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Activism for the masses

19 April 2012 By Neil Unmack, Jeffrey Goldfarb

Bill Ackman looks decidedly closer to the holy grail of permanent capital. The founder of activist U.S. hedge fund Pershing Square Capital Management is planning a London-listed vehicle with a market value of at least $4 billion. That would dwarf other public funds, many of which trade at a big discount to net asset value. Ackman’s scale, plus some fee sweeteners, may give him an edge. And his focus on easily priced bets could minimize the NAV problem.

The initial public offering of a new fund, which would invest in Pershing Square’s offshore hedge funds, next year is designed to let Ackman do more of what he does best. The bulk of his 22 percent annualized net return over the last eight years comes from successfully agitating at companies like JCPenney and Fortune Brands. By tapping the market, he wouldn’t need to keep half his assets in cash and other liquid investments, as he does now to accommodate investors who want to exit.

But listed alternative asset funds haven’t always worked out for shareholders. The vogue for them in the pre-crisis boom spawned some disasters. Some now trade at a premium to NAV, for example infrastructure funds and Brevan Howard-managed vehicles. But London-listed hedge funds and funds-of-funds trade at a 7 percent and 15 percent discount on average, respectively. The closest thing to Ackman’s strategy – activist Dan Loeb’s Third Point fund – was trading recently at a 16 percent discount to NAV.

Ackman may have more to offer, though. First, the listed fund’s sheer size should create a more liquid investment than most funds provide. Second, there’s a novel fee structure. To entice existing investors to make the switch, Ackman is slashing his performance fee from 20 percent to 16 percent. Investors in the listed fund also will share 20 percent of Pershing Square’s incentive fees. Finally, Ackman’s investments are unlevered and in public stocks, making them easier to value. That could help narrow the traditional NAV gap.

The history of publicly traded hedge funds isn’t on Ackman’s side, as he tries to persuade investors to buy in. But he also hasn’t ignored the industry’s past, which may help spare the fund from repeating it.


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