Below is a copy of the Form N-2 filed by Bill Ackman with the Securities & Exchange Commission relating to the IPO of Pershing Square USA, Ltd (PSUS).
Dear Strategic Partners,
We are reaching the critical last few days of the road show so I am providing an update.
In the past, road shows would involve intense global travel. Fortunately, Covid and Zoom have greatly improved productivity allowing 90% of our meetings to occur by Zoom. That said, the intensity now is much greater than an old-fashioned IPO because there are no breaks between meetings and we start early and end late.
Over the past six weeks, which included the testing-the-waters phase and the formal IPO road show which began on July 9th, Ryan and I have had more than 150 in-person and Zoom meetings, town halls, financial advisor teach in’s etc. We have 20 or more scheduled between now and Monday. There has been enormous interest in the deal from a very broad array of participants in the capital markets who have given helpful feedback, and we have reshaped our thinking on the transaction as a result and made some tactical adjustments.
In summary, there is enormous sensitivity to the size of the transaction. Particularly in light of the novelty of the structure and closed end funds’ very negative trading history, it requires a significant leap of faith and ultimately careful analysis and judgment for investors to recognize that this closed end company will trade at a premium after the IPO when very few in history have done so. The $25 billion number in the media initially anchored investors in thinking the deal would be too large. Ultimately, I expect this ‘anchoring’ to be helpful to the final outcome.
Everyone appreciates our track record (36 times vs. 7 times for the S&P 500 over 20 years), our unprecedented $500m investment, the low fees, the liquid profile of the company, the firm’s brand and our large global base of institutional, retail, and media interest in the firm, and they understand conceptually why a investment holding company structured as a closed end company gives us enormous investment flexibility, with the benefits of a tax-free corporate structure.
The principal questions that have been raised concern:
- The current discount at which PSH trades, which I believe we have successfully addressed for investors by explaining the structural, regulatory, and tax challenges that PSH faces, particularly for U.S. investors.
- Key man risk, a concern which quickly drops away when people understand the investment team’s depth, seniority, tenure and widespread ownership of the firm coupled with this group’s investment and third-party validation of the lack of key man risk.
- Ramp up time, that is, how long will it take for us to be near fully invested and whether will we be front run by other investors. This, of course, is helped to the extent the deal size is smaller rather than larger, and we have a lot of experience with managing this issue.
- For certain mutual funds, some hedge funds and certain other asset managers, an important concern is whether PSUS fits their mandate as some perceive PSUS as investing another manager’s investment vehicle. We have addressed this issue by analogy by comparing PSUS to Berkshire Hathaway. We make the case that if you can own Berkshire, an investment holding company that owns both controlling stakes in companies as well as public securities, then why should you not be able to invest in an investment holding company that buys minority stakes in public companies at a discount with a path to control, in a company and with a tax-exempt corporate tax structure.
The above argument wins the day for many investors, but not all. Some of the largest mutual fund complexes have passed for this reason (e.g., the Capital Group Companies). Nearly every investor who has rejected PSUS for this reason has said that they would love to invest in the management company IPO and/or a future private round for PSI.
- Post IPO Trading Dynamics and future equity issuances.
In summary, we have addressed issues one through four for the substantial majority of institutional investors, but number five remains an issue for every investor in their consideration of their participation and the size of their investment in the IPO. In that this will be a public company, the only inducement to invest in the IPO versus the after market is one’s assessment of whether the stock will trade at a premium in the aftermarket, and for a large investor, whether they can buy their desired size in the IPO or better in the aftermarket.
We have a powerful case to make for aftermarket demand. We have explained to every investor that this will not be our last public offering and that the success of this offering is critical to the long-term ability of Pershing Square Inc. to have successful future IPOs. We have committed to limit supply versus potential demand so that the stock trades well in the aftermarket including announcing a hard cap on size at $10 billion. Going against this perception is the fact that in all previous closed end fund IPOs the issuers have met 100% of the demand stock. As a result, the post-IPO trading dynamics of closed end funds are not a good reference point for what we are committing to achieve.
We have other powerful technicals in our favor that are appreciated by investors. First, this is the first global offering for a closed end entity and Pershing Square has a very large global profile in the investment world. We have been able to get an audience with the senior members of the largest and most influential investors in the world including sovereigns, family offices, mutual funds, hedge funds, etc.
Importantly, because of PSUS’s corporate structure, we are not permitted to offer the transaction to investors in the European Union, as well as institutions in Norway, Korea, Kuwait, Malaysia, markets where Pershing Square is well known and where we have many current and former investors. In addition, non-U.S. retail is not permitted to buy stock in the IPO. As a result, all of these ineligible IPO investors have to buy stock in the aftermarket when the stock begins to trade. In addition, we believe that U.S. retail will be huge source of aftermarket demand.
The nature of IPO processes is such that they are highly momentum driven and back end loaded. There are few incentives for investors to give orders until a day or so before or even hours before the transaction is finalized, particularly for the big institutions. Fidelity is notable for giving their order in the last few hours of every deal.
We have worked to counter this dynamic with incentives, namely, we are using an “open-ticket process” for the retail order book, which guarantees retail investors that they will get stock if they enter their orders prior to the close of open ticketing. Open ticketing closes today, after which point retail orders are not guaranteed to be filled. Retail orders also tend to also to be back end loaded, but we are very pleased with retail demand so far and how it is accelerating. For institutions, we have encouraged early orders by indicating that we will make more favorable allocations to those commit orders early.
The banks also play a very important role. While they are nominally fiduciaries for us on this deal, ultimately they care more about the regular IPO buyers who buy every deal more than any one issuer. They will always favor Fidelity, Blackrock and others versus us. It is therefore very important that the banks get a sense that a deal’s momentum is building as they convey that feeling of momentum to the capital markets desks of every institutional investor, and the financial advisor community also wants to hear that the institutions are interested and motivated.
We have already had some orders from a diverse group of investors including Baupost Group for $150m, Putnam, a highly regarded mutual fund complex for $40m which they indicated would grow if the transaction is smaller than $10 billion, and Teachers Retirement System of Texas for $60m which would increase if the transaction is larger. One family office that has known the firm for 15 years has expressed interest in buying 9.9% of the ultimate deal size, which they said would be “small” even at $1 billion for them. This family would be a highly strategic partner for PS Inc. , particularly for another transaction which we are working on which will share with the group. The family’s assets are in excess of $65 billion.
The Request
In light of all of the above, participation by this illustrious group is important and extremely helpful to the IPO. Three members of this group have already put in orders with the banks for $25m, $50m and $100m. In each case, their investments represent 50%, 66% and 100% of their investment in Pershing Square Inc. While we did not make it a requirement for strategic investors to invest in PSUS, our hope was that our strategic investors would find the offering highly attractive and would participate in the IPO.
In short, this is a moment when you can be very helpful to Pershing Square by participating in the PSUS offering and giving your order to the banks, the sooner the better. An order today will enable us to improve the strength of tomorrow’s initial message to the market on deal size. Orders that come later are of course still very helpful as the book will build and we create momentum over the weekend into Monday.
We have told the market that the transaction will have a hard cap at $10 billion. The typical approach is to show a small deal size to make market participants concerned that they will miss the deal if they don’t put their order in quickly. Our first prospectus filing for the Pershing Square Tontine Holdings, Ltd. IPO was $1 billion. We had $12 billion of demand and finalized the deal size at $4 billion.
I expect that we will file a prospectus tomorrow with a $2.5—$4 billion cover. The ultimate deal size will depend on how demand builds Thursday, Friday and Monday. We will price Monday night unless we have to refile due to a material increase in the size of the deal above tomorrow’s filing range.
We believe that 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. If PSUS achieves a sustained premium to NAV which I believe it will achieve, it will enable us to access low-cost equity capital when we have good uses for that capital. As a result, PSUS will compound its AUM from both performance and accretive equity issuances. In that we are not charging fees for the first year, in the short term the initial size of PSUS does not matter to PSI’s financial performance. This transaction is therefore all about a successful IPO from the first day and successful trading at a premium thereafter.
While the investment in the management company should be thought of as a long-term initially illiquid investment, we expect PSUS to be a highly liquid, NYSE-listed company which will likely trade about 1.5%-2% of its market cap each day. As such, you will have total flexibility in managing the size of your investment in PSUS over the long term.
We would grateful if you would participate in the PSUS IPO and indicate an order to the banks as soon as possible. Today would be ideal for those who have the capable to do so.
Please reach out to [***] if you have any questions about the above.
Thank you!
Sincerely,
Bill Ackman
