The billionaire American hedge fund manager Bill Ackman surprised the market this week after he decided to withdraw the initial public offering (IPO) of a new fund after experiencing weak demand from prospective investors.

Ackman initially aimed to raise $25 billion for its brand new Pershing Square USA fund but soon cut his target to just $2 billion after key investors pulled out and demand started to wane.

ackman's ipo would have surpassed the entire proceeds obtained by ipos this year

The fund’s ambitious vision involved the creation of a Berkshire-Hathaway-like investment vehicle that would hold annual meetings like the ones Warren Buffett organizes for his shareholders and that could eventually be added to the S&P 500.

Ackman hoped to capitalize on his recent popularity on social media where he managed to amass over one million followers – primarily retail investors – and saw an opportunity to create a vehicle that would allow ordinary investors to leverage the successful strategies he has implemented at his hedge fund – Pershing Square Holdings.

If successful, the fund would have attracted more money than all of the combined initial public offerings (IPO) completed so far in 2024 according to data from Renaissance Capital.

Ackman Sold a Stake at Pershing to Invest in the New Fund

Ackman made several strategic decisions heading up to the IPO including selling a stake at his hedge fund valued at approximately $1 billion and intended to use some of the proceeds – around $500 million – to invest in Pershing Square USA.

It is common for hedge fund managers to have some “skin in the game” as this aligns their interests with those of their investors.

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The fund would primarily invest in Ackman’s “value picks”, which are handpicked companies that he scrutinizes to determine if they are undervalued from a fundamental standpoint.

Ackman’s approach is similar to that of Buffett and other successful value investors. It has made him a celebrity in the financial industry for producing attractive returns for investors over time.

The new entity would be structured as a closed-end fund, meaning that it would only sell a limited number of shares to the public.

Ackman Made Some Rookie Mistakes that Cost Him the Support of Key Investors

Despite Ackman’s recently gained celebrity status and his optimism and grand vision, the IPO faced challenges from the get-go.

One of the most significant obstacles was weak interest from prominent investors. This was evidenced by his decision to slash the fund’s initial capital raise target by around 90%, from $25 billion to a mere $2 billion.

According to sources who were pitched by Ackman, he disclosed unnecessary details about the fund’s scope and reach and provided names of people who had already committed to put money down.

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Moreover, a letter sent to investors that should have been kept private was disclosed in an SEC’s securities filing and put Ackman in the spotlight as he was forced to push back the date of the IPO by a week or so.

Ackman’s claim that the fund would trade at a premium of its net asset value (NAV) was also criticized as his other funds trade at a discount and are not listed in the United States as this new fund intended to.

Meanwhile, the last nail in the coffer came after the Baupost Group, a key investor that Ackman listed as one of the fund’s top backers pulled out from the deal. The hedge fund manager had already pledged publicly that he had their support and his credibility was undermined by the situation.

As investors jumped off the boat, Ackman had to ultimately scratch the offering yesterday.

“While we have received enormous investor interest in PSUS, one principal question has remained: Would investors be better served waiting to invest in the aftermarket than in the IPO? This question has inspired us to reevaluate PSUS’s structure to make the IPO investment decision a straightforward one. We will report back once we are ready to launch a revised transaction,” Ackman wrote in an X post.

Ackman acknowledged that the lack of interest in the fund prompted him and his team to revise its structure. He hinted that he would revisit the offering and come up with a better one in the future.

What Went Wrong? A Disadvantageous Structure and Odd Fees

Despite the IPO’s withdrawal, it’s worth examining the proposed structure and value proposition of Pershing Square USA, as these details could provide insights into Ackman’s vision and the reason for the challenges he faced.

Pershing Square USA was designed as a closed-end fund, which means that it would sell a fixed number of shares to the public. This structure can sometimes lead to shares trading at a discount to the net value of the fund’s holdings – a concerning aspect that probably contributed to investors’ hesitation.

Meanwhile, the fund was intended to mirror Ackman’s main stock-picking fund, focusing on 12 to 15 different companies with strong balance sheets and competitive advantages. The target companies would have to be attractively valued and relatively insulated from macroeconomic conditions, interest rate volatility, commodity prices, and regulatory risks.

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In an attempt to attract investors, Ackman proposed an unusual fee structure. He planned not to impose any performance fee for his services, which typically amount to 15% to 30% of a hedge fund’s annual gains. Instead, only a 2% management fee would be applied, which he offered to waive for the first 12 months.

Ackman promised greater transparency than what investors typically get from actively managed funds. PSUS would aim to publish a weekly list of the value of its net assets, contrasting with the monthly or quarterly updates provided by most funds. Meanwhile, to align his interests with those of his shareholders, Ackman’s Pershing Square Capital Management planned to invest $500 million in the fund that would be locked up for 10 years.

As Ackman regroups and considers his next move, the investment community will be watching closely. Whether he can learn from this experience and successfully launch a revised version of PSUS remains to be seen. Regardless of the outcome, this episode will likely be remembered as a significant moment in Ackman’s career and a notable event in the history of hedge fund IPOs.The incident will surely be remembered as a notable event in Ackman’s career.