Bill Ackman Is Launching a New Way to Invest in Pre-IPO Companies

Bill Ackman just launched a new closed-end investment fund a few months ago, and he’s already planning his next one. The CEO of Pershing Square (PS +1.05%) launched Pershing Square USA (PSUS -0.38%) in April, giving U.S. investors an easy way to invest with him. But he sees another opportunity in the U.S. market — pre-IPO companies.

To that end, Pershing Square announced the forthcoming launch of Pershing Square Ventures, Ltd.: a small closed-end fund that will invest in late-stage private companies. Ackman argues that he and his team are well-suited to invest in private companies. In fact, Pershing Square has already taken some positions on its own balance sheet (outside of its funds). What’s more, Ackman argues, launching a venture fund and researching more start-ups will help produce better results for investors in Pershing Square’s existing funds.

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How will Ackman’s new fund stack up?

Management says Pershing Square Ventures will boast a few advantages over existing venture funds. For one, as a closed-end fund, it can hold companies even after they go public. That provides more flexibility for the fund manager to hold or dispose of positions when valuations make sense, or to wait until a new venture deal comes to market, without having to hold cash.

It also expects to charge lower fees than existing funds on the market today. Robinhood Markets (HOOD -0.70%) offers a pair of venture funds. Its first fund charges expenses of about 3.13% per year, the second fund charges a 2% management fee and takes 20% of all capital gains. Both are very high fees to pay, even for access to private businesses.

Ackman also mentioned that other venture funds are “oversubscribed forever.” He believes Pershing Square Ventures will be able to meet investor demand.

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Importantly, Ackman plans to seed the fund with investments held on Pershing Square’s balance sheet and his family office. That way, investors know what they’re buying into as the fund looks to raise capital. Ackman also emphasized that the fund won’t meaningfully contribute to Pershing Square’s overall assets under management right away, keeping it small. However, if it proves successful, it will, over time, contribute a significant amount to Pershing Square’s total fees.

Ackman argues that starting a venture fund will further support Pershing Square’s main investment funds in publicly traded equities. That’s because researching up-and-coming start-ups in the same space as its public investments will help it understand competitive threats and how larger companies are adjusting (or not) to them.

The plan is to launch Pershing Square Ventures before the end of the year. Investors should look for more details on the fee structure and the investments the company will seed into the fund in the coming months. Another option for investing in private companies before their public debuts should be good for investors interested in the space. While the risks of investing in such funds remain high, more competition could mean lower fees across the board.