Billionaire investor William Ackman, who raised $4 billion in the world’s largest special purpose acquisition company (SPAC), told investors he would return the sum after failing to find a suitable target company to return public through a merger.
The development is a major setback for the prominent hedge fund manager who originally planned for SPAC to take a stake in Universal Music Group last year when such investment vehicles were all the rage on Wall Street.
In a letter sent to shareholders on Monday, Ackman pointed to numerous factors, including unfavorable market conditions and stiff competition from traditional initial public offerings (IPOs), that thwarted his efforts to find a suitable company with which to merge his SPAC.
“Profitable high-quality, sustainable-growth companies can generally delay their IPO date until market conditions are more favorable, which has limited the universe of possible high-quality transactions for PSTH, especially in the last 12 months,” Ackman said, referring to the ticker symbol for his SPAC.
In July 2020, Pershing Square Tontine raised $4 billion in its IPO and attracted high-profile investors ranging from hedge fund Baupost Group, Canadian pension fund Ontario Teachers and mutual fund company T. Rowe Price Group.
SPACs, also known as blank check companies, are publicly traded cash shells that are created by large investors – called sponsors – for the sole purpose of merging with a private company. The process, which is similar to a reverse merger, makes the target company public.
SPACs peaked in 2020 and early 2021, helping reap paperwork wins worth hundreds of millions of dollars for a number of top SPAC creators like Michael Klein and Chamath Palihapitiya.
However, over the past year, companies that have merged with SPACs have performed poorly, forcing investors to avoid blank check deals. This, coupled with tighter regulatory scrutiny and a slowdown in stock markets, has brought the SPAC economy to a virtual standstill, with many billions of dollars at stake.
Additionally, the record performance of regular U.S. IPOs in 2021 has posed competitive challenges for SPAC sponsors like Ackman, as several highly regarded startups have opted to list their shares on exchanges through traditional routes instead.
“The rapid recovery of capital markets and our economy has been good for America but unfortunate for PSTH, as it has made the conventional IPO market a strong competitor and preferred alternative for high-quality companies looking to go public,” Ackman said.
In July last year, Ackman’s effort to take a 10% stake in Universal Music, which was being spun off by French media conglomerate Vivendi, through its SPAC, was derailed due to regulatory barriers. The United States Securities and Exchange Commission opposed the deal, and Ackman placed the investment in his hedge fund instead.
“While there were potentially actionable deals for PSTH over the past year, none of them met our investment criteria,” Ackman said.