Why Value-Oriented Investor Seth Klarman Recently Invested in Bill Ackman's SPAC: Pershing Square Tontine

The Boston-based hedge fund Baupost Group's 3rd Quarter 13F Filing which was released just weeks ago disclosed a 4.3 % portfolio weighting in Bill Ackman's SPAC, Pershing Square Tontine Holdings (PSTH) whose ideal or target company is a high growth large-cap unicorn with a growing market share according to the transcript of David Rubinstein's Bloomberg Interview with Bill Ackman. This is a rather unordinary investment decision in stark contrast to the firm's self-described value oriented and longer term approach. Baupost Group's founder, president, and chief investment officer, Seth Klarman became ubiquitously known throughout the finance industry in the wake of the 2008 financial crisis after acquiring the shares of many insolvent and undervalued companies in anticipation of an impending government bailout and a resumption of sanity within the markets. Additionally, the legendary value investor is quite familiar with SPACs and has held numerous positions in similar blank-check companies in the past. In his interview with Dave Rubenstein, Ackman stated that the structure of his SPAC was such that his firm's exposure to the outcome of the deal is significant since no fees can be incurred unless a deal that is profitable for all investors occurs; hence, the name "Tontine" because if individual investors take a loss, his firm will endure the same fate. 

    Ackman's Pershing Square despite its decline in AUM has experienced a wild ride these past two years with annual returns in excess of 50% for 2019 and 70% for 2020 which Ackman attributes to his new marriage and purchase of credit default swaps preceding the liquidity crises that transpired during the first  few weeks of the lockdown in March. Additionally, Ackman's self-characterization as a value investor and long-term track record of acquiring, seeding, and merging companies is probably perceived favorably by like-minded experienced SPAC investors, such as Klarman. Examples of Pershing Square's successful SPACs include Justice Holdings which raised $1.5 Billion with a 30% stake from Pershing amongst other funds that co-sponsored the offering. Justice Holdings later acquired a 29% of Burger King's shares and forced a merger between it and Restaurant Brands (QSR). This outstanding long-term and short-term investment track record in SPACs and special situations in addition to the Pershing Square Tontine's equitable structure (ignoring the Herbalife and Valeant debacles that plagued the fund's returns for five years and ultimately lead to the outflow of most of its AUM) is probably what has attracted other fund managers and investors like Seth Klarman, whose recent performance cannot justify scrutiny of Ackman's failures. Finally and most importantly, Pershing Square will only receive a 6.21% performance fee after other investors achieve a 20% return which incentivizes superior performance while rendering its fate inextricably linked to that of other investors.