Pershing Square Holdings (PSH), the £11.5bn London-listed US equities hedge fund run by Bill Ackman, is to provide up to $1bn (£750m) of financing for an insurance company acquisition by portfolio holding Howard Hughes that is part of the fund manager’s ambition to build a “modern-day Berkshire Hathaway”.
The investment company, whose shares stand on a 22% discount that reduces its market value to £8.7bn, has agreed to subscribe for up to $1bn of non-voting exchangeable perpetual preferred stock to be issued by New York-listed Howard Hughes Holdings.
This is to help fund the $2.1bn acquisition of Vantage Group, a privately held specialty insurance and reinsurance company being sold by private equity groups Carlyle and Hellman & Friedman.
The rest of the money will come from cash held by Howard Hughes, the developer of gated retirement communities that is 47% owned by Pershing Square companies with 28% of that held by PSH.
Ackman had previously flagged an insurance acquisition was in the pipeline as he aims to make Howard Hughes (HHH) a holding company for stakes in other listed businesses as he seeks to emulate Warren Buffett’s success in growing Berkshire Hathaway into a $1trn investment conglomerate funded by its big insurance subsidiaries.
Ackman, executive chair of Howard Hughes as well as chief executive of Pershing Square Capital Management, said: “In Vantage, HHH obtains an exceptional diversified specialty insurance and reinsurance platform managed by an excellent and highly experienced team. The combination of Vantage’s insurance expertise and Pershing Square’s investment capabilities creates the opportunity to build a large, highly profitable insurance company and an important source of long-term value creation for Howard Hughes.”
PSCM will not charge a fee for managing Vantage’s $2.8bn of assets.
Greg Hendrick, chief executive of Vantage, said: “With Howard Hughes’ permanent capital and long-term vision, we expect to strengthen our balance sheet and expand opportunities in specialty insurance, reinsurance, and partnership capital. After closing, we anticipate enhanced resources to fuel profitable growth, drive innovation, and deliver even greater value to brokers and clients over time.”
The PSH board said it believed the Vantage deal offered attractive prospects for HHH and, accordingly, for PSH, HHH’s largest shareholder, and its shareholders.
The amount of funding that PSH provides will be decided when the transaction closes in the second quarter of next year. The preferred stock will be split into 14 tranches that HHH can repurchase over seven years at the higher of 1.5 times book value or the original price plus 4% annual interest. In the event of a takeover of HHH or Vantage, the preferred shares will be compulsorily purchases.
On a call with investors, Ackman said he expected HHH to buy back the shares within two years given its high cash generation.
Winterflood analyst Shavar Halberstadt was positive on the deal, saying an expansion of the Persing Square empire was useful for PSH shareholders and that growth at HHH benefited the portfolio directly, while the preference shares were structured on “friendly but not unprofitable terms”.
“It is fair to question whether this capital, if provided, would be better off in the investment portfolio, but, as this is part of a larger operation to create a version of Berkshire Hathaway, it is difficult to say definitively at this stage.”
Given that Pershing Square staff owned a big stake in PSH, he felt they were sufficiently aligned with the investment company’s shareholders.
PSH shares dipped 30p to £49.76 yesterday after the transaction was announced and added 10p to £49.42 today. They have returned a total of 29% and 69% over the past three and five years, beating the 11% and 67% returns from the S&P 500 index.
