In an effort to better understand the potential discount or premium to the NAV of Fundrise Innovation FundI wanted to check out Pershing Square Holdings, ticker PSHZF, listed on the London Stock Exchange.
Pershing Square has more than 18 billion dollars and is run by American, Bill Ackman. Meanwhile, the fund is currently trading at about a 25% discount to its NAV. When it first listed in 2014, it traded as little as 9% off. The NAV discount widened to around 40% in 2022, then sold at a 30%–35% discount in 2023 and 2024.
As an investor, you can take this 9% to 40% historical discount-to-NAV range as a data point for when to invest. Obviously, the bigger the discount to NAV, the better value you get. Not only will the NAV not increase in value if Ackman invests in winners, but the discount to NAV may be smaller as well.
If Innovation Fund listed on the NYSE, would it trade at the same discount to NAV as Pershing Square? It is possible, but I highly doubt it for the reasons I highlight in this post.
Why Is Pershing Square Fund Trading At Such A Big Discount?
Here are four main reasons for the persistent discount to NAV.
1) Core Holdings Public Shares
Pershing takes entrenched positions in holdings 8–12 and actively engages with management to effect change. Previous holdings include Chipotle, Restaurant Brands International, Hilton Worldwide, Alphabet, Canadian Pacific Kansas City, and Amazon.
The issue with having public shares is that You and I can build the same portfolio. In other words, there is no barrier to entry into public ownership. Fund investors must rely on the knowledge of Ackman and his analysts on when to buy and sell.
Although most of the positions were in public stocks, Ackman used credit protection to hedge the downside risk of early 2020 COVID volatility. So if you’re investing in a hedge fund and you want low security, Pershing can provide that ability. But usually it doesn’t seem like that, it’s 90% – 100% long.
2) Closed Structure + European Listing
PSH is a closed-end fund listed in London, not an ETF listed on a US stock exchange.
That creates:
- There is no daily redemption method for the arbitrage price that returns to NAV
- A limited natural US investor base that does not invest in LSE stocks or funds
- Smaller index coverage compared to US currencies
- Other institutional guidelines that cannot be owned by closed-end foreign listed funds (CEFs)
If this were a US ETF holding the exact same portfolio, the discount probably wouldn’t be as large. Maybe 0-5% instead. Closed-end funds can trade at discounts for decades if there is nothing to help close the gap.
Unlike an ETF, there is no simple method that enforces convergence, as I wrote in my post about how different types of funds trade.
3) Fee Structure (1.5% + 16% Performance Fee)
PSH Fees:
- 1.5% administration fee
- 16% performance fee above high water mark
That’s cheaper than traditional 2/20 hedge funds, but expensive compared to equity exposure. Meanwhile, investors are psychologically discounting future returns due to compounding costs.
If you discount future NAV growth with expenses, some investors seek a structural discount.
4) Concentration and Volatility Risk
Typically with only 8–12 stocks in the portfolio, there is a high concentration risk in PSH that warrants a discount. In good times, giving back can be good. But in bad times, like 2022, returns can be negative, hence the 40% discount to NAV.
When you invest in a hedge fund, your goal is usually to reduce volatility and protect against downside risk by using hedges (to narrow down some words). But if the fund doesn’t hedge meaningfully or consistently, and instead creates more volatility for owners who don’t qualify for it, a discount to NAV is required.
With manager risk, key man risk, and strategic rotation, a discount to NAV is natural.
Fundrise Innovation Fund Compared to Pershing Square Holdings
Trading at a 25% discount to NAV after a NYSE listing would be the worst case scenario Fundrise Innovation Fund (VCX) owners. However, I don’t think it will happen given the following differences compared to Pershing Square Holdings:
1) VCX Has Private, Hard To Invest In Assets
VCX owns shares of highly coveted private equity firms with 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 fund raising. As a result, it makes sense that investors will pay a premium having these words, not a discount.
2) VCX Will Trade On Largest US Exchanges
VCX will attempt to list on the NYSE, not the London Stock Exchange. The NYSE is 8–9 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 only $5–$10+ billion per day on the LSE.
As a result, the natural demand pool is large. VCX will be available on every US retail brokerage account and may attract institutional traffic.
3) VCX Charges Very Low Fees
VCX plans to charge an annual fee of 2.5% and 0% carry interest (percentage of profit). PSH only charges a 1.5% management fee, but 16% of profits after the high-water mark, which is part of the reason Ackman is so rich. I would rather pay 2.5%–3% of AUM than 1.5% and 16% of profit in potentially high growth companies.
Hypothetically, if your $100,000 position doubled to $200,000 in one year, you would pay approximately $3,750 in VCX and retain $96,250 in profits. Conversely, you will pay a $2,250 fee to PSH and 16% of the $100,000 profit, or $16,000, for a total of $18,250. Obviously, paying $3,750 in cash is better than paying $18,250 in cash.
4) VCX Manages A Smaller, More Nimble Fund With More Assets
VCX is a $550 million fund compared to PSH which is worth $18+ billion. As a result, it is sometimes very difficult to do well with such a large number of assets under management.
For example, investing $55 million (10% of VCX) in a well-performing private growth company can make a bigger difference in VCX than PSH (0.3%). Taking the same position of 10%, or $ 1.8 billion in PSH, will tend to move the stock more or not possible if Ackman wants to invest in a small company because of the limited float.
VCX owns at least twice as many companies as PSH. However, about 75% of VCX is focused on OpenAI, Anthropic, Databricks, Anduril, dbt Labs, Vanta, Canva, and Ramp. So I would say that the concentration risk is similar to 8–12 PSH companies.
Conclusion About PSH Case Study
I highly doubt the Innovation Fund will trade at the same discount as Pershing Square Holdings. They are fundamentally different vehicles, with different asset bases, payment structures, investor audiences, and structural strengths. Although both are closed-end funds and do not have the redemption mechanism of ETFs, the similarities end there.
Pershing’s discount is primarily a function of public equity exposure, closed-end structure without redemption mechanism, European listing volatility, performance fees, and concentration risk. VCX, in contrast, provides access to rare private assets, intends to list in the United States, and has no operating income drawdown.
While no listed vehicle is immune to trading at a discount, applying Pershing Square’s historical discount range directly to the Innovation Fund is probably the wrong frame.
Destiny Tech100 (DXYZ) and Robinhood Venture Fund (RVI)
A more relevant comparison might be DXYZ, which is currently trading at about a 140% premium to its roughly $11.50 NAV, and RVI’s soon-to-be-listed Robinhood Venture Fund.
Both hold the same hard-to-reach private companies that are in high demand. It will mean seeing if RVI is also trading at a premium to NAV following its $1 billion offering. If it happens, the chances of VCX trading at a premium increases, and I will invest more in VCX pre-listing.
As we approach RVI’s listing, I plan to publish the following analysis that examines how its performance can inform the expectations of the Innovation Fund. I’m doing this job primarily because I have about $770,000 invested in the fund, which could go down $150,000 or up $385,000 based on the energy range.
Because my wife and I don’t have day jobs, we rely heavily on our investments to support our lifestyle. As a DIY investor, I need to conduct extensive due diligence to improve my chances of making sound, long-term investment decisions.
Anyone here investing in Pershing Square Holdings? If so, what are your thoughts on how to approach the fund given its discount to NAV? Wouldn’t it be better to just invest in an S&P 500 ETF with lower fees, given that performance has been the same for the past 5–7 years?
Fundrise is a long-term sponsor of Financial Samurai, as our investment philosophies align. Please do your due diligence before investing and invest only the amount you can afford to lose. There are no guarantees when investing in risky assets, and you can lose money.
