Bill Ackman
Christopher Goodney/Bloomberg
Bill Ackman made news last week with the disclosure that his investment firm had bought a roughly 6% stake in Domino’s Pizza and that he was “cautiously optimistic” that his special-purpose acquisition company would reach a deal to merge with what he called “an iconic, phenomenal, great business.”
Investors can play alongside Ackman through his chief investment vehicle, Pershing Square Holdings (ticker: PSH. Netherlands), an overseas closed-end fund that continues to trade at a big discount to its asset value despite solid gains in 2021 and huge returns in 2019 and 2020.
A deal for Ackman’s SPAC could boost investor interest in the fund, which trades around $36 a share, or a 26% discount to its most recent weekly net asset value of $48.78 a share.
The fund has traded at a persistently wide discount to NAV in recent years even as a revived Ackman has produced outsize returns. The fund gained 70% last year after a 58% return in 2019. The fund’s net asset value was up 7.5% year-to-date through May 11.
The fund also trades on the “pink sheets” (PSHZF) and on the London Stock Exchange, where it was added to the FTSE 100 index last year. It accounts for about 90% of the funds run by Ackman’s Pershing Square Investment Management. Barron’s has written favorably on the fund, including an article in late 2020.
The fund, with net assets of nearly $10 billion, has a concentrated equity investment portfolio that includes Lowe’s (LOW), Hilton Worldwide Holdings (HLT), Chipotle Mexican Grill (CMG), Restaurant Brands International (QSR), Howard Hughes (HHC), and Domino’s (DPZ).
The fund also offers a play on Ackman’s SPAC, Pershing Square Tontine Holdings (PSTH), because it has the opportunity to invest roughly $1 billion or more in any deal reached by the SPAC. It’s also entitled to potentially valuable sponsor warrants on the newly merged company’s shares if Ackman finds a target.
Investors have been waiting for the Ackman SPAC to reach a deal after he said in late 2020 that he expected a transaction in the first quarter. The Ackman SPAC, which raised $4 billion, trades around $24, one of the bigger premiums to its offering price among SPACs that have yet to reach a deal. Pershing Square Tontine went public last year at $20.
Jefferies analyst Matt Hose is one of the few analysts following the company and carries a Buy rating. In his last report, in February, he wrote that the fund “should intrinsically trade on a much narrower discount” but he saw limited near-term catalysts.
The fund stopped its share repurchase program this year ahead of a potential investment in the Ackman SPAC target. The fund bought back $286 million of its shares in 2020.
At The Wall Street Journal’s Future of Everything Festival last Wednesday, Ackman said Pershing Square had been working on a transaction since November for the SPAC to take a minority position in an “iconic” company. A decision on a deal should come in a relatively short time. If nothing materializes, Pershing Square will move on to something else, he said. Ackman cited the “complexity” of the transaction for the long negotiations. The size of the target could be in the range of $15 billion to $30 billion.
Ackman added that Pershing Square had taken a nearly 6% stake in Domino’s after its shares were hit earlier this year. “The stock got cheap for about five minutes,” Ackman said, adding that the firm started buying around $330 a share. Domino’s now trades around $430.
Ackman said he had long admired Domino’s franchise model and its efficient delivery system, which doesn’t depend on outside companies like DoorDash (DASH). Ackman added that his firm had sold its stake in Starbucks (SBUX) after its stock rose sharply.
Pershing Square Holdings is favored by the Matisse Discounted Closed-End Fund Strategy (MDCEX), a mutual fund, because of Ackman’s strong investment performance in the past few years and the large discount on the fund. U.S. closed-end funds tend to trade at discounts of under 10%.
Ackman owns about 21% of the fund, a stake now worth around $1.5 billion. The fund has a hedge-fund style fee structure, with a base fee of 1.5% annually and an incentive fee of 16% of gains subject to a high-water mark.
The continued big discount on Pershing Square Holdings could reflect a legacy of Ackman’s poor showing a few years ago, the high fee structure, and the European listing. It’s an oddity, a European-listed fund that invests in U.S. stocks. Many U.S. investors aren’t aware of it.
Ackman had a poor stretch from 2015 to 2017, when Pershing Square Holdings’ net asset value fell about 30% and trailed the S&P 500 by around 60 percentage points.
One drawback is that the fund is classified as a passive foreign investment company, which requires U.S. holders to file an IRS form 8621. This could cause some tax hassles for investors.
The fund’s obscurity could change if Ackman finds an attractive target for his SPAC and if investors view the fund as an appealing way to play that deal as well as his concentrated stock portfolio.
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