Pershing Square Tontine Holdings (NYSE :PSTH.U): The Largest SPAC Offering Ever

Imagine you are a private company with a strong and established business and the only thing holding you back from reaching the next level is a lack of additional funding. You can try to get the funding you need by going public with an IPO, but this can oftentimes be a long and complicated process. Another option is pursuing a SPAC or Special Purpose Acquisition Company merger. This can be attractive because SPACs offer a less-regulated way to go public than traditional IPOs.

Some of the recent SPAC mergers that have gained traction in the market include Nikola Corporation (NASDAQ: NKLA), DraftKings (NASDAQ: DKNG), and Virgin Galactic (NYSE: SPCE). This week, hedge fund billionaire Bill Ackman’s SPAC Pershing Square Tontine Holdings NYSE: PSTH.U debuted with an IPO of $4 billion, which made it the largest SPAC offering ever. It’s already up roughly 9% and might be worth a look based on Bill Ackman’s investing track record alone. Let’s take a deeper look at SPACs below and discuss the important things to know about Pershing Square Tontine Holdings.

Blank Check Company

Special purpose acquisition companies are also known as blank check companies. They are companies that don’t actually have any business operations but are instead formed for the sole purpose of offering a “blank-check” to a private company in the form of a merger. Blank check companies are unique in that they typically issue “units” instead of shares during the IPO. The units usually offer investors a mix of common stock and warrants which can be exchanged for additional shares later. At one point, SPACs were considered high risk and had a bad reputation due to suspiciously favorable terms for sponsors, although investors have been more open to them lately.

Part of the reason why SPACs present a unique set of risks is because you are essentially buying a shell company without any financial history, income-generating assets, or underlying business. That is why they are known as “blank check companies”. However, the fact that Bill Ackman is behind this one should be a consideration, since he has a strong track record of investing success at Pershing Square Capital Management. If you aren’t familiar with Mr. Ackman, he recently pulled off one of the best trades of all-time by making $2.6 billion on a $27 million dollar short which involved buying credit default swaps betting that the pandemic would take some big corporation’s investment-grade credit ratings away.

No Compensation for Pershing Square

Ackman’s Pershing Square Tontine Holdings SPAC is unique in that Pershing Capital will not be collecting any compensation itself until its shareholders have gained at least a 20% return. Normally, SPAC sponsors will receive about 20% of the shares that serve as compensation regardless of if the shares of the company go up or down. During a recent interview with Bill Ackman about his SPAC he stated “What’s new in our structure is it’s the first SPAC where we’re taking no compensation: no management fees, incentive fees ... we’re not buying cheap stock. There’s literally no compensation to the sponsors,” This could help to ease some investors’ fears of buying.

It’s intriguing to consider what types of companies that Pershing Square Tontine Holdings will be targeting. Ackman has stated that he is looking for a “mature unicorn”, which is essentially an established private company that is venture-backed and has achieved strong cash flow generation, significant scale, and has a competitive advantage. It could be a well-run and reputable company that is currently in need of capital due to impacts from the COVID-19 pandemic or a strong business that is interested in a good alternative to an IPO.

Is Pershing Square Tontine Holdings a Buy?

If you are a believer in Bill Ackman’s ability to identify great companies, Pershing Square Tontine Holdings might be well worth a look. He has prior experience with SPACs and used a shell company to buy Burger King back in 2012 which saw its shares double in 2 years. Just keep in mind that SPACs are highly speculative and we don’t really know what type of business Pershing Square Tontine Holdings will actually be buying, so there is a lot of uncertainty related to this investment. If you are interested in seeing where this SPAC goes but are hesitant to buy, you can always wait until more information becomes available.