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Rupert Hargreaves
Rupert Hargreaves
Articles (1363)  | Author's Website |

Why Does Seth Klarman Like Pershing Square Tontine?

A look at one of the value investor's newest holdings

November 23, 2020 | About:

Earlier this year, Seth Klarman (Trades, Portfolio)'s Baupost hedge fund raised just under $2 billion from clients to take advantage of emerging opportunities in the market. As I noted in April, Klarman was very busy adding stocks to Baupost's portfolio in the first quarter.

He deployed at least $1.5 billion into public equity markets, according to his firm's 13F filing at the time. Baupost's cash balance was around 31% of assets under management at the end of 2019.

Disclaimer: These figures only detail part of the picture. The 13Fs only highlight public equity positions. They do not show cash balances, credit, real estate, or other asset trades. Still, Baupost's third-quarter 13F does provide some insight into the companies Klarman was buying during the three months to the end of September.

We know that only around $10 billion of Baupost's $30 billion in assets under management are invested in public equities. That suggests the figures for approximately two-thirds of his portfolio are not available to the public.

According to the hedge fund's latest 13F filing for the quarter ended Sept. 30, eBay (NASDAQ:EBAY) was the most substantial single public equity investment in Baupost's portfolio at the time. It owned 30 million shares in the group with a $1.6 billion value, giving it a 17% portfolio weight. Liberty Global (NASDAQ:LBTYK) was the second most significant position in the portfolio at the end of September. Baupost owned 53 million shares in the group at the end of the quarter, giving it a 12% portfolio weight.

The most significant new addition to the portfolio was Pershing Square Tontine Holdings Ltd (NYSE:PSTH). According to Baupost's 13F, the hedge fund acquired 17.5 million shares in this firm during the period. This position was worth around $400 million and had a 4.3% weight in the equity portfolio.

Pershing Square Tontine is a special purpose acquisition company (SPAC) formed by activist hedge fund manager Bill Ackman (Trades, Portfolio).

Klarman is no stranger to investing in SPACs. In reviewing his portfolio over the past few years, I noticed that he has held many of these firms in the past, and these vehicles can be very profitable for their owners and sponsors if managed correctly.

Ackman is incentivized to produce positive returns for investors of this newly public enterprise. His hedge fund, Pershing Square, subscribed to the share offering and provided capital. If the SPAC does not work out, it will reflect poorly on his returns -- unlike other SPACs where sponsors put in minimal capital to achieve the highest returns.

Further, Ackman's record of buying, building and merging companies is impressive. For example, in 2011, the hedge fund co-sponsored Justice Holdings, a SPAC which went on to raise $1.5 billion. Persing provided around 30% of the capital. In 2012, the new vehicle acquired a 29% stake in Burger King Worldwide Holdings Inc. for $1.4 billion in cash and subsequently merged with Tim Hortons to form Restaurant Brands International (NYSE:QSR). Pershing Square remains a substantial investor in Restaurant Brands. An investor who bought shares in Justice at the IPO has seen a compound annual return of 19%.

Ackman's track record suggests that he has the ability to make the SPAC work, and if he doesn't manage it this time, as I've noted above, he is going to lose money. So, here you have a highly incentivized manager with skin in the game and a track record of creating value for investors. Perhaps that's where Klarman sees value.

Further, the hedge fund is not going to take excessive fees. It is entitled to a 6.21% fee after other investors have achieved a 20% return. This is another reason why Ackman and the team are incentivized to produce positive returns.

Disclosure: The author owns no share mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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