2020 was the year of the special purpose acquisition company (SPAC). This alternative way of taking companies public led to thrilling results, as numerous SPAC stocks tripled, quadrupled, or soared even more after their respective launches. Not surprisingly, superstar investors don’t want to be left out. Thus, they’re offering their own SPACs. Bill Ackman is one of the prominent folks doing this via his Pershing Square Tontine Holdings (NYSE:PSTH), letting interested investors buy via PSTH stock.
Pershing Square, for those unfamiliar, is the hedge fund that Ackman manages. This Tontine structure is separate from the parent hedge fund and is designed to buy an individual company, just as other SPACs do. Journalists have reported rumors that Pershing Square Tontine was interested in media giant Bloomberg or other financial properties, though there’s no official word on what Ackman will end up buying as of yet.
As such, PSTH stock represents one way to bet on Ackman. If you have confidence in his decision-making, it makes sense to invest alongside him in Pershing Square Tontine. Most individual investors are not able to invest in high-end hedge funds such as Pershing Square directly, so the idea of riding along in an Ackman SPAC sounds good.
However, there is an interesting wrinkle here that prospective buyers should consider. Because if you like PSTH stock, there’s something else you’re probably going to love.
Ackman’s Pershing Square: A Publicly Traded Stock
It’s well known that hedge fund managers are streaky. They’ll have a few good years, bring in a ton of capital, and then make some major blunders. When they do, investors bail out of the fund and you get a downward spiral. Ackman was smart enough to foresee this possibility while he was riding high. Accordingly, he offered a closed-end fund (CEF) to the public to invest in his hedge fund directly.
CEFs, unlike exchange-traded funds (ETFs), have a fixed number of shares outstanding and invest in a certain basket of stocks or assets. By not regularly creating or redeeming shares — unlike ETFs — CEFs have more autonomy to invest in illiquid, unusual, or out-of-favor assets. Ackman’s CEF Pershing Square Holdings Ltd. (OTCMKTS:PSHZF), in turn, invests in the Pershing Square fund.
By buying PSHZF stock, investors are entitled to ownership of a share of the overall Pershing Square hedge fund’s results. Here’s the interesting angle to it. Because investors can’t redeem shares at any time at net asset value (NAV) as they can with ETFs, the price of CEFs often deviates from the value of their underlying assets.
Pershing Square Is Trading at a Huge Discount
As of Dec. 31, 2020, the Pershing Square CEF — aka PSHZF stock — had a NAV of more than $45 per share. Meaning each share you purchased was backed by more than $45 of stock securities and financial instruments in the Pershing Square hedge fund. Included in that investment, of course, is Pershing Square’s stake in its Pershing Square Tontine SPAC that has garnered so much attention.
Thanks to clever deal-making, Pershing Square has a favorable structure setup and should receive disproportionate upside via kickers such as warrants if the price of PSTH stock really pops after a deal is announced. And the perks last a long time. The warrants, in fact, would give the Pershing Square hedge fund the ability to buy nearly 6% of the SPAC near today’s price over the next decade, regardless of how high shares go in the interim.
You can see how this favors the hedge fund and related CEF owners rather than the Tontine investors. Just stop and think what 6% of a potential acquisition might be worth in a decade, and that value accrues to the Pershing Square hedge fund holders. Yet, despite holding $45 of assets per share including the juicy SPAC exposure, the Pershing Square CEF is trading at just $36 now. That’s a solid 20% or so discount to the actual assets there and is available to any investor with access to pink sheets-listed stocks.
By Contrast, Pershing Square Tontine Is at a Premium
The flip side of this is that PSTH stock has already surged. Ackman’s SPAC debuted at $20 per share. Note that this is different from the vast majority of SPACs, which have a base $10 unit price. So with the SPAC up to $26 now, investors are paying 30% over fair value for Pershing Square Tontine without even knowing what company Ackman is eventually going to purchase with the money. He’s said he wants to buy a so-called “mature unicorn,” but details are still sparse beyond that.
There’s nothing necessarily wrong with paying a premium, by the way. Ackman is hot again. In 2020, his Pershing Square hedge fund delivered a 70.2% increase in the net asset value of its capital. That’s simply breathtaking. Off the March lows, the publicly traded CEF — PSHZF stock — has nearly tripled. In any case, investors are paying far more for Ackman’s SPAC rather than Ackman’s overall investment portfolio.
PSTH Stock Verdict
Look, if Ackman makes a good purchase for the SPAC, everyone is going to earn a strong profit. I have no problem whatsoever with the concept of owning the Pershing Square Tontine Holding stock. There’s a decent chance PSTH will pop a lot more once Ackman announces the deal.
However, I do think investors should give serious consideration to the Pershing Square CEF instead. If you want to bet on Ackman, you get his whole portfolio at a 20% discount to its fair value. And that includes a substantial chunk of exposure to the SPAC as well.
A rising tide lifts all boats; if Ackman scores on this one, both shares should rally further. However, PSHZF stock is a more compelling option among the two. After all, if you want to buy an Ackman vehicle, would you rather pay a 30% premium to its current net asset value in the Ack-SPAC, or buy Ackman’s hedge fund at a 20% discount? The choice seems clear.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
