From US$25bn to zero in three steps: Ackman walks away from PSUS IPO
Bill Ackman’s Pershing Square Asset Management on Wednesday pulled the plug on the NYSE IPO of closed-end fund Pershing Square USA, concluding one of the more bizarre forays into capital markets.
PSUS was to have priced a US$2bn IPO on August 5 after delaying pricing from July 29 on a deal that was reported to be initially targeting US$25bn that was then revised to US$2.5bn–$4bn before being revised down again.
“Over the last seven weeks, we have met with many institutions and family offices, and held numerous town halls for Pershing Square USA,” Ackman said in a statement. “While we have received enormous investor interest ... one principal question has remained: ‘Would investors be better served waiting to invest in the aftermarket than in the IPO?’
“This question has inspired us to reevaluate [PSUS’s] structure to make the IPO investment decision a straightforward one. We will report back once we are ready to launch a revised transaction."
He later added on Twitter/X that he had "changed course" after coming up "with a better transaction structure".
Fee leakage
PSUS was to have used the IPO proceeds to invest in 12 to 15 large cap, investment-grade publicly traded companies.
Aside from the fact that institutional investors could replicate that portfolio relatively easily, the central concern in that investment premise is that investable proceeds would be reduced by fees.
PSAM had agreed to waive the 2% management fee based on assets under management for the first full year. After that, it would sweep up some 2% of US$2bn, or US$40m annually.
Combined with the fees it would have paid to the army of banks involved, fee leakage meant the closed-end fund was likely to trade at a discount to net asset value.
Ackman argued to potential investors that his track record would have led the fund to trade above NAV, although PSAM has a similarly structured Euronext Amsterdam-listed US$4bn Pershing Square Holdings closed-end fund that trades at a 20% discount to NAV.
This is the issue that Ackman was presumably referring to when he said investors would be better served by waiting. But it can hardly come as a surprise – nor is it clear what new structure could navigate round that apparent inevitability.
Citigroup, UBS, Bank of America and Jefferies were global coordinators on the downsized 40m shares at a fixed price of US$50 each.
Why would investors pay US$50 if they could purchase the stock at, say, US$47.50 in the aftermarket?
The banks were to have been paid a 1.5% gross spread on retail allocations, or US$30m if the entire US$2bn went to retail and less if some shares were placed with institutions.
Bill’s due
In the leaked letter to investors, which Ackman was required to reproduce in a so-called free writing prospectus – the US$2.5bn–$4bn version – a week earlier, he labelled banks leading PSUS as “nominally fiduciaries” while also suggesting they favour allocations to large institutions over retail.
“The level of hubris here is stunning. No one within the banking community thought he could raise US$25bn, but he wouldn’t listen,” said a banker.
Sceptical bankers wondered whether the letter was leaked in a backdoor effort to communicate the interest of institutional investors to convince retail buyers to pile in.
In the letter, Ackman outlined institutional orders that included Seth Klarman’s Baupost Group for US$150m, Putnam Investment for US$40m, Teacher Retirement System of Texas for US$60m, and a large family office for 9.9% of the ultimate deal.
“It is ... very important that the banks get a sense that a deal’s momentum is building as they convey that feeling of momentum to the capital markets desks of every institutional investor,” he said in the letter.
Observers wondered whether suggesting a deal could be as large as US$25bn – which would have made it one of the largest IPOs ever – would achieve that objective. But either way, that money is now off the table.
Known for staying out of the press, Klarman pulled his order in the aftermath, bankers told IFR. The other anchor investors did not appear in the relaunched prospectus on Tuesday.
PSAM was to have invested US$550m through a private placement alongside the IPO – US$500m in common stock and US$50m in preferred stock. That investment was to have been locked up for 10 years.
But that wasn’t Ackman's money.
In June, PSAM sold a 10% stake for US$1.05bn. That money, from other institutions, was to have been rolled into PSUS.
Led astray
Ackman may have been led astray by his experience with SPACs. Pershing Square Tontine raised a record US$4bn on its IPO at the height of the SPAC craze in 2020, an absurdly large amount that allowed Ackman to purchase a partial stake in Universal Music, an investment ultimately assumed by Pershing Square Capital Management.
Closed-end funds and SPACs differ in one significant way – the former being permanent capital and the latter allowing investors to get their money back if they don’t like a deal. Investors participating in PSUS could have sold on the open market, but the money raised transitions to someone else as it is permanent money.
End game
For Ackman, the end game is to take PSAM public with closed-end funds providing predictable cashflows to underpin valuation. In marketing PSUS, Ackman labelled Warren Buffett and his Berkshire Hathaway vehicle as “the original activist hedge fund”.
Apollo Global Management, Blackstone and KKR have all navigated similar fee streams to the public equity markets, listing funds backing leveraged buyouts and credit lending.
But PSAM may not be IPO worthy – and possibly never will be – with the central flaw being equity is equity and credit is credit. Whereas equity has unlimited downside, even when hedged, credit provides a floor.
Public equity investors want smart credit exposure but have no need for easily replicable equity strategies.