Bill Ackman Has a New Investment. And He’s Still Working on That SPAC.

Bill Ackman’s Pershing Square Capital is coming off of a big year — and 2022 looks to be another doozy.

Investors can expect to learn about a new investment along with a decision on both Pershing Square’s beleaguered special purpose acquisition company and a new instrument Ackman has designed as an alternative to a SPAC, which is awaiting approval by the Securities and Exchange Commission. 

In last Friday’s annual investor meeting for Pershing Square Holdings, Ackman revealed that late last year the firm began to make another big investment that the firm is still building. He did not disclose the name. The investment even predates Pershing Square’s new stake in Netflix, which was made during the depths of January’s stock market downturn.

Ackman’s newest investment team member, Manning Feng, who joined Pershing Square in September from Warburg Pincus, will present the idea when it becomes public, Ackman said. Feng, the first female member of the group, was among those involved in the idea and “did great work,” he added.

The hedge fund manager also laid out last year’s winners and losers during the meeting. Last year Pershing Square Holdings netted a 26.9 percent gain, which helped the publicly traded hedge fund deliver a 50 percent annualized net return over the past three years. This year has started off a little rougher; the fund is down 8.2 percent as of February 8. (The net annualized return since inception of Pershing Square Holdings, and its predecessor, in 2004 is 17.4 percent.)

Last year, news about Pershing Square was dominated by turmoil around its SPAC — Pershing Square Tontine, the hedge fund’s subsequent investment in Universal Music Group, and its proposal for a newfangled instrument, called a SPARC, for special purpose acquisition rights company. 

But the investment that was the biggest contributor to 2021’s gains — home improvement retailer Lowe’s — got little notice.

Pershing Square Holdings made 10.8 percentage points of gross return on Lowe’s, followed by Universal Music, which earned it 8.7 percentage points, according to a report released at the annual investor meeting. 

Later in 2021, it became clear that Ackman’s view on inflation, and the subsequent rise in interest rates, were also paying off big. The fund’s investment in interest rate swaptions came in third, with 7.7 percentage points of gross return.

Ackman swore off short selling after his bruising, and unsuccessful battle, against Herbalife. But the asymmetrical short-biased derivatives bets that initially made him famous have continued to fuel returns.

In late 2020 through earlier this year, Pershing Square bought out-of-the-money, two-year and 10-year swaptions betting on a rise in interest rates. Ackman said he had believed both fiscal policy and monetary stimulus surrounding Covid-19 were bound to lead to a surge in inflation once the economy began to recover.

The investment cost $188 million and earned $1.4 billion when the fund cashed out most of these bets. The fund used the proceeds to make the Netflix investment.  

Although the return was substantial — at a 7.4 multiple of capital — it wasn’t as spectacular as two prior derivatives plays, as he laid out in the annual meeting. Pershing Square bought CDS (credit default swaps) on bond insurers, primarily MBIA, between 2005 and 2009, earning a 18.5 multiple of capital and $1.2 billion in proceeds.

Then his 2020 Covid-19 bet using Index CDS in investment grade and high-yield bonds made a stunning 96.3 multiple and $2.6 billion in total.

Last year’s biggest loser was the Tontine SPAC, which caused 6.4 percentage points of gross losses. Last January the stock soared as high as $35 per share during the SPAC frenzy. But after the Securities and Exchange nixed the firm’s plans to take a stake in Universal during a partial spinoff from French conglomerate Vivendi, Tontine fell back to around its IPO price of $20, where it remains. (Ackman’s hedge fund made the investment in Universal instead.)

Since then, Ackman has been looking for another merger partner, but so far hasn’t sealed a deal. Tontine is now fending off a lawsuit filed by two securities law professors who argue that the SPAC falls under the Investment Company Act of 1940 because it is holding government securities while searching for a merger partner.

Ackman did not mention the lawsuit in the meeting. Instead, he noted the “disruption and the volatility in the IPO market really positions us well. We are working on a couple of interesting things.”

He added, “The SPAC market is really in disarray…so we can give certainty to a counterparty that no other can do.” Ackman noted that many SPAC deals that have been consummated are below their deal prices and that “we remain disciplined on both business quality and valuation.” 

If the SPAC can’t find a deal by July, when its two-year period is up, Ackman plans to return investors’ capital “and will use SPARC as our go forward.” Tontine’s investors will receive one SPAR per share of common stock and two SPARs per outstanding distributable redeemable warrant. 

“We think is a much better version of a SPAC,” he said.  In a SPARC, investors won’t have to put up capital ahead of a deal announcement. Of course all this assumes the SEC will approve the SPARC.

Ackman expects the SEC to file a revised rule within weeks. The deadline for its decision is May 8.