Guy on Twitter: PSUS, Left, ETFs

and now it was pulled entirely. They're reevaluating it. And along that path we got a letter that was released which maybe Bi Lackman didn't know was going to be released, and then we had some investors bowing out as well.

funds and the clothes end funds. And he recently sold about a ten percents take in the management company to a few institutional and highnight Worth investors. And last week he sent a letter to those guys, those people who were investors in his management company saying essentially, hey, it would be really helpful if you would put in some orders in the Pushing Square USA Closed End Fund IPO. And I read that letter and it seemed to me

that that's not a good sign. I probably underplayed this when I wrote about it, because there are other possible interpretations, right, Like one possible interpretation is that Bi Lackman is just unusually candid about how the IPO process works to his management company investors. But it sort of seemed like he was saying, hey, guys, it would really help out a

lot if you could put it in order. Yeah. I used to be a capital markets banker and you would do a deal and you would get calls from investors. I would say, how's the deal going, And there's only one answer you can give them. You say, the deal is going great. There's so much demand. You really better put your order in because otherwise you're going to miss out because this deal is going so good, so many

people wanted to buy it. You can't like necessarily lie if the dealer is going poorly, but you say things like, oh, there's a lot of interest, we're having a lot of meetings. That feedback is really good. You should put in your order quick, right, You try to create the sense of excitement. If the deal is not going well, then like you might call up your best friend investor and say, hey, it would really help out if you would put in a big order, because that would get us over the line,

that would create some momentum. And it sort of seemed like that was what Acman was doing by sending this letter to the people who are already in his management company. Problem is, if you do that publicly, everyone can read it, and no, that's a bad sign. So I do think that, like the letter did not necessarily help very much, because I do think that some people read it and think, well, this suggests that there's not a ton of demand.

possible explanations. But like, here's another explanation. If you interpreted that letter to mean there's not a ton of demand, then even if you were already in the book, you would take your order out of the book, right, yeah, Because this is the problem with this thing is like you can be a long term investor, right you can

say I like Bill Lackman. I think that he's going to compound my money at a high rate, and so I want to be invested in his fund and I'll invest, you know, this month and hold it for ten years and expect Bill Ackman to compound my money for me. But the problem is that on the first day of trading, this thing is either going to trade up or it's going to trade down. And as you said, his existing clothes unfund trades at a big discount to its net

ASSEID value. Most closed un funds traded discounts to their net asset value. And so if you're an investor, instead of buying the shares at fifty dollars in the IPO, you might say, well, I'll just wait until the next day and I'll buy them at a discount. I'll buy them at like forty five or whatever. So it would be sort of silly to buy on the IPO if

you could wait to buy at a discount. The whole point in the IPO process is for Bill Ackman to tell people, no, no, it's going to trade it at a premium, right, and so he makes that case in this letter, but he sent these investors and that was then made public sort of by accident. He makes the case that is going to trade at a premium. You know. The essential case is that a lot of retail investors, for one reason or another, aren't going to get shares

in the IPA. Like the main one is that most retail investors, most retail brokerages aren't going to get allocated anything in the IPO. Also, there are some European retail investors who would want to buy shares, but who can't buy them in the IPM. So all these retail investors want to buy shares in the bill Ackman IPO. They can't buy it at the time of the IPO, so they'll buy it the next day in the aftermarket, and there'll be so much retail demand and maybe so much

institutional demand that the IPA will trade up. And so if you wait to buy in the aftermarket, you'll have to pay fifty five dollars a share instead of fifty dollars a share. But the IPO was so big that the really essential question is is there going to be enough institutional demand in the aftermarket? Is there going to be institutional demand the next day? And they were just kept being indications that there was just not enough institutional

demand to like price a really tight large IPO. And so if you thought that there wasn't that much institutional demand, then you'd say, well, it'll trade down to forty five and I'll wait until the buy it the next day, and then there will be no institutional demand. Right, if everyone's going to wait to buy it, then no one will buy it in the idea.

necessarily guaranteed. And you think about the following that he has on Twitter, I would imagine that the majority of those people, or at least a sizeable portion, aren't necessarily following him for his investing acumen.

billion dollars, right. That can't be right, right? That implies that he would take like half of the value from like his investors' funds for himself or for his investors. Now, the only way you can get to a ten billion dollar valuation for the management company is if you think that the management company is very soon going to manage

a lot more money. And I think obviously the case that was made to these management company investors, is we are going to transform from a smallish hedge fundition manager to a sort of more institutional asset manager that attracts a lot of retail interest and a lot of institutional interest and runs tens of billions of dollars and has a publicly traded permanent capital vehicle, and has like the steady stream of large earnings from running large amounts of money.

And then, you know, I think if you were investing in the measurment company, somewhere in your mind was the notion of a twenty five billion dollar pieces IPO and a zero dollar pieces ipo makes that case more challenging. The other thing I want to say about the management company is so I wrote on Thursday about the problem here, which is that it's very hard to sell the these shares at nav because you expect to close on fund to trade at a discount. Everyone wants a discount. Well,

how do you sell the shares at a discount? Because the shares are just it's a pot of money, right, So you can't sell you know, one hundred dollars worth of money at ninety dollars because then you only have ninety dollars. So how do you create a discount? And I wrote about some possible ways to do that, which come down to kind of Pershing Square putting in some money. But several readers emailed me immediately to be like, well,

here's the obvious way to do it. The obvious way to do it is to put some of the management company into pieces. So instead of really, I've been seating the fund with like a billion dollars of his own money for free, he could see it with ten percent of Pershing Square the management company, for free, and then pieces would have a net asset value more than just the cash that investors put in. And then the investors say, okay, I'm getting a discount and they put in their money.

And this is a good idea. And you know, someone drew the analogy to like Vanguard, where Vanguard invest do own a piece of the management company. It's because it's a mutual company. But the problem here is you sort of already promised the management company in an IPO to these other investors, right, so to say we're going to push the management company into pieces is a little bit

more challenging. So what does it mean for the for the IPO added, It's like a setback, right, I mean the IPO was I think premised on the Pieces IPO going really well, and with having a hard time raising money for Pieces, it's harder to get to a ten billion dollar valuation for the management company.

of your positions, right. That is easy to do if you are just the index one, right, But it's harder to do if you are doing the kinds of trades that b. Lackmann wants to do, which are like these like long term fundamental equity and trades, but also like you know, derivative trades. I mean, like some of their track record is from CDX beats going into COVID, and again that's harder to do if your capital can vanish

every night. So I think that from his perspective, it's obviously to permanent capital, and I think he can make the case to investors that actually, like permanent capital is the way that I create value and ETF doesn't make sense for the kind of investing that I do. I think that's a reasonable case.

company is like that one guy. And I think that they would like to have a proof of concept that actually it's an institution and really the investing team has kind of transitioned away from him and it's not just him, and it's a permanent entity that will exist forever and provide wealth for him forever, right, instead of like when

he quits, the thing vanishes. So I think there's a temptation for anyone who runs a company to take that company public so you can you know, take money off the table and have permanent shares instead of just like your own labor. But right, the track record of it is kind of challenging.

pay the startup costs. Then the sponsor kind of sells shares at net asset value to investors, and then if the sponsor does a good job and finds a good deal, the sponsor gets a lot of like free upside. So there's this like Carter, where like if the thing is those kind of met the shareholders get all their money back, so they are protected against the problems of investing at

nav and then having the navy go down. If the thing does poorly, then the manager the sponsor eats the loss, and if the thing does really really well, the shareholders give up some of the upside and it goes to the sponsor. And so the sponsor has the sort of asymmetric trade where the sponsor puts in some money that's at risk, but then if it does really well, the

sponsor makes a lot of money. You can imagine a structure like that for pieces, where you know, Bill Ackman seeds it with money, and if it trades below net asset value, he kind of bears the first loss so that the investors who buy in the IPO still get at least the amount of money they put in. And then if the thing does really well, he gets warrants or something so that he gets upside to compensate him for that. Like, that's a structure that could work. You

could do something like that. That's easy enough.

and that's how he makes money. A lot of these people are guys on Twitter who may or may not have something like a hedge fund or something called a hedge fund. But when Andrew Left got in trouble last week the SEC, one of its complaints about him was that he wasn't really running a hedge fund. He didn't know outside money. He was just a guy investing his personal account. I assume a lot of activists shorts are just guys investing their personal accounts, but it just sounds nicer.

So Andrew Left is Andrew Left. But he's also Sitron Research, which just sounds fancier than just being a guy on Twitter. And honestly, I think he's kind of earned it, Like he's had a good track record of spotting frauds. You know, he really was instrumental in spotting big problems at Valiant Pharmaceuticals a few years ago in a way that really took billions of dollars off that market cap and was good investigative work. And he has a good track record

of finding companies that will go down. So that's his deal. And last Friday, the SEC and the Department of Justice brought charges against him for doing alleged fraud. And basically they're accusing him of doing a reverse pupping dump. Right instead of like saying hey you should buy the stock and then selling it, he said hey, you should short

the stock, and then he bought it. So their accusation is that he would short these stocks, he would publish angry reports calling them frauds, and then kind of the minute he published the stock would go down and he would buy back the stock. So five minutes or an hour a day after he published his report, he was no longer short, so he took all the risk off

the table. And the SEC one I think, just doesn't like that because it just seems like, if you're doing it that way, you don't really think the stock is a fraud. You just want to move the stock down so you can make money, and you don't care what happens after that. I don't think that's right. I think

the SEC is wrong about that. I think that Andrew Left has a lot of incentive to care about what happens after that first day because this is his livelihood, and if he's always wrong, the stocks will stop going down and this will stop working. The only way this works is that every time he says this company is a fraud, there's a good chance the company is actually

a fraud. And if he keeps having a pretty good hit rate, then the stocks will keep going down and he can keep collecting profits on the first day and he doesn't have to wait until, you know, a year later when the company goes bankrupt. But the whole thing doesn't work unless he's got a pretty good hit rate. So the SEC doesn't like it for I think some

reasons that are wrong. But the SEC also doesn't like it because he lied about it a lot, Like he would go on television and the reporters would say, sorry, you're still short, and he'd say, I'm still short, but he actually had covered. So it's like bad, you can't do that. And you know, you think about like a pumping dump, like a classic pumping dump, there's like nothing

to it. It's like some guy in a telegram chat room saying you got to buy this microcap stock because it's going to go to the moon, and maybe they give some business case for it, but everyone knows they're kidding. You know, Yeah, it's discovered a cure for cancer. And then the stock goes up a little bit and the pump and dumper dumps the stock, and the pump and nupper says, oh, I'm holding on until he gets through

one hundred. I'm all in on this, but he's lying and he's already sold the stock, and the SEC sort of sees that in reverse, and Andrew left. But I think the difference really is that a pump and dumper normally has no basis for recommending the stock other than like if we all buy the stock, it'll go up right. It's just a pure social market dynamic thing. And the only thing that that the audience cares about is that

this pump and nupper is buying the stock. And if the pump and number is actually selling the stock, then like, yeah, it looks like frat with Andrew Left. I don't think that's how it works. Like, I don't think people were shorting those stocks or selling those stocks because they're like, oh, Andrew Left is short, I'd better be short too. I think they were short in the stocks because Andrew Left published reports saying this company is a fraud, and they

thought that's probably true, and often it was true. The SEC complains about this coming called Kronoscrip, which is like cannabis company, and it was trading like nine or ten dollars.

And Andrew Left said, I think this is a fraud, and I have a price target of three dollars and fifty cents, and then like the next minute, you know, the stock goes down and he covers his short and he never waits for it to get to three dollars and fifty cents and he gets out of the trade, and then you know, he lies about it and says I'm still short even though he's he's actually not short. But that stuff got to like two dollars and settled

an SEC's case for a fraud. He was not wrong. Yeah, So like there's a lot of that where the SEC focuses on what he said about his own trading, but it doesn't focus on whether his reports were honest or accurate. And to me, this is not the law. But to me, like if the reports were honest and he was you know, largely right, then like, yeah, no harm.

that wasn't really true. And again the SEC really did get mad at him for saying he was a hedge fund. He would like tweet things like you know, we want to reassure our investors that blah blah blah, and I say, oh, you don't have investors, right, Like yeah, Like that's dishonest, and like some pumpin' uppers like do sort of create the impression that they run a lot of money for outside investors in order to like gin up an audience.

But I don't know. I feel like everyone kind of knew he was a guy on Twitter with like airs and like that's normal.

I would caveat that by saying, again, I really do think that a lot of people really, really really dislike the business model of shorting a company, publishing bad stuff

about the company, and then immediately covering. Like even if he never lied about that, even if he said in the fine print of his report like I could cover at any time, and then he went on TV and they said have you covered, he said no comment or even yes, Like, I think that people would still be really mad about that, because it just seems like that it's dishonest, and I don't think it is, but I

do realize that people find it upsetting. Yeah, people think that if you're doing that, you can't really believe that the company is a fraud. And to me, it's just there's like a division of labor where he is in the business of spotting the frauds, calling attention to them, profiting from that first day move and then moving on to the next thing, and other people will provide the long term capital to be short the frauds all the way down or whatever.

will go down. And I never understood this concern and thought it was very silly, And now it seems to have gone away, and Raban now has this piece saying that bond ETFs are eating the bond market and that's good, and I think that I agree. It seems right.

but they bought bond ETFs. So you have the FED stamp of approval on the structure and everything turned out fine. Like I can't imagine a better test.

very easy to trade ETFs. And so I think the perception is that most market participants felt that the ETFs were adding to liquidity rather than subtracting, because at least you could trade the ETF right, which allowed you to do some sort of like macro positioning around credit, even if it was hard to get off individual bond trades.

But I think the other point of Robin's piece is that the ETFs have largely made it easier to get off actual bond trades for a combination of reasons, one of which is that there are all these new dealers who you know, the sort of Jaane Streets of the world, who are big ETF market makers, And if you're a big ETF market maker, then those bond ETFs get bigger.

You have to get into bond ETF market making, and if you're an ETF market maker, you have to trade both the ETF and the underlying and so Jane Street and all the other infloat trading, and all the big ETF firms have gotten into bond trading, and so that's another source of liquidity and another set of market makers,

another set of balance sheets. And as banks have retreated from market making and a lot of financial products, you have new bond traders that have made bond trading a little bit more liquid and He also talks about portfolio trading, where instead of trading one bond at a time, you can call up Jaine Street and say I have four hundred bonds I want to sell, and they're like, yeah, we could probably stuff most of those into an ETF.

So it's fine, Yeah, we'll take them all. And so instead of kind of paying four hundred bit asks, you kind of pay a tighter bit ask spread on a single portfolio. And that's I think improved liquidity for a lot of actual bond managers. So it's a very rosy story of like bond ETFs have made bond market liquidity nicer.

ten billion dollars. It's by far the biggest, and there's some people who have pointed out that there's so much demand for this specific ETF, and you know, some of the flow is starting to increase to the other ETFs as well, that it's starting to potentially tightened spreads on clos just because all this money keeps pouring in, the ETF has to keep buying clos and that's actually having an impact in the cash markets as well, which is interesting.

Like the question that that raises in my mind is you know, now you have this super accessible wrapper, maybe it's introducing a new class of investors into that asset class who didn't want to take the time to figure out how to do the mechanics of it before, but now it's super easy, and now you're seeing the ETFs potentially impact that market.

big diversified board. Oh have clos the story that you told the spreads coming in, it's just in any product, if liquidity is improved, you should expect the valuation of the product to go up, right, and the spreads to come in. And the ETF technology just improves the liquidity of anything it wraps. And so if you have some audience that would have said out it's like a pain to hold whatever, but we can hold it in ETF form.

And you put an ETF form, then the liquidity of that product, of the underlying product goes up and the spreads go down. And obviously, you know, the example that we've talked about before is bitcoin, right, I mean Bitcoin was for some subset of investors a pain to hold, and then you put in an ETF and Bitcoin prices go up. So I think that it's a sort of general use technology. Yeah.

to worry about buying those bonds yourself. You know, it's about to say, I wonder how we're going to fit ETFs into next week's episode. But I'm going to Paris, so oh yeah, that's.