activist strategies for “value creation through active corporate engagement” and use sophisticated hedging strategies to capitalise on market volatility or the macroeconomic environment.
In other words, it’s a hybrid of Ackman’s trademark activism and computer-driven trading strategies, which the prospectus boasts have produced stunning five-year returns in other funds.
For now, the date of the IPO and total funds raised – at a price of $US50 per share – remain a mystery, as US regulatory rules allow for this ambiguity.
“In Australia when you lodge a prospectus it must have all the dates and numbers,” said Wilson. “But in the US you can lodge a prospectus, and it has 99 per cent of the information and none of the numbers.”
Wilson and Ackman caught up earlier this year when the Australian fund manager was in New York.
However, it’s now widely speculated that investment banks led by UBS, Jefferies and Citi are already on the hustings targeting $US26 billion and touting the fund to global investors. If so, that means the Wall Street activist’s latest venture could hit the NYSE within months.
If it does, it will be the largest standalone IPO this year and more than triple the $US8.7 billion raised by 66 companies on the Nasdaq over the six months to June 30, according to Morningstar.
