Billionaire activist Bill Ackman’s three-year pursuit of a European initial public offering may appeal to institutions seeking greater liquidity and affluent individuals shut out of many U.S. hedge funds. Yet as even Ackman has suggested, investors might do better replicating him on their own.
Pershing Square Holdings Ltd., one of the funds managed by Ackman’s Pershing Square Capital Management LP, seeks to raise about $2 billion in an IPO in October on the Euronext Amsterdam. Ackman wants the listed fund to provide a pool of permanent capital as a buffer against the risk of investor withdrawals that loom over private funds.
Pershing Square, with about $14 billion under management, is following hedge funds including Brevan Howard Asset Management LLP and Third Point LLC in selling shares of individual funds. While a public stock offers investors more liquidity and transparency, Pershing Square’s investor correspondence outlines a cheaper way to benefit from his activist campaigns without buying the listed fund.
The idea: Buy shares in his target companies after he discloses them, then ride the appreciation that typically follows.
“You can replicate his portfolio very easily, for free, and you have immediate liquidity without the headline risk,” said Armen Karamanian, founder of Admire Capital LLC, a fund manager that invests selectively in activists’ target companies.
Investors were informed today that the IPO has demand for all the shares for sale, including a greenshoe option for the underwriters to sell an additional 10 percent of the stock, said a person with knowledge of the deal, who asked not to be named as the details aren’t public.
The first day rise -- or “pop” -- in the stock price of an activist target often represents only a small percentage of the ultimate increase “achieved by a successful activist,” Ackman wrote in an Aug. 13 letter to Pershing Square investors obtained by Bloomberg News.
“In 26 out of 30 of our activist commitments the day-after price was still a bargain price versus the ultimate price achieved from our involvement with a company,” he wrote.
By that reckoning, 87 percent of the time investors could have simply followed him into target stocks on the public markets and profited similarly while avoiding Pershing Square’s fees. Those fees -- also disclosed in the letter -- can make a big difference. Since its inception in 2004, fund Pershing Square LP’s gross return was 1,199.1 percent, reduced to 626.7 percent net of all fees.
Ackman made the comments in the Aug. 13 investor letter as part of a broader defense of shareholder activism’s benefits, and didn’t specifically propose it as a work-around.
His focus on a small number of large investments -- presently eight -- makes Pershing Square easier to replicate, activist watchers including Karamanian said.
Representatives for Pershing Square and Ackman declined to comment, citing rules against public statements while marketing the fund.
Other public closed-ended funds have typically traded at a discount. Dan Loeb’s Third Point Offshore Investors Ltd. in London has sold at a 4.1 percent average discount to net asset value this year, and Brevan Howard’s BH Macro Ltd. fund traded an at average discount of 5.1 percent.
To counter that discount trend, Ackman has set “substantially lower performance fees” than his private funds, Pershing Square said in a Sept. 15 statement, without providing details. Hedge funds typically charge annual management fees of 1 to 2 percent of assets managed and pay themselves 20 percent of the profits generated above a benchmarked return.
Hedge funds globally charged an average management fee of 1.52 percent in the second quarter of this year, according to Hedge Fund Research Inc. The fees declined two basis points from a similar period in 2013. The average incentive fee charged by hedge funds in the second quarter fell three basis points to 17.96 percent, compared with the the prior quarter, HFR said last week.
Ackman will also contribute a portion of the firm’s incentive fees from existing and future funds, said people familiar with the matter, who asked not to be identified because the terms aren’t yet public.
Only institutions and rich, sophisticated individuals are allowed to invest in private hedge funds, which often require a minimum $1 million commitment.
For others, Ackman’s public stock allows “another whole part of the investment world to get access to activism,” said Ken Squire, who runs the 13D Activist Fund, which tracks target companies, and activist website 13D Monitor. “You know every day how it’s going and you can buy or sell more on a daily basis.”
Ackman has said he’s wanted to raise permanent, public capital since at least 2011 to avoid a repeat of the financial crisis, when investors withdrew about 27 percent of his New York-based firm’s funds.
The redemption potential forces his and other funds to set aside cash that they would prefer to invest. Publicly traded funds allow investors to buy and sell stakes without affecting the fund’s holdings. It will also allow him to invest more of his assets in activist targets for longer periods, he said.
“Because we are an active, control and influence-oriented investor, we have avoided being fully invested because of the risk of investor redemptions,” Ackman wrote in the August investor letter. The IPO of the fund will address that as it “will increase the amount of our capital that is permanent,” he wrote in the letter.
The Amsterdam-traded fund will have a market capitalization of at least $5 billion, Pershing Square said in the Sept. 15 statement. Thirty cornerstone investors have already committed funds worth $1.5 billion to the IPO, and the shares are being priced at $25 apiece.
More than 300 investors have money in the fund, which had a net asset value of approximately $2.9 billion as of June 30, statements show. The Pershing Square parent and its management will invest $100 million at or around the time of the IPO and some existing investors will roll part of their private fund holdings into the public entity.
Pershing Square prefers to keep the names of the institutions private, as some of them are worried about the publicity, said one person with knowledge of the matter.
Public hedge funds “provide certainty of capital and for investors a higher degree of transparency,” said Chris Donegan, a partner at Azure Wealth LLP, a London-based wealth management firm. “The manager likes the sticky money -- no panic redemptions or providing liquidity to the market -- and the investors often benefit from an ability to take measured actions without regard to redemption periods.”
As an outspoken activist, Ackman may present what’s called a headline risk that doesn’t plague most publicly traded funds. He is waging campaigns against management at Herbalife Ltd., Allergan Inc., and Air Products and Chemicals Inc. He has previously made fortunes at targets including Canadian Pacific Railway Ltd. and General Growth Properties Inc. -- while also disappointing at retailers JC Penney Co., Target Corp. and Borders Group Inc.
Companies including Dutch insurer NN Group NV and Russian retailer Lenta Ltd. have raised about $68 billion from IPOs on European exchanges this year, the most since 2011, according to data compiled by Bloomberg.
Yet many sellers have struggled to remain in favor with investors, with the Bloomberg European IPO Index declining 2.5 percent this year, compared with a 5 percent increase in the benchmark STOXX Europe 600 Index.
“My guess is, the target buyers are European money managers, probably wealth managers, allocating capital for individuals who invest outside the U.S. and aren’t wealthy enough to buy into the hedge funds directly,” said Admire Capital’s Karamanian. “They get exposure to activists that otherwise is difficult to get.”