On Monday, October 13, Pershing Square Holdings Ltd., a fund managed by activist investor Bill Ackman, held its initial public offering on EuroNext Amsterdam. The offering, priced at $25 per share, raised $2.73 billion in capital for Pershing Square Holdings, raising its total assets to $3.07 billion and its value to $6.2 billion. Ackman’s Pershing Square Capital Management LP – the parent company of Pershing Square Holdings Ltd. – follows other hedge funds including Brevan Howard Asset Management LLP and Third Point LLC in selling shares of individual funds.
A public offering is a novel approach to raising capital in the hedge fund context, in that it provides a permanent pool of capital not subject to conventional investor redemption mechanisms. It opens the door for funds such as Pershing Square Holdings to make bigger bets on companies.
This is especially important for Ackman, whose reputation and bold investments have seen him clash against businesses and governments alike. Allergan Inc., the target of Ackman’s recent $60 billion hostile takeover bid, filed suit alleging that Ackman made public misstatements and violated insider trading laws in his acquisition of a 10% stake in the company; those claims were dismissed as “baseless” in Pershing Square Holdings’ initial public offering prospectus. Meanwhile, Pershing Square Capital Management LP, which separately manages $14.1 billion in assets, filed suit in the U.S. Court of Federal Claims, contending that the U.S. government’s diversion of profits violates the Fifth Amendment, which prohibits the taking of private property for public use without just compensation.
Given Ackman’s hands-on approach, capital raised through the initial public offering provides greater room for him to pursue his activist agenda. In the last financial crisis, investors withdrew 27 percent of PSCM’s capital through redemption mechanisms, which in past occasions have forced hedge fund closures. Ackman conceded that the fund has previously avoided allocating all of its money to investments “because of the risk of investor redemptions.” Under the new capital-raising scheme, exiting investors will now have to find buyers in the open market. The initial public offering will enable the fund to “invest a greater percentage of [its] assets in activist commitments on a long-term basis, and improve[e] [its] ability to take advantage of market dislocations.” Ackman has revealed that, using his newly-raised permanent capital, he plans to take a “decent-size stake” in another U.S. company in the coming months.
Interestingly, repeated mention of Ackman in US business headlines and conversations hides a surprising fact: Pershing Square Holdings is not an American fund. Incorporated in 2012 in the Bailiwick of Guernsey, the fund is designated as an investment scheme operating under Guernsey Companies Law, intended to operate alongside other funds managed by PSCM while benefiting from Guernsey’s business-friendly tax system. Indeed, Pershing Square Holdings’ initial public offering was open only to non-U.S. investors, and was not even registered with the U.S. Securities and Exchange Commission based on Rule 506(b) under Section 4(a)(2) of the Securities Act of 1933 that exempts private offerings meeting certain requirements.
It remains to be seen whether Ackman’s proven track record can sustain a steady draw of investors willing to back his activist investments, and thereby confer authority to a new method for hedge funds to raise capital. At the same time, the resulting capital structures of funds may have material implications for new and ongoing litigation. Lastly, the attention drawn to the initial public offering may direct unwanted eyes to the beneficial tax jurisdiction planning leveraged by Ackman and competitors in the financial industry.