RPT-BREAKINGVIEWS-Bill Ackman sweetens IPO effort too elaborately

By Stephen Gandel

NEW YORK, March 11 (Reuters Breakingviews) - Third time's hardly a charm for Bill Ackman. The vocal hedge fund manager is back with another initial public offering, two years after he unsuccessfully tried to list a fund and four since folding his shell company. He now wants to raise as much as $10 billion and is throwing in a stake in his Pershing Square parent firm to entice investors. The implied valuation doesn't stack up, however, even before factoring in a complexity discount.

There's no faulting Ackman's persistence in his quest for capital with no designated time horizon. Unlike private credit managers such as Blue Owl OWL.N, which have faced rising redemptions and forced sales into a downturn, a so-called closed-end fund locks in money. The tradeoff is usually a discount to net asset value, to reflect the inability of investors to offload underlying shares in the market.

To compensate for this problem, Ackman added a slice of his shop and the fees it generates from all its funds, including a 2% management toll on whatever assets he raises for the latest one. For $50, a buyer gets one share in the new fund, Pershing Square USA, and one-fifth of a share in Pershing Square Inc. After the market debut, the two will trade separately.

Ackman's UK-listed fund trades at 74% of its NAV. To make up for an equivalent gap in the U.S. fund, the stake in the firm itself would need to be worth about $13, implying $64 per share for Ackman's management firm. With 400 million shares, Pershing Square Inc would be worth $26 billion.

It's hard to justify the figure. The firm generated $430 million in management fees last year, and would add another $160 million if the fund raises $10 billion. Value the sum at 18 times, around what peers fetch, and that's more than $11 billion. Performance fees are often lumpy, however, and command lower multiples. Put last year's $450 million, after deducting a $40 million rebate due the British fund's backers, on 5 times, and they're worth some $2 billion. The nearly $14 billion combined leaves a yawning gap.

Any extra value from giving shareholders preferential treatment on management fees is offset by their upside being capped. Anchor investors also get a bigger piece of the operating firm. Although Ackman has successfully navigated wild market swings over the years, his existing portfolio is dominated by stocks like Amazon.com and Alphabet, which any investor can buy without paying hedge-fund rates. The many complications with this IPO only make it easier to say no thanks.

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CONTEXT NEWS

Pershing Square on March 10 disclosed its prospectus for an initial public offering of a closed-end fund seeking to raise as much as $10 billion at $50 a share.