Bill Ackman’s Closed-End Fund Offers Another Way to Play Universal Music. And It’s Cheap.
Bill Ackman
Bryan Bedder/Getty Images for The New York Times
Pershing Square Holdings, a European-listed closed-end equity fund run by Bill Ackman, will emerge as a sizable shareholder in Universal Music Group as part of Pershing Square Tontine Holdings’ $4 billion deal to buy a 10% stake in the music publisher.
The little-known Pershing Square Holdings (ticker: PSH. the Netherlands) is Ackman’s largest investment vehicle. It should hold just over $1 billion of Universal Music Group, or about 10% of its net assets of around $10 billion.
Unlike the better known Pershing Square Tontine Holdings (PSTH), the Ackman special-purpose acquisition company, the closed-end fund trades at a big discount to its NAV. The SPAC, which fetches around $23, trades around its NAV, depending on how its complex pieces are valued.
Pershing Square Holdings shares trade around $36, a 27% discount to its most recent weekly net asset value of $49.41 on June 22.
U.S. investors can buy Pershing Square Holdings on Euronext, the London Stock Exchange, or through a U.S. Pink Sheets listing under the ticker PSHZF. The U.S. shares offer reasonable liquidity with an average daily volume of about 50,000 shares in the past three months. Some brokerage firms, however, restrict the ability of U.S. investors to buy shares of the fund because of its offshore status.
Pershing Square Holdings will also invest about $400 million, for a roughly 25% interest in Pershing Square Tontine, which will retain about $1.5 billion for a future deal.
Pershing Square Holdings has a concentrated portfolio of about 10 stocks, including Lowe’s Cos. (LOW), Hilton Worldwide Holdings (HLT), Chipotle Mexican Grill (CMG), Howard Hughes (HHC), and Domino’s Pizza (DPZ).
Pershing Square Holdings is favored by Bryn Torkelson, the chief investment officer of Matisse Capital. Matisse runs the Matisse Discounted Closed-End Fund Strategy (MDCEX), which invests in cheaply valued closed-end funds. Pershing Square Holdings is the largest investment in the $350 million fund that has returned about 20% so far in 2021.
“Ackman is a premier manager and he gets a 27% discount. It’s kind of crazy,” Torkelson says. Ackman is coming off two phenomenal years in 2019 and 2020, when Pershing Square Holdings returned 70% in 2020 based on its NAV after gaining 58% in 2019.
So far in 2021, it’s up 9%, a few percentage points behind the S&P 500 index.
Torkelson notes that Ackman hedged the portfolio with credit-default derivatives before the pandemic, which offset equity losses during the market downdraft last March.
“He’s one of the few managers who hedges. How many managers last year when Covid hit had hedged their portfolios perfectly?” Torkelson says.
U.S.-listed closed-end equity funds recently traded for a median discount of 9% to NAV and the discount on all U.S. closed-end funds including bonds is just 2% amid a general narrowing of discounts this year.
This makes the 27% discount on the Ackman fund an outlier, even relative to Third Point Investors (TPOU.UK), a smaller offshore closed-end fund run by investor Dan Loeb’s Third Point that traded recently at a 14% discount to NAV.
The big discount on the Ackman fund could reflect its weak performance from 2015 to 2017, a relatively high hedge-fund style fee structure of 1.5% annually and 16% of the profits, and its unfamiliarity among U.S. investors. Ackman is a believer and is the largest holder of Pershing Square Holding with a 21% stake worth $1.5 billion.
Pershing Square Holdings held sponsor warrants along with other funds run by Ackman’s Pershing Square Capital Management on any deal that Pershing Square Tontine reached but it won’t get to exercise them in the Universal deal.
“While the waiver of the sponsor warrant on the UMG share purchase is mildly disappointing, PSH’s investment in Tontine will likely benefit from an attractive sum-of-the-parts valuation,” wrote Jefferies analyst Matt Hose, who has a Buy rating on the fund.
The fund and other Pershing Square entities will hold warrants for a possible future deal by Pershing Square Tontine.
The deal with Universal Music disappointed some Pershing Square Tontine holders who wanted a merger deal with a leading private company like Bloomberg or the candy maker Mars.
One drawback with Pershing Square Holdings is that it 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.
But the big discount on the fund and the opportunity to invest with a resurgent Ackman could outweigh that.
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