William Ackman’s Pershing Square Capital Management LP is raising money in the next 10 days for a special purpose vehicle to buy the stock of a large U.S. company, according to a letter sent to investors.
The target is a large-capitalization, investment-grade U.S. corporation that principally operates in one business, Ackman wrote in the letter, without naming the company. The stock trades at a lower multiple than its closest competitor.
“The business is simple, predictable, and free-cash-flow-generative, and enjoys high barriers to entry, high customer switching costs and substantial pricing power,” Ackman wrote.
Ackman is seeking new money at a time when high-profile bets such as his investment in J.C. Penney Co. (JCP) and a wager against Herbalife (HLF) Ltd. have lost money or produced small profits. The last fund Ackman raised for a single-stock investment, a $2 billion vehicle that invested in Target Corp. in 2007, lost 90 percent of its value over the next two years. At the time, Ackman called it “one of the greatest disappointments” of his career.
“It’s unclear what the strategic advantages are of going into a single-stock vehicle,” said Brad Balter, head of Balter Capital Management LLC, a Boston-based firm that invests in hedge funds on behalf of its clients. “When the name of the stock is disclosed it will jump, but if I bought the stock myself I’d still expect to get most of the upside.”
The activist fund will be capped at $1 billion and will invest alongside the New York-based firm’s main hedge funds, which plan to invest about 15 percent of their capital in the same stock. Pershing Square manages about $12 billion, meaning the total investment could approach $3 billion. The firm, which already has a position in the stock, plans to buy more than 5 percent of the company and will talk to the board and management to bring about change.
Pershing Square exited its Target stake in the first quarter of 2011, less than two years after the retailer’s shareholders rejected a board slate nominated by Ackman.
This year, Pershing Square gained 6.3 percent in its main fund through the end of June, according to a report sent to investors. The performance lags behind such large competitors as Daniel Loeb’s Third Point Offshore Fund Ltd., which climbed 13 percent in the first half, and Nelson Peltz’s Trian Partners Ltd., which climbed 14 percent in 2013 through June 14.
The hedge-fund manager sold short 20 million shares of Herbalife, saying in December that the weight-loss and nutrition company is a pyramid scheme. While Ackman has never disclosed his average cost of shorting Herbalife, the average price between May 2012, when investors said he first put on the position, and Dec. 18, when he made the stake public, was $48.58. The shares closed today at $47.48.
Ackman didn’t return a phone call seeking comment on the new fund.
Pershing Square is making some changes to this single-stock fund, its fifth. The loss on the Target (TGT) fund was magnified because he used options to leverage his bet. This time, he won’t use a material amount of borrowed money or options to make the wager, he wrote.
The new fund will charge investors a reduced 0.25 percent management fee and will take 5 percent to 15 percent of profits depending on the size of investments, which will be locked up until Sept. 30, 2016, according to the letter.
The firm has received a $200 million “indication of interest” from an institutional investor that has conducted due diligence on the stock and received investment committee approval for the investment, Ackman wrote.
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