In an effort to maximize the potential discount or premium on NAV for the Fundrise Innovation FundI wanted to investigate Pershing Square Holdings, ticker PSHZF, listed on the London Stock Exchange.
Pershing Square manages more than $18 billion and is run by American Bill Ackman. Meanwhile, the fund currently trades at a discount of around 25% to its net asset value. When it first floated in 2014, it traded at a discount of just 9%. The NAV discount widened to around 40% in 2022, then traded at a 30% to 35% discount in 2023 and 2024.
As an investor, you can use this historical discount/NAV range of -9% to 40% as a data point for when to invest. Obviously, the bigger the discount to NAV, the more value you get. Not only could NAV increase in value as Ackman invests in winners, but the discount to NAV could also narrow.
If the Innovation Fund listed on the NYSE, could it trade at a similar discount to NAV as Pershing Square? It’s possible, but I highly doubt it for the reasons I highlight in this post.
Why is the Pershing Square Fund trading at such a large discount?
Here are four key reasons for such a continued discount to NAV.
1) Core interests are public shares
Pershing takes concentrated positions in eight to twelve holding companies and actively works with management to drive change. Previous holdings include Chipotle, Restaurant Brands International, Hilton Worldwide, Alphabet, Canadian Pacific Kansas City and Amazon.
The problem with owning public shares is that you and I can put together the same portfolio ourselves. In other words, there is no barrier to access to owning public shares. Fund investors must rely on the insight of Ackman and his analysts on when to buy and sell.
Despite most positions being public equities, Ackman used credit protection to hedge downside risk during COVID volatility in early 2020. So if you invest in a hedge fund and want downside protection, Pershing can provide that option. But most of the time that doesn’t seem to be the case, because it lasts 90% – 100% long.
2) Closed structure + European listing
PSH is a closed-end fund listed in London, and not an ETF listed on a US stock exchange.
That creates:
- No daily redemption mechanism to bring the price back to NAV
- A limited natural US investor base that does not invest in LSE shares or funds
- Less index inclusion compared to US funds
- Some institutional mandates that cannot own foreign-listed Closed-end Funds (CEFs).
If this were a US ETF with the exact same portfolio, the discount probably wouldn’t be nearly as large. Maybe 0-5% instead. Closed-end funds can trade at discounts for decades if there is no catalyst to close the gap.
Unlike an ETF, there is no simple mechanism that enforces convergence, as I wrote in my post on trading different fund types.
3) Compensation structure (1.5% + 16% performance fee)
PSH costs:
- 1.5% management fee
- 16% performance fee above a high water mark
That’s cheaper than traditional 2/20 hedge funds, but expensive compared to passive equity exposure. Meanwhile, investors mentally discount future returns as costs mount.
When you discount expected future NAV growth with fees, some investors demand a structural discount.
4) Concentration risk and volatility
Because there are typically only 8 to 12 stocks in the portfolio, there is significant concentration risk in PSH that warrants a discount. In good times the returns can be high. But during bad times, like 2022, returns can be terrible, hence the 40% discount to NAV.
When investing in a hedge fund, your goal is generally to reduce volatility and protect downside risk through hedging (shorting certain names). But if the fund does not hedge meaningfully or consistently, and instead creates additional volatility for holders who are not suited for it, a discount to the net asset value will be taken.
Given the manager risk, the key man risk and the cyclical nature of the strategy, a discount to the intrinsic value is only normal.
Fundrise Innovation Fund Comparison with Pershing Square Holdings
Trading at a 25% discount to NAV after listing on the NYSE would be a terrible scenario Fundrise Innovation Fund (VCX) holders. However, I don’t think this will happen given the following differences from Pershing Square Holdings:
1) VCX owns private, hard-to-invest assets
VCX owns coveted shares of private companies in names like OpenAI, Anthropic, Databricks, Anduril, SpaceX, Canva, and more. Unlike public stocks, very few people can invest directly in these companies during their next private fundraising. As a result, it makes sense that investors would pay some amount premium to own these names, no discount.
2) VCX will be traded on a much larger US exchange
VCX will seek to list on the NYSE, not the London Stock Exchange. The NYSE is 8 to 9 times larger than the LSE in terms of total market capitalization. Trading volume on the NYSE is typically $50-$100+ billion per day, compared to just $5-$10+ billion per day on the LSE.
As a result, the natural demand pool is larger. VCX would be available to any US retail brokerage account and could potentially attract institutional flows.
3) VCX charges a much lower fee
VCX plans to charge an annual management fee of 2.5% and 0% carried interest (a percentage of profits). PSH charges only a 1.5% management fee, but 16% of profits after a high-water mark, which is one of the reasons Ackman is so rich. I would much rather pay 2.5%-3% of assets under management than 1.5% and 16% of profits for companies that have the potential to grow enormously.
Hypothetically, if your $100,000 position doubled to $200,000 in one year, you would pay about $3,750 to VCX and keep $96,250 of the profits. In contrast, you pay a fee of €2,250 to PSH plus 16% of the profit of €100,000, or €16,000, for a combined total amount of €18,250. Clearly, paying a $3,750 fee is preferable to paying an $18,250 fee.
4) VCX runs a smaller, more agile fund with more investments
VCX is a ~$550 million fund, versus PSH at $18+ billion. As a result, it is sometimes more difficult to achieve outperformance with such a large amount of assets under management.
For example, investing $55 million (10% of VCX) in a well-performing private growth company could make a bigger difference for VCX than for PSH (0.3%). Taking a similar position of 10%, or $1.8 billion in PSH, would move the stock significantly or even be impossible if Ackman wanted to invest in a smaller company due to its limited float.
VCX owns at least double the number of companies as PSH. However, about 75% of VCX is concentrated in OpenAI, Anthropic, Databricks, Anduril, dbt Labs, Vanta, Canva, and Ramp. So I would say that the concentration risk is comparable to that of PSH’s eight to twelve companies.
Conclusion on the PSH case study
I highly doubt that the Innovation Fund will trade at a similar discount as Pershing Square Holdings. They are fundamentally different vehicles, with different asset bases, fee structures, investor audiences and structural dynamics. While both funds are closed-end funds and lack the redemption mechanism of ETFs, the similarities largely end there.
Pershing’s discount is primarily a function of its public equity exposure, closed-end structure with no redemption mechanism, European listing frictions, performance fees and concentration risk. VCX, on the other hand, offers access to scarce private assets, plans to list in the United States and does not suffer from performance fees.
While no publicly traded vehicle is immune to discount trading, applying Pershing Square’s historic discount margin directly to the Innovation Fund is likely the wrong framework.
Destiny Tech100 (DXYZ) and Robinhood Venture Fund (RVI)
A more appropriate comparison might be DXYZ, which currently trades at a premium of about 140% to its net asset value of about $11.50, and the soon-to-be listed RVI, the Robinhood Venture Fund.
Both have similarly difficult-to-access private growth companies that are in high demand. It will be telling to see if RVI also trades at a premium to NAV after the $1 billion offering. If so, the likelihood of VCX trading at a premium increases, and I will invest more in VCX pre-listing.
As we get closer to RVI’s listing, I plan to publish a follow-up analysis examining how its performance could impact expectations for the Innovation Fund. I do this work primarily because I have about $770,000 invested in the fund, which could realistically go down by $150,000 or even up by $385,000 simply based on listing dynamics.
Because my wife and I do not have day jobs, we rely heavily on our investments to finance our lifestyle. As a DIY investor, I need to conduct deeper due diligence to increase the chances of making good long-term investment decisions.
Is anyone here investing in Pershing Square Holdings? If so, what are your thoughts on how to approach the fund given the discount to NAV? Wouldn’t it be better to just invest in an S&P 500 ETF with minimal fees since its performance has been similar over the past five to seven years?
Fundrise has been a sponsor of Financial Samurai for many years, because our investment philosophies are aligned. Do your due diligence before making any investment and only invest an amount you can afford to lose. There are no guarantees when investing in risky assets and you can lose money.
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