September 2024
IN THIS ISSUE
There’s a Robot Warren Buffett ETF
Be investor-friendly
Bill Ackman is trying.
In 2020, at the height of the “blank-check companies” euphoria, Bill Ackman raised $4 billion for Pershing Square Tontine (“PSTH”), his Special Purpose Acquisition Company (SPAC). The plan was to take a private company public through a merger rather than the traditional IPO process. But as it turns out, companies for which traditional IPOs are not attractive, perhaps if market conditions are overcrowded with other more favorable IPOs, largely opted to wait rather than go public via SPAC.
Here’s Ackman, explaining his troubles in a letter to shareholders:
“High quality and profitable durable growth companies can generally postpone their timing to go public until market conditions are more favorable, which limited the universe of high-quality possible deals for PSTH, particularly during the last 12 months”
So in 2022, PSTH and most other craze-initiated SPACs reached the end of their 2 year window unable to merge with a target company, and had to return the committed funds to investors.
Ackman’s next project for 2024 was to launch a closed-end fund, Pershing Square USA, so that ordinary investors (not high-net-worth individuals and institutions by way of his hedge fund) could gain access to his stock-picking prowess. One “problem” with hedge fund structures is that investors can withdraw their capital in ways that impact the fund manager’s strategy, hence the desire for forming a closed-end fund. I suspect Ackman wanted access to less fleeting, more committed capital - akin to Warren Buffett’s “high quality shareholders” of Berkshire Hathaway. Whereas Buffett famously opposes stock splits which has led to Berkshire’s whopping $680,000 per share price, which at that entry point necessarily means having a narrow group of high quality shareholders who rarely redeem their shares, Ackman opted for the closed-end fund structure so that redeeming shareholders had to find buyers on the open market rather than pulling money from Ackman’s pot of investable capital.
Anyway, Ackman attracted a lot of attention with his initial $25 billion target for the fund, with lofty visions of this closed-end fund joining indexes like the S&P 500 Index alongside huge world-class companies in which, well, hedge funds don’t exactly fit.
There were a number of other challenges. For instance, Ackman’s stock picks already have to be publicly disclosed in periodic regulatory filings, so fee-paying Pershing Square USA investors would merely be gaining access to Ackman’s stock picks a bit earlier than non-fee-paying followers. Ackman’s desire for more permanent capital necessarily means less access to redemptions for investors, and not surprisingly, investors like to have access to their capital(!). Then there’s the instant haircut - akin to the drop in a new car’s value the moment you drive it out of the dealership - that investors would Likely take as most closed-end funds trade at a discount to their NAV.
Anyway, after a months-long road show and other promotions, Ackman saw the writing on the wall and scaled back expectations from $25 billion down to $10 billion, okay. Then down to $2.5-4 billion in a private letter to his hedge fund investors hoping to gin up interest from those definitely-not-retail investors. Then down to $2 billion. Then Ackman dropped the IPO entirely, realizing that investor demand for his product simply was not there.
Two bold initiatives, two humble pies.
So what can fund managers and investors learn from Ackman’s ventures into SPACs and closed-end funds?
I would argue that fund managers must prioritize investor-friendliness. Perhaps this sounds obvious, but investor-friendliness seems to be a challenge for most fund managers these days, and seems a Likely explanation for the persistent long-term trend of investors pulling their capital from actively-managed funds and into the higher net-of-fees returns of passive indexing.
There’s a saying in the industry that a hedge fund manager’s job is to keep their job. Not to deliver excess returns to investors, and not to outperform their benchmark indices - just to keep the sweet gig going as long as investors will let them. With often-eye-popping compensation and also-often-index-lagging performance, keeping the gig going as long as possible is very rational…
…it’s just not investor-friendly. And recent investors have reminded Ackman of this. Twice.
ONE MORE THING…
There’s a Robot Warren Buffett ETF. Here’s a different context for the same lesson: AI + humans > AI alone. Hat tip to Gary Kasparov and his fabulous TED Talk. There’s a Robot Warren Buffett ETF (Bloomberg)
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