Ackman Seeks to Raise $10 Billion for New Equity Fund in Tough Market --

Dow Jones02-13

Andrew Bary

Investor Bill Ackman is trying to do the near impossible: launch the largest U.S. closed-end fund ever.

His goal is to sell a fund of possibly $10 billion or more -- double the size of the largest U.S. closed-end fund, the $5 billion Pimco Dynamic Income fund, which trades under the ticker PDI.

The nearly $300 billion U.S. closed-end sector is moribund with no new deals priced in 2023. Why? The average closed-end fund is trading for a roughly 10% discount to net asset value, creating cheap competition for a new fund and making investors fearful that any new fund will fall to a discount and result in paper losses to holders.

That isn't stopping Ackman. His firm, Pershing Square Capital Management, filed last week for an initial public offering of a new closed-end fund called Pershing Square USA Ltd with a ticker PSUS that would trade like other CEFs on the NYSE. A Pershing Square spokesman had no comment on the deal, citing regulatory restrictions related to the offering.

The Pershing Square prospectus doesn't indicate the potential size of the new closed-end deal, which will hold roughly 12 to 24 stocks.

But Ackman gave an "illustrative" size of $ 10 billion last week in a presentation for his Pershing Square Holdings, a European-listed closed-end fund with a market value of nearly $10 billion that trades over the counter in the U.S. under the ticker PSHZF. Its shares trade at around $50.

It will be interesting to see if the new fund's portfolio overlaps with the concentrated European fund, which has 10 positions, including shares of Alphabet, Lowe's, Restaurant Brands International, Howard Hughes Holdings, and Hilton Worldwide Holdings. The prospectus says the new fund will hold "large-capitalization, investment grade, free-cash-flow-generative North American durable growth companies."

If anyone can market a new fund, it's Ackman. He's among a limited number of big investors with star power and a market-beating record in recent years.

The negatives are the weak state of the closed-end market, a relatively high fee of 2% a year, which will be waived for the first year, and competition from Ackman's Pershing Square Holdings. It trades at a discount of more than 25% to its net asset value.

"I would not be surprised if the amount raised is much, much less than the $10 bln 'planned for' in the Pershing Square presentation," says Eric Boughton, a portfolio manager at Matisse Capital, which runs the Matisse Discounted Closed-End Strategy mutual fund.

In an email to Barron's, Boughton cited the persistent discount of Pershing Square Holdings, "despite large share buybacks, an active marketing campaign, great performance, and an increasing number of U.S. shareholders (like us) finding a way to own it." Pershing Square Holdings is the largest investment in the Matisse fund.

The negatives with Pershing Square Holdings are its location and taxes. U.S. investors can buy it overseas on the LSE or Euronext or on the OTC Markets under the ticker symbol PSHZF. Some brokerage firms, however, may prohibit U.S. holders from buying it, and the overseas fund is not supposed to be held in U.S. individual retirement accounts. U.S. holders of Pershing Square Holdings get a Passive Foreign Income Company tax form, which can be more cumbersome than a 1099 form.

Closed-end funds sell a fixed amount of shares, which trade on an exchange. Unlike a traditional mutual fund, whose shares are bought and sold at net asset value, a closed-end fund can trade at a premium or discount to its net asset value depending on investor demand. Closed-end holders can't request that the issuer redeem their shares at NAV unless the issuer decides to do so.

During 2023, Ackman raised the prospect of a potential U.S. listing for Pershing Square Holdings to broaden the ownership base.

But in the recent slide deck, he said that such a strategy wasn't viable due to several factors, including taxes, possible trading issues, and the relative size of potential merger partners. One idea that had been floated was a merger of Pershing Square Holdings with Howard Hughes, a real estate company that is more than a third owned by Pershing Square and chaired by Ackman.

Pershing Square Holdings has a base fee of 1.5% and an incentive fee of 16%. Barron's has written that the high fee structure could be a factor in the sizable discount on the fund. The new U.S. closed-end fund would result in some reduction in the incentive fee on the European fund depending on the size of the new fund under a complex formula.

The new fund could generate significant fees for Ackman because the annual management fee will be 2% annually, about double the average fee on U.S. equity closed-end funds.

The closed-end structure should mean a durable fee stream to Ackman's firm and be beneficial to his long-term investing strategies due to what's essentially permanent capital.

U.S. funds can have performance fees, but they generally need to be symmetrical, meaning that the manager gets the fee if it beats an index like the S&P 500 and gives back part of its fee if the fund trails its benchmark. This structure has deterred managers from including a performance fee. Ackman won't be including a performance fee in his new closed-end fund. Pershing Square Holdings doesn't need to beat a benchmark to earn a performance fee for Ackman.

Fidelity Contrafund, run for over 30 years by Will Danoff, has such an incentive structure. While the fund has a strong long-term record, it reduced its fee in 2022 due to the performance adjustment as it trailed the S&P 500 over the relevant period. Fidelity is one of the few managers that has employed performance fees on many of its funds, including Fidelity Magellan and Fidelity Blue Chip Growth.

Ackman has had strong performance in recent years with Pershing Square Holdings, which accounts for the bulk of his firm's assets under management.

The fund topped the S&P 500 in 2022 and 2023 after crushing it in 2019 and 2020. However, it badly trailed the index from 2015 through 2017 and was behind the index in 2021. Through early February, the fund was up 2% in 2024, behind the S&P 500 index.

The poor stretch from 2015 to 2017 weighs on the fund's longer term returns. Barron's calculates that Pershing Square Holdings, which went public in October 2014 at $25 a share, trails the S&P 500 with an 8.7% annualized return through early February based on its market price, against about 12.8% annually for the S&P 500. The fund is slightly behind the index with a return of 12% annualized based on its NAV, we calculate.

The new Ackman fund will pay a sliding underwriting fee that starts at 2% for the first $1 billion raised from institutions and drops to 0.6% for money raised between $2 billion to $10 billion. If it raises $5 billion, we calculate the fee at about 1%.

The Ackman fund will shape up as a test of whether the star manager can raise a lot of money in an area where there has been no success in the past year.

Write to Andrew Bary at

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.


(END) Dow Jones Newswires

February 13, 2024 02:30 ET (07:30 GMT)

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