Behind Bill Ackman’s $4 Billion Day

The year of the coronavirus may turn out to be the best one yet for hedge fund mogul Bill Ackman, who spoke with Institutional Investor after he scored another coup Wednesday when his Pershing Square hedge funds sponsored an initial public offering of a $4 billion special purpose acquisition company. 

Pershing Square Tontine Holdings, as it is called, is the largest-ever SPAC — also known as a blank check company because it’s simply a publicly traded receptable for the cash that eventually will be used to buy a private company, allowing it go public without all the trouble and risk associated with such efforts. 

“We designed Tontine to be the most efficient way for a large, high-quality growth company to go public, and our shareholders have bought into that plan,” Ackman said in an interview after the IPO launched Wednesday.

While SPACs have become the rage among hedge funds, Tontine’s huge popularity is also a reflection on Ackman’s rising stature this year, which added to investors’ willingness to give him so much money to play with.

“He’s a courageous investor, is willing to be bold, and he finds a way to win,” says Chamath Palihapitiya, whose Social Capital has also launched three SPACs, including one that bought Richard Branson’s Virgin Galactica and is now up about 150 percent since its launch in March of 2019.

“I admire [Ackman] and hope he crushes it,” Palihapitiya said.

Tontine’s launch comes as Ackman’s biggest hedge fund, the publicly traded Pershing Square Holdings, has gained 34.7 percent in 2020, thanks in large part to a $2.6 billion profit on a big CDS short bet he made in February. That investment was timed perfectly, as markets tanked on Covid-19 fears in March — and may have set another record, based on return on the time value of money.

[II Deep Dive: Bill Ackman Explains Himself as Pershing Square’s Portfolio Soars]

As was the case with that investment, timing looked to be on Ackman’s side for Tontine. He got the IPO off the ground at a time when the markets are still fairly buoyant, but Ackman says he is cautious about the next nine months. The surge of coronavirus across the U.S., the lack of a vaccine, the sluggishness of the economy, protests in the streets, and a high-stakes presidential election all make the market environment volatile.

“Uncertainty is the enemy of the initial public offering,” Ackman told II.

Tontine is the 14th largest IPO of a U.S. domiciled company —  and it is destined to get bigger. With about $2 billion sitting in cash, thanks in part to the sale of its $1 billion stake in Berkshire Hathaway this spring,  the $10.5 billion Pershing Square has also committed to adding another $1 billion to $3 billion to the SPAC. 

That will give Tontine at least $5 billion to buy a minority stake in a private company that will automatically be publicly traded once the merger is completed.

Units in Tontine rose 6.5 percent in its first day of trading, closing at $21.30 from an offering price of $20 per unit. The deal was oversubscribed three times, to $12 billion, according to people familiar with the IPO who attribute the heightened investor interest to an unusual feature: Pershing Square eschewed the hefty benefits sponsors of such vehicles typically take.

“It’s the first SPAC in history without compensation to the sponsor,” a person familiar with the deal noted. “In every other SPAC the sponsor gets 20 percent of the company if they do a deal.” 

Instead, Pershing Square has purchased warrants for $65 million, which give it the right to buy up to 5.9 percent of the company for $24 a share — but only three years after Tontine closes on a deal.  

Other terms, like investor warrants, incentivize investors not to redeem, thereby encouraging those with a long-term investment horizon.

There have been four IPOs in the past ten years that have raised more than $5 billon: Alibaba, Facebook, GM, and Uber. With the additional $1 billion from Ackman, Tontine will be a rare opportunity for investors to join that club. 

Having $5 billion to invest if the market tanks also puts Tontine in an enviable position.

Moreover, the SPAC offers a unique way for Pershing Square’s investors to invest in private companies, which have earned many hedge funds big profits in recent years. Pershing Square has missed that windfall, as its funds’ terms do not allow investments in private companies — a holdover from the troubles that befell Ackman’s first hedge fund, Gotham Partners, when it got stuck in illiquid private holdings and shut down.

With the SPAC structure — which Ackman used once before when he took Justice Holdings public and bought a minority stake in Burger King — the funds get in on the ground floor of a private company as it goes public.

SPACs have become exceedingly popular in recent years, and some, like the one done by Social Capital, have done spectacularly well.

But a few recently have sputtered, showing the downside. In 2018 Dan Loeb’s Third Point and former New York Stock Exchange President Thomas Farley raised more than $600 million for a SPAC called Far Point Acquisition Capital. 

Last year it signed a $2.6 billion merger deal with Silver Lake-owned Global Blue, a Swiss payments company that enables tourists to purchase goods internationally tax free. But when Covid-19 killed international tourism, Far Point asked investors to vote against the merger.

The good news for investors in all SPACs is that once a deal has been identified, the investors can get back their initial capital with interest if they don’t like it.