04/18/2012

Pershing Square Details Plan for Listed Fund

Pershing Square is moving ahead with plans to offer an exchange-listed hedge fund, but first it must raise at least $3 billion of private capital to fund initial investments.

In an email to prospective investors late last month, the New York firm provided more detail about a novel plan to hold an initial public offering for a vehicle that would pursue activist plays — the specialty of Pershing Square founder Bill Ackman. Earlier versions of the plan led some investors to question whether the offering would be sufficiently large to ensure daily trading liquidity. In response, the firm added a provision to the fund’s offering memorandum guaranteeing that it would raise a minimum of $3 billion of private capital prior to any public offering.

The offering itself would have to raise at least $1 billion. Accordingly, when shares of the fund begin trading, it would have at least $4 billion of assets — making it “by far the largest closed-end hedge fund admitted to trading on a major exchange,” Pershing Square said. The vehicle, Pershing Square Holdings, would trade on the London Stock Exchange.

Once the fund is listed, original investors presumably would exchange their private shares for public shares. The $11.2 billion firm has scheduled a “town hall” meeting in London on April 23 to address other questions investors may have.

The fund is set to land its first subscriptions and begin investing around July 1 — more than a year after Ackman initially proposed launching an exchange-listed vehicle. Activist investments are long-term plays requiring stable sources of capital. A public floatation effectively would give Pershing Square a pool of permanent capital to invest alongside its flagship vehicle, allowing the firm to increase the number of deals it targets. Other fund operators, including Greenlight Capital and Third Point, have turned to the reinsurance business to provide reliable sources of capital.

Pershing Square’s email suggests some investors remain cool to the idea of an exchange-listed fund. A likely concern: Many listed hedge funds trade below their net asset values. Indeed, one hedge fund investor said he’d only consider buying shares of Pershing Square’s fund if he can pick them up for a discount after they begin trading.

To attract private capital, the fund is offering a discounted performance fee of 16% of gains, compared to Pershing Square’s usual 20% take. Limited partners will be permitted to withdraw up to one-eighth of their investments per quarter — the same liquidity terms that apply to Pershing Square’s other vehicles. If a stock offering doesn’t materialize within four years, then the performance fee would rise to 20%.

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