Hedge fund billionaire Bill Ackman’s Pershing Square USA (PSUSA) has officially canceled its initial public offering just one day after filing with the SEC for a $2 billion listing—a far cry from its original target valuation of $25 billion. Ackman had been on a roadshow in recent weeks looking to gain commitments from institutional investors to buy PSUSA shares. However, after seven weeks of meeting with potential investors, Pershing Square is unsure if an IPO is the best way to serve its investors, Ackman wrote in an X post that announced the IPO cancellation. “We will report back once we are ready to launch a revised transaction,” Ackman added, implying that PSUSA may still launch without listing shares on a stock exchange.
Ahead of filing with the SEC, Ackman had revealed to investors in an internal letter (first leaked and then made public by Pershing Square) that the IPO would fall short of expectations. He wrote on July 24 that PSUSA would be targeting a valuation between $2.5 billion and $4 billion, with a cap of $10 billion.
In the same letter, Ackman said the “most important factor for creating long-term value for Pershing Square Inc. is not the size of the PSUS IPO, but how it trades in the market.” Ackman’s PSUSA IPO was expected to be a kickstart for the CEF (closed-end fund) IPO market, as the total net assets of the U.S CEF market have not recovered to its mid-2021 peak of over $300 billion. A CEF is an investment vehicle that raises money through an IPO and then trades similarly to a stock or ETF; money pooled into the fund is used to realize an actively managed investment strategy. CEFs can also be unlisted, with shares being issued directly to investors, an option Pershing Square may be considering. PSUSA would have been Ackman’s third IPO, following a European closed-end fund that still actively trades in London and Amsterdam markets and a short-lived SPAC in 2020.
Why did the IPO fall apart?
In the July 24 letter, Ackman revealed several commitments from institutional investors, including $150 million from Baupost Group, $40 million from Putnam Investments and $60 million from the Teachers Retirement System of Texas. A $65 billion family office also promised to buy 9.9 percent of all available shares and is willing to put in as much as $1 billion, the letter said. Since then, however, the Boston-based hedge fund Baupost has reportedly bowed out of investing.
Barron’s reported that the average closed-end fund trades at a discount of 6.2 percent—meaning that the market values the average CEF for less than the value of assets it owns, showing a bearish sentiment from the market toward the investment vehicle. Ackman acknowledged this in his July 24 letter, writing, “Particularly in light of the novelty of the structure and closed-end funds’ very negative trading history, it requires a significant leap of faith…to recognize that this closed-end company will trade at a premium after the IPO when very few in history have done so.”
He noted the “enormous sensitivity to the size of the transaction,” implying that investors would like to see PSUSA be a smaller and more manageable size compared to the CEF market. At $25 billion, PSUSA would have been the largest closed-end fund ever. Currently, the largest closed-end fund is PIMCO’s Dynamic Income Fund, with a market cap of $5.97 billion (as of July 30). Of the 414 closed-end funds Nuveen tracks, only 60 enjoy a market cap greater than $1 billion. So, at a $2 billion valuation, PSUSA would still have been a notable player in the CEF market.
While most closed-end funds are positive on year-to-date and five-year return on price, they can perform poorly in markets because treasuries offer investors safer returns in high-rate environments. Lack of faith in active managers or steep management fees can also drive investors away from closed-end funds.