| Please note: Our email domain is changing, which means you'll be receiving this newsletter from noreply@news.bloomberg.com. Update your contacts to ensure you continue receiving it — check out the bottom of this email for more details. Generally the way an initial public offering works is that a company decides to sell, say, 10 million shares, representing 10% of the company, and then there is a negotiation about price. "This company is great and worth $5 billion, so you should pay $50 per share," its bankers will tell investors. "Ehh the company is fine and worth $4 billion, so I'll pay $40," the investors will say. There'll be debates and negotiation and posturing, the bankers will take orders at different prices, and eventually they will come to the company and say "we have orders for 20 million shares at $43 per share, and we think you should price the IPO there. That way, we'll sell 10 million shares at $43, and a lot of people will be left wanting more and will buy shares in the aftermarket and the stock will trade up and everyone will be happy." And the company will say "sure" and the deal will price at $43. Sometimes, in the marketing process, the banks and the company will decide to upsize or downsize the deal (sell 12 million shares, or 8 million). But the main point of the IPO process is to figure out the price. Some people think the company is worth a lot, some people think it's worth less, and you want a price where enough investors think they're getting a good deal. The IPO is launched with a range of prices — the prospectus will say "10 million shares at a price between $42 and $45" or whatever — and the final price will be set by supply and demand. The IPO is a process for discovering the value of a company. Pershing Square USA, Bill Ackman's proposed US-listed closed-end fund, is — was? will be? was to have been? — a pot of money. You give Bill Ackman the money, he invests it, you get the returns. If you give him $50, he invests $50, and you get the returns on $50. If you give him $73, he invests $73, and you get the returns on $73. It is, in some sense, meaningless to talk about the valuation of Pershing Square USA. The valuation of a pot of money is the amount of money in the pot. The valuation of an empty pot of money is the money you are about to put into the pot. In another sense, it is quite meaningful to talk about the valuation of Pershing Square USA, and lots of people — particularly Ackman — do. These conversations take forms like: - Skeptics say: "Closed-end funds typically trade at a discount to net asset value, and Bill Ackman's own European-listed closed-end fund currently trades at a discount to net asset value, so Pershing Square USA will probably trade at a discount to net asset value, so if you put $50 into the pot it will be worth $45."
- Ackman says: "It requires a significant leap of faith and ultimately careful analysis and judgment for investors to recognize that this closed end company will trade at a premium after the IPO when very few in history have done so," but it will, because "everyone appreciates our track record (36 times vs. 7 times for the S&P 500 over 20 years), our unprecedented $500m investment, the low fees, the liquid profile of the company, the firm's brand and our large global base of institutional, retail, and media interest in the firm." That is, there is so much demand for Bill Ackman to invest people's money, and he is so good at it, that people would pay $55 to let him invest $50 for them.
So you can argue about whether $50 in a pot of money invested by Bill Ackman should be worth $45 or $50 or $55 or some other number. But here's what you can't do: You can't negotiate the price. Pershing Square USA was going to fill its pot of money by doing an IPO. The IPO launched with a fixed price of $50 per share. If you put in $50, Pershing Square USA would invest the $50 for you. But $50 is an arbitrary number; the point is not that you're putting in $50, but rather that you are investing at the net asset value, because your money is the net asset value: You're filling up the pot. If you put less money in the pot, the pot will have less money. If you called up the bankers and said "hey look I like Bill Ackman but I don't like the valuation, I think this fund will trade at a discount, I only want to pay $45 per share," what would that even mean? You could give Pershing Square USA $45, but then it would invest $45 for you, and you'd still be buying at 100% of net asset value. Now, it is not quite right that the IPO investors have to invest at 100% of NAV. For one thing, Pershing Square USA has to pay some underwriting expenses out of the money it raises: If you put in $50, in fact Pershing Square will invest $49 or so for you, and the underwriters will get the rest. So the investors are actually paying a bit more than 100% of NAV. Conversely, you could imagine ways for investors to invest at less than 100% of NAV. If shareholders put in less than the amount of money in the pot, somebody else has to put in the rest. Here's one way: - Investors put in $4 billion at $50 per share (80 million shares).
- Bill Ackman puts in $1 billion, from his personal account, at $100 per share (10 million shares).
That leaves 90 million shares outstanding and a $5 billion pot of money. The net asset value per share (ignoring underwriting fees) is $55.56 per share; the outside investors buy at a discount to net asset value. Ackman himself buys at a premium to net asset value. You can probably spot the objections to this structure. If you have a buzzy tech startup and you launch an ambitious IPO and investors say "this startup is cool but your valuation is too high, we want to pay less," you can just do that. You can sell them the shares at a lower price; you will raise less money than you wanted and be less rich than you expected and be a bit disappointed and perhaps embarrassed, but you'll go public and try to improve from there. If you have a closed-end fund and you launch an ambitious IPO targeting institutional investors and those investors say "you are cool but I want to pay less for these shares," there is just not a lot you can do. You can't raise a fund by letting everybody invest at 90% of net asset value. Where will the other 10% come from? If you can't get enough people to pay 100% — or a bit more — then there's just no deal. Anyway! Billionaire Bill Ackman's Pershing Square has withdrawn an initial public offering for a US closed-end fund, after sharply downsizing a $25 billion fundraising target and facing difficult questions from investors. Pershing Square USA Ltd. will reevaluate its structure based on investor feedback, Ackman wrote in a statement Wednesday. "We will report back once we are ready to launch a revised transaction," Ackman wrote. The withdrawal comes after Pershing Square slashed the anticipated size twice in just over a week. The hedge fund manager had floated a potential size of $25 billion during the marketing of the offering earlier this month, which took place in a series of one-on-one meetings and larger town halls. Pershing Square USA was scaled back to a range of $2.5 billion to $4 billion in a July 24 letter, and finally $2 billion — a hefty drop off from what would've been the biggest US closed-end fund ever.
Here is Ackman's statement: Over the last seven weeks, we have met with many institutions and family offices, and held numerous town halls for Pershing Square USA, Ltd. While we have received enormous investor interest in PSUS, one principal question has remained: Would investors be better served waiting to invest in the aftermarket than in the IPO? This question has inspired us to reevaluate PSUS's structure to make the IPO investment decision a straightforward one. We will report back once we are ready to launch a revised transaction.
Ackman has spent the IPO process arguing that the shares are worth more than $50, and therefore you should buy them in the IPO at $50, because they will trade up to $55 or whatever in the aftermarket. Investors, meanwhile, argued that the shares are worth less than $50, and therefore they should wait to buy them in the aftermarket at $45 or whatever. But if everyone thinks that, there is just no deal: The shares can't trade to $45 unless Pershing Square USA sells them at $50 first. Now, if some people think the shares are worth $50 and others don't, then Pershing Square USA could price a small deal, sell to the people willing to pay $50, and then let the shares trade down in the aftermarket. There are two problems with that: - It limits Pershing Square USA's ability to raise more money later. If the stock trades below net asset value, then selling more shares will dilute existing shareholders. As Ackman told investors: "If PSUS achieves a sustained premium to NAV which I believe it will achieve, it will enable us to access low-cost equity capital when we have good uses for that capital. As a result, PSUS will compound its AUM from both performance and accretive equity issuances. … This transaction is therefore all about a successful IPO from the first day and successful trading at a premium thereafter." Trading at a discount would be a failure.
- Ackman has been weirdly public about all of these dynamics — I keep quoting from a letter he sent to investors about them, which Pershing Square USA made public last week — so it was not hard for investors to figure out that there was not enough demand at $50. If you think everyone else is waiting to buy in the aftermarket at $45, then you should too.
I guess I'm excited to see what the reevaluated structure looks like? (Bill Cohan reported yesterday: "'All good,' Bill texted me this afternoon. 'Better actually.'" Okay!) Here's an idea: Traditionally, US funds had a distribution component which helped reduce discounts and give capital back to investors at the net asset value, according to John Cole Scott, president of CEF Advisors. "It might sound silly, but he should offer 2% — a quarter of NAV — to investors," Scott said. "It's what most other equity funds do. This tends to lead to narrower discounts."
Eh. My idea — buy some shares yourself at a huge premium to NAV, to subsidize everyone else — is free. We'll see what they come up with. Wait, no, I do have one more idea. You know who did this trade incredibly, incredibly well? You know who went out to big institutional investors and raised a multibillion-dollar closed-end fund that trades at a big premium to net asset value, and that proved it would trade at a big premium to NAV before raising money from institutions? You know who did one of the coolest weirdest equity capital markets raises I've ever seen? Brad Jacobs, man. Jacobs quietly priced an IPO for his own closed-end fund this week, and it traded up nicely. I mean, not really, but bear with me. We have talked about this trade before. The summary: - Jacobs is a successful investor who does roll-ups of logistics-y businesses, and he wanted to raise a fund to buy companies in the building products distribution industry.
- So he went and found a small public company called SilverSun Technologies Inc., which had a market capitalization of about $20 million when he found it.
- He agreed to invest $1 billion (of his own and some seed investors' money) in it, at a price of $4.57 per share.
- Investing $1 billion in a $20 million company gave him, you know, 99% of the stock; he quickly took over management and renamed SilverSun "QXO Inc."
- At this point, QXO was mostly a pot of (his) money, which he planned to use to buy building products distributors. But a teeny little stub of it was the public stock that was left in the hands of the old SilverSun shareholders, which continued to trade.
- That stock traded way, way up, on some combination of (1) small float and volume (average trading was under 40,000 shares per day), (2) retail enthusiasm for Jacobs and (3) confusion about how the share math worked. The stock peaked at $235.61 per share this June, which represented roughly $150 million worth of public shares, but a nearly $100 billion market capitalization when you count Jacobs' shares — which, again, he bought for $4.57.
- Jacobs then went to other institutional investors and sold them stock at $9.14 per share, which represented (1) a premium to net asset value, (2) a premium to what he paid and (3) a huge discount to the public trading price of the stock.
- In total, QXO has raised a bit more than $5 billion from investors (including Jacobs' initial investment), at a fully diluted market capitalization of about $6.8 billion. So the institutional investors in Jacobs' fund have bought in at about a 33% premium to net asset value. (Except that Jacobs and his initial investors who put in the $1 billion bought at a discount.)
- All that money was locked up: The big investors couldn't sell until QXO filed a registration statement allowing them to sell their shares.
- The tiny sliver of public shares continued to trade at huge prices unrelated to the prices that big investors paid in the fundraising rounds. Last week, while QXO raised another $620 million at $9.14 per share, the stock hit $123.96.
I wrote last week: The public shares are less than 0.1% of the fully diluted stock, and they trade at prices that are pretty unrelated to the price of the other 99.9%. QXO is 99.9% a fund for big investors to bet on Brad Jacobs' ability to roll up the building products distribution industry, and 0.1% a bizarre speculative retail vehicle.
But that was perhaps too strong. "Pretty unrelated," maybe, but not entirely unrelated. If you were an institutional investor considering investing in QXO at $9.14 per share, it was probably some comfort to you that retail investors were currently buying the same shares at $123.96. Not that much comfort — low volumes, confusion, etc. — but there was technically a public price for the stock you were buying, and that price was way higher than what you were paying. Then, this Tuesday, QXO's stock price collapsed. The stock closed on Monday at $60.50; it opened at $10.90 on Tuesday, an 82% drop. Then it traded up a bit, closing at $12.05 on Tuesday and $12.50 on Wednesday. All of this came on heavy volumes: After trading a few tens of thousands of shares per day for the last few months, QXO traded 19.2 million shares on Tuesday and 6.7 million on Wednesday. What happened? Well, on Monday evening, QXO filed a registration statement allowing its big investors to sell the hundreds of millions of shares that they bought for $4.57 or $9.14. And then on Tuesday they did. Not all of them, not even close to all of them, but millions of them anyway. On Monday there were something like 664,284 shares of QXO available for trading; now there are something like 790 million. The supply of QXO shares increased overnight by more than 100,000%. And so the price fell by 82%. Which is … really, really good? At no point this week did the stock trade below $10 per share. If you were an institutional investor who bought into QXO in its fundraising rounds, you paid $9.14 for stock that is currently trading at about $12.50. Would it be fair to say that you got a 36% IPO pop? That you bought at $9.14 in a — weird, slow, delayed — initial public offering for QXO, and then were able to resell at $12.50 in the aftermarket? I mean, no, but also kind of yes. And, again: You knew this would happen, or at least you had an inkling. If Brad Jacobs called you up and said "do you want to put some money into my fund at a premium to NAV," you would have said "why would I do that," and he could have said "well, the fund is publicly traded, and it's currently trading at an enormous premium to NAV, so if you buy at a modest premium to NAV you will make an easy profit." And you could have looked at the trading history of QXO and said "huh, this is weird, but he's got a point." And then you could have bought at $9.14 and sold at $12.50 and life is good. Meanwhile Bill Ackman was out there calling up investors saying "would you like to invest in my fund at a small premium to NAV," and investors are like "why would I do that," and he was like "well it will trade at a big premium to NAV," and the investors were like "but closed-end funds never do," and he was like "well this one will," and the investors were like "no it won't," and, uh, he did not win that argument. The lessons here are not necessarily obvious, or easily applicable, but there sure are lessons. A reader emailed me to suggest that Pershing Square USA should buy a deli, and honestly it's a good idea? IRL was a social media app that raised $150 million from SoftBank Group Corp. in 2021, when everyone was raising money from SoftBank. SoftBank wanted to fund things that had rapid user growth, so IRL obligingly showed SoftBank rapid user growth, and SoftBank gave it money. Eventually things went south, and last year SoftBank sued IRL's founder, Abraham Shafi, saying that he had tricked them. We talked about the lawsuit at the time, because it was funny. In SoftBank's telling, IRL's users were mostly fake: Its board of directors did an investigation and determined that 95% of the users were bots, posting on IRL's groups to create an appearance of activity in a ghost town, and that Shafi directed employees to attract more bots to create an appearance of user growth. Shafi later countersued the board, saying that "they needed a scapegoat" and all the stuff about bots wasn't true. Yesterday the US Securities and Exchange Commission also sued Shafi for fraud. You might think: "Sure, startups have some latitude to puff themselves up to venture capitalists, but you can't sell even SoftBank a social network that is 95% fake, so once SoftBank revealed the fraud of course the SEC would step in." But: no? The SEC complaint isn't about bots. Instead, the SEC faults Shafi for acquiring users with "incent ads," and not telling SoftBank: Shafi described IRL as an app that had attracted 12 million purported users and achieved a high rank in the Apple App Store based on viral popularity and organic growth. This description misleadingly omitted the significant role that advertising played in Shafi's growth strategy for IRL. Since the fall of 2019, Shafi had promoted IRL and boosted its perceived popularity by spending millions of dollars on "incent" advertisements—advertisements that offered users incentives to download the app. Moreover, Shafi did not simply fail to disclose IRL's use of incent advertisements. He also made false statements about IRL's advertising expenditures, providing prospective investors with offering materials that significantly understated the amount of money that IRL had spent on marketing-related expenses.
He also allegedly "charged at least hundreds of thousands of dollars in personal expenses to IRL business credit cards." Okay! How many startups do you think have these three characteristics: - They raised money from SoftBank by showing strong user growth.
- They were aggressive about paying for user growth — by advertising, by giving users discounts or freebies to lure them in, etc. — because they knew SoftBank really wanted growth, and they were a bit coy, in their fundraising presentations, about exactly what they were doing to create that growth.
- The founder worked all hours, blurred the lines between life and work, and charged personal expenses to the startup's credit card.
My guess is that the answer is not one. Is the answer possibly "all of them"? The SEC mentions the bot thing in a tossed-off paragraph at the end of the complaint: Shortly after the Special Committee removed Shafi from the CEO role, IRL's purported number of users plummeted. A forensic analysis undertaken at the direction of the Special Committee determined that, prior to the collapse, a substantial percentage of IRL's users were likely bots. More specifically, the analysis determined that 95% of users for which detailed usage data were available were likely bots, and that the accounts for which such data were not available were also unlikely to be representative of human activity.
Sounds like fraud, no? Not to the SEC, which just moves right along. What's weird here is that the two fraud cases sort of undermine each other. The SEC's theory is that IRL got user growth by paying users to download its app, and that SoftBank and other investors were focused on download numbers and user-acquisition costs and were bamboozled by the fake downloads. SoftBank's theory is that IRL got user growth by adding lots of bots, and that SoftBank was focused on usage numbers and was bamboozled by the bots. On the SEC's theory, the bots were not really relevant to the investment decision, and on SoftBank's theory, the incent ads were not really relevant. They both seem to think that Shafi tricked SoftBank, but they don't agree on how. I wrote my "everything is securities fraud, so CrowdStrike is securities fraud" column last week, before anyone sued CrowdStrike for securities fraud, because I knew it was coming. Just a quick update: Here it is. CrowdStrike has been sued by shareholders who said the cybersecurity company defrauded them by concealing how its inadequate software testing could cause the July 19 global outage that crashed more than 8 million computers. In a proposed class action filed on Tuesday night in the Austin, Texas federal court, shareholders said they learned that CrowdStrike's assurances about its technology were materially false and misleading when a flawed software update disrupted airlines, banks, hospitals and emergency lines around the world.
Yes that is a risk when you ship a flawed software update and you are a public company. Glencore's Billionaire Ex-Oil Head Charged With Corruption by UK. Fed Clears Path for September Interest Rate Cut. Bond Traders Are Fully Pricing In Three Fed Rate Cuts This Year. Portable alpha. Exxon Almost Walked Away From Its $1 Trillion Oil Discovery. Top BlackRock executive benefits from unusual 'points-style' bonus pay. How Thousands of Middlemen Are Gaming the H-1B Program. SocGen retail bank gloom overshadows equities trading bonanza. Traders Defying US Ban Embrace Polymarket With Election Bets. Meta Has Run Hundreds of Ads for Cocaine, Opioids and Other Drugs. Jumbo Blueberry Grower Gets $1 Billion Valuation in Funding Round. WeedMD co-founder fined $200K for giving confidential information to friend. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! |
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