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“Weird” has suddenly become a very loaded term, but there really is a lot of weirdness surrounding the flotation of Bill Ackman’s Pershing Square USA. Perhaps the weirdest thing of all is the involvement of Baupost Group.
In a letter to select investors — the one Pershing Square USA subsequently had to embarrassingly disclose to the SEC — Ackman said Baupost had put in an order of $150mn ahead of the IPO.
Baupost reportedly quickly dropped out once its name was made public, which is probably a big reason why Ackman has since had to downscale the IPO again, to just $2bn.
But we just can’t let this go. If you even have a passing familiarity with Baupost and its head Seth Klarman the whole thing is just so . . . weird.
We wouldn’t be surprised if Klarman — one of the most low-key and publicity-shy hedge fund managers in the industry — was quite upset about getting outed like this by Ackman. It certainly looks like an attempt to leverage Baupost’s reputation for careful rectitude to entice other investors.
However, that doesn’t explain why Baupost was involved in the first place. The hedge fund declined to comment, but FT Alphaville wouldn’t be surprised if a few Baupost investors were as shocked as we were, and made a few calls to find out what on earth is going on.
First of all, if you‘re a hedge fund investor paying a 1.25 per cent management fee and (we think) a 20 per cent performance fee, you don’t want your investment manager to flip that money on to another investment manager. Aside from the fact that you’re copping fees on fees, the optics are terrible. Investors pick investment managers, investment managers picks securities, and (ideally) never the twain shall meet.
Second, assuming it really did initially commit to investing $150mn, this is out of character for Baupost. Klarman’s hedge fund often carries extraordinary levels of cash precisely because it is picky about opportunities.
Now, it wouldn’t have been Klarman’s first time throwing money at Ackman. Baupost previously took a stake in Pershing Square Tontine Holdings, the failed Ackman SPAC which returned $4bn to investors in 2022 after being “unable to consummate a transaction” in its boss’s words.
But putting that much money into a conventional closed-end fund is an entirely different proposition. Shovelling a decent chunk of the ca $23bn it manages out to Ackman would have looked pretty odd (Pershing Square USA would have become its eight-biggest holding, according to its latest 13F filing).
Thirdly, Klarman is a value investor — he edited the latest edition of Ben Graham and David Dodd’s Security Analysis, and wrote a book called Margin of Safety that is a cult classic in parts of the hedge fund community. Even if he believes in Ackman’s nous, why not simply invest in Pershing Square Holdings? After all, Ackman’s existing Amsterdam-listed fund is trading at a 30 per cent discount to its net asset value.
Fourth, Baupost has just been through the biggest round of job cuts in its 42-year history, as part of a narrower focus on its strengths in distressed debt and special situations. Pershing Square USA is certainly a very “special situation”, but not in that kind of way.
And, finally, while it’s not unusual for hedge fund managers to throw pals a bone, $150mn is a bit more than a bone, and Klarman makes for an unlikely Ackman buddy.
Klarman was once the singe biggest donor to the Republicans, but was ferociously opposed to Donald Trump and switched his money hose to the Democrats in 2017. A quick look at OpenSecrets reveals that he has kept donating almost exclusively to Democrats and the Democratic party. In other words, Klarman probably isn’t be thrilled with Ackman’s embrace of Trump. Personality-wise they also seem like polar opposites.
It’s almost tempting to assume that Baupost’s mooted Pershing Square investment must have been orchestrated by some portfolio manager without Klarman’s say-so.
But we really struggle to see the financial rationale, and doubt that a cheque of that size could be written without Klarman’s consent. Is there some kind of cool special situation trade we’re simply missing?
This isn’t the first weird Baupost situation in 2024 either. Klarman eviscerated Adam Neumann and his company WeWork in 2020, only to reportedly at least explore backing Neumann’s attempt to seize back control of WeWork earlier this year. They dropped talks then too, after their name became public.
Wild speculation and informed analysis in the comments please, because this is a bit baffling to us.
Further reading
— Bill Ackman’s four unfortunate IPO snafus (FTAV)
— ‘I Can’t Believe I’m Saying This, But I’m Passing on Seth Klarman’ (II)
— Pershing Square USA to investors: please ignore Bill Ackman (FTAV)