The Journal. - $25 Billion to Zero: Bill Ackman’s Bungled IPO

Episode Date: August 8, 2024

Bill Ackman has pressed pause on the initial public offering of a new fund aimed at everyday investors after a lack of demand. Ackman originally aimed to raise around $25 billion in the offering, hoping to capitalize on his social-media celebrity but his fund goals shrunk dramatically. WSJ’s Peter Rudegeair unpacks what happened.  Further Reading: -Can Bill Ackman Turn Social-Media Stardom Into a Blockbuster IPO?  -What Bill Ackman Got Wrong With His Bungled IPO  Further Listening: -The Life of One of Wall Street’s Greatest Investors  Learn more about your ad choices. Visit megaphone.fm/adchoices

This year, a storied Wall Street investor had a big plan. He was going to raise money in what would be the largest IPO of the year. The investor was Bill Ackman. So Bill Ackman is a hedge fund manager. He made a name for himself as somebody who takes small stakes in big companies and tries to agitate for change. That's our colleague Peter Rutegeer. He likes to take a position. He's very outspoken. And he thinks he's right. And he wants to argue with people who think he's wrong. And that willingness to argue and to stick to a position, I think, endears him to a lot of supporters.

More recently, he's kind of fashioned himself as a stock picker, as identifying undervalued stocks in kind of the Warren Buffett style and being able to get in early and ride them higher. Ackman's IPO was for a new investment fund he wanted to create, called Pershing Square USA. The idea was to let ordinary investors capitalize on his stock picks through the fund and build a community like Buffett's Berkshire Hathaway, complete with a splashy annual meeting. Then, to drum up even more excitement, Ackman announced the target for the fund's IPO.

And how much money did Ackman want to raise? So Bill initially told people he wanted to raise as much as $25 billion for this fund, which is just a gargantuan amount of money for any type of stock picking fund. $25 billion. It was the kind of bombastic move Bill Ackman is notorious for making. But in just a few months, his lofty ambitions came crashing down. Bill Ackman pulling the plug on his IPO dream of that closed-end fund after his fundraising targets plummeted in just weeks.

Pershing Square is planning to withdraw the IPO of PSUS. Go from 25 to 4 to 2 billion to zero. How did this happen? Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Thursday, August 8th. Coming up on the show, how Bill Ackman's $25 billion dream imploded. business. Because at TD Insurance, we understand that your business is unique. So your business insurance should be too. Contact a licensed TD Insurance advisor to learn more. When it comes to picking stocks, how would you describe Bill Ackman's record? Really good. If you look at the last five years, call it 2018 to 2023, I think his fund has annualized

a return of something in the neighborhood of 30 percent. So that's about double what the S&P has done, including dividends, over that same period of time. So by any measure, he's a successful hedge fund manager. Ackman's main gig is founder and chief executive of the hedge fund company Pershing Square Capital Management. And Ackman loves being in the spotlight. He's a big fan of Elon Musk and regularly posts on X, where he has nearly 1.4 million

followers. What sets Bill Ackman apart? I think Bill knows how to tell a really good story and, again, knows how to get attention for himself. Now we're joined by Bill Ackman, founder and CEO of Perthian Square Capital Management. You've seen him on TV for decades. I think it was around the pandemic where he really started to lean into social media and his Twitter account. Most recently that was on display with the campus protests in Harvard and MIT and Penn, Bill was very outspoken. Bill Ackman calling out his alma mater yet again,

writing a letter to the university's president to take immediate steps to reduce anti-Semitism on campus. He thought campus presidents had to go, that they were failing in their duties to safeguard Jewish students, to combat anti-Semitism on campus. And two of those presidents eventually resigned. I think he takes credit for some of that, or at least shining a spotlight on it.

But it really speaks to him's ability to insert himself into any argument and get people to pay attention to him. Ackman thought he could leverage that kind of attention for his new investment fund and pave the way for a blockbuster IPO. So we learned in February that Bill wanted to start what's called a closed-end fund in the United States. And so this is a fund that everyday investors, you or I, could go into their brokerage account and buy shares in. Historically, hedge funds are only for the wealthy or for university endowments, other institutional investors. And Bill wanted to do a fund that mimicked that kind of strategy, but made it available to everyday people.

The trouble if you're a hedge fund manager is that your investors can ask for their money back pretty regularly, and you are obligated to give it to them. That kind of hampers your ability as a hedge fund manager to keep being a hedge fund manager, because if you have a string of bad performance, all your investors ask for their money back, you have to close up shop. In a closed-end fund, investors who want to pull their money have to sell their shares on the open market, rather than asking for their money back. That would mean more permanent capital for Ackman.

In exchange, investors would benefit from his stock picking expertise. But to make a $25 billion IPO, Ackman needed a huge amount of buy-in, especially from established investors. So he made the rounds with his pitch. What we're doing here is really democratizing access to the Persian Square strategy in a very broad way. And we can have investors who buy one share, we can have investors who own millions of shares and all get the same outcome. I think he took over 150 meetings. You sent a couple of tweets about where you can find the prospectus and other documents

for it. I should say that a big part of this pitch was that Bill is going to use his social media audience to engage with investors, to draw attention to the fund, to draw attention to investments, and just generate interest and liquidity for shares of the fund. That was a huge part of why he was making the case you should invest in Bill Ackman because he has this retail following. People will be interested in the stock, get it on day one because it might be more expensive tomorrow. And this is a typical thing

that people do leading up to an IPO, right? Yeah, it's a typical thing for an IPO of a company, a tech startup or any operating company. Closed-end funds do have public offerings and road shows itself, but Bill is really trying to convince everyone that this is not just a closed-end fund. This is a special company that you want to be a part of from the beginning. He talked about making this fund a part of an index, like the S&P 500. You think the S&P 500, you think the commanding heights of American capitalism and railroads and banks and telecom companies.

You don't think of a hedge fund firm with 40 employees and a stock picker at the side of it. So Bill was trying to generate excitement for this fund launch by comparing it to just another public company and a very exciting one that you should buy into from day one. But many of the people he was pitching to were skeptical. One major concern, because investors couldn't ask

for their money back, the only way for them to cash out would be to sell their shares in the fund at market price. But closed-down funds tend to trade at a lower price than the net value of the investments they hold. That's called the discount. And the question is, why would I pay $50 for a share of this company in IPO if it's going to trade $45 a couple weeks later. Right. It's like I'm not putting my money into something that will lose me money almost immediately. Immediately. Right. You don't generally do that. Another issue is that a lot of major IPO investors already have their own funds. Think about it. If I'm a mutual fund manager, it's my job to pick stocks. Why would I buy

a stock that is just somebody else picking stocks? Right. And I'm paying fees on fees because of that. Another is, you know, Bill Ackman is Pershing Square, Pershing Square is Bill Ackman. That's the perception in the market. If Bill Ackman gets hit by a bus tomorrow, can Pershing Square, can this fun continue? And he tried to make the argument that this is a team sport, that he has a deep bench behind him, that it's not the Bill Ackman show, and investors may or may not have been convinced by that. And recently, the stock market has been all over the place, which didn't help Ackman's

campaign. So the markets have totally been rocky, and Bill has been on the losing end of that. So one of his biggest positions is in Universal Music Group, the record label. That position lost on paper, I think, over a billion dollars in one day after they reported some results that the market didn't like. So, you know, there is some concern around the economy, the markets, or valuation's too rich. That's going to be a difficult time to launch a new fund. So the response from potential early investors was tepid.

Eventually, Ackman pared back expectations. He went from trying to raise $25 billion in his IPO down to $10 billion. And then Ackman made a big mistake. That's next. So what's it like to buy your first cryptocurrency on Kraken? Well, let's say I'm at a food truck I've never tried before. Am I gonna go all in on the loaded taco? No, sir. I'm keeping it simple. Starting small. That's trading on Kraken.

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and usage accessories sold separately. In his quest to raise money for his IPO, Bill Ackman turned to shareholders of his main hedge fund company. These shareholders are a mix of institutions and super wealthy people. Last month, Ackman sent them a letter urging them to invest in his new fund.

And the letter is laying out the entire argument he's making for the size of the IPO. It's listing some of the names of the investors that are gonna participate in an IPO and kind of urging these shareholders to put the orders in ASAP because he needs to show momentum going into the final closing of the books. In the letter, Ackman also said that he expected to raise around $2.5 to $4 billion, way lower than even the the 10 billion that he'd already cut back to. These types of details are usually closely guarded. Ackman wrote the letter thinking it would stay private. But the letter was made public in an SEC filing after lawyers determined that it needed to

be made available to other potential IPO investors. It's remarkable in a number of ways. One, you don't typically disclose the identity of your IPO investors if they don't want to be disclosed. Second, he reveals that the $25 billion number, as opposed to drawing a lot of interest from investors, actually was a point of concern. That it was too big, that maybe all demand, all orders would be filled, and no one would want to buy the stock on day one. demand, all orders would be filled, and no one would want to buy the stock on day one. Ackman hasn't publicly commented on the letter. That blunder pushed the IPO back another week. It also meant that Ackman had to regroup. He lowered his expectations for the fund even more, bringing it down to $2 billion.

A day after the filing that the $2 billion target is made public, we learn the whole thing is off. Bill put out a press release saying we're withdrawing the IPO. We're going to rethink the structure. We're going to come back when we have something that we think will address investors' concerns, particularly around how will this trade better than other similar funds have traded in the past. The IPO is officially dead, at least for now. how will this trade better than other similar funds have traded in the past? The IPO is officially dead, at least for now.

At what point did this plan go off the rails? Was it sort of like ill conceived from the start? What happened here? I think it was hard to live up to the expectations that Bill set initially. I think his argument was this number, this $25 billion number will excite people and will get them interested in this and they'll want to be a part of something big and important. And I think what happened was a lot of people were scared off by that number. They thought it was too big.

So let's imagine a world in which Bill did not put that number out there, said that right before the thing went public, we're going to raise $2.5 to $4 billion. That still would have been one of the biggest fund launchers of its kind ever. I don't know if it would have played out the same way had he not set expectations too high. So how bad is it for Bill Ackman? Are there any repercussions for him, for his reputation? I think he's definitely smarting from this. Now, he has said he's gonna come back. Bill has rebounded in the past when a lot of folks have counted him out. So I don't want to say that he won't be able to recover from this. It's pretty remarkable.

I can't think of another offering that went from 25 billion to 10 billion to 2.5 billion, 2 billion to zero. That is just a remarkable path. Peter, why is the story important? Like, what are the lessons here? I think in the past couple of years, we've seen this wave of, call it like, investing influencers on social media, right? So we've always had investors that have had wide followings among individuals. Warren Buffett, Peter Lynch at Fidelity. What you saw a few years ago was people who really tried to harness their Twitter followings to corral them to join them in investments.

Bill is kind of the latest in a line to do that. Bill is more successful originally than a lot of those folks and tried to corral that reputation he had. Trust me with your money, we'll be able to help each other out here. I think it's just to be decided whether that is actually a successful strategy or not. For every Trump media company or Tesla, which has a huge retail following, and that following has allowed the company to weather ups and downs at business performance.

There are companies like GameStop and AMC that have really disappointed shareholders with their ability to turn that retail following into a money-making business. So we still need to see a success story in this influencer, investor class. So it sounds like the jury is still out. I think the jury is still out.

We'll see what Bill Ackman can do. That's all for today, Thursday, August 8th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.