Bill Ackman’s pricey IPO plan

Bill Ackman made headlines this morning after The Wall Street Journal reported that he is planning to take his investment fund, Pershing Square, public in late 2025 or early 2026. As a precursor to the planned IPO, Ackman is also selling a stake in the firm to investors in a funding round that will value Pershing Square at approximately $10.5B.

It’s rare for a hedge fund to IPO in the US because the US Investment Company Act of 1940 prevents investing groups from charging retail investors expensive performance fees, such as the “2 and 20” that is common for hedge funds. Hedge funds can, however, charge “qualified purchasers” (generally high-net worth clients or institutions) higher fees, which is why hedge funds are typically private.

However, Bill Ackman isn’t looking to take a “hedge fund” public. To quote the Journal piece (emphasis ours):

Pershing Square has told potential investors to compare it to asset managers like Brookfield Asset Management and Blue Owl Capital rather than hedge funds. Brookfield’s market value is about $15 billion; it has more than $925 billion in assets under management. Blue Owl’s market value is about $28 billion and it manages more than $174 billion.

Basically, Ackman isn’t looking to take a specific investment vehicle public. He wants to IPO the holding company that happens to own several investment vehicles, which… kind of makes sense?

As of their February 2024 annual report, Pershing Square had $18.2B in assets under management (AUM), consisting of the following:

• $14.6B in a closed-end Europe fund (PSH), which is listed on the Amsterdam and London exchanges

• $1.6B in an investment vehicle that it used to purchase a stake of United Music Group

• $2B in traditional hedge funds

Pershing listed its largest fund in the European markets in 2014 to skirt US regulations regarding fees: while they couldn’t charge high performance fees on a publicly traded US-listed fund, they can (and do) charge a 1.5% management fee and a 16% performance fee on their European fund.

The planned IPO would sell stakes in the parent entity controlling the funds, which wouldn’t charge high management fees, rather than a specific investment vehicle. While The Wall Street Journal reported that the $10.5B valuation looks high, (for context, Blue Owl Capital is worth $28B with $174B in AUM), the firm justified its valuation by explaining that it will soon manage much more money. From the Journal piece:

The firm justified its rich valuation to investors by explaining that it expects to manage considerably more money, and eventually earn more in fees, after Pershing Square U.S.A. and other funds launch, people familiar with the matter said.

In February, Ackman announced plans to launch a $10 billion US-based closed-end fund which, importantly, would not charge a performance fee, and just a flat 2% management fee, keeping it within US regulations. 

Additionally, Pershing also received SEC approval to raise a multi-billion dollar “special-purpose acquisition rights company,” or SPARC, to take a private company public, which would further increase its AUM.

Why is Ackman now prioritizing the American market after a decade with most of his firm’s capital in Europe? One reason is that Pershing’s Europe-listed fund is trading at a ~27% discount to its net asset value (NAV), meaning that the price per share of its fund is worth 27% less than the value of its underlying assets. If Pershing’s European fund traded at a premium to its NAV, Pershing could issue new shares and raise money until the price per share matched the underlying assets. With its share price at a discount, however, any capital raise in Europe would be below the fund’s intrinsic value.

While Pershing’s $10 billion valuation feels high for the firm right now, that number could look more reasonable in the future depending on the company’s ability to raise funds for its new US closed-end fund, its SPARC, and any other ventures that Ackman may have up his sleeve.