Description

Today I am posting two ideas, one long and one short, each for a publicly traded investment vehicle. While not exactly a pair trade – I think each is interesting on its own, and the underlying assets are different – the basic set of facts relative to each other highlights the opportunity:

• One has an excellent long-term track record; the other does not

• One trades near its all-time widest discount to NAV; the other does not

• One is buying back shares aggressively; the other is not

• One owns a high-quality set of assets with public marks; the other does not

The Long: Pershing Square Holdings (PSH):

Pershing Square Holdings (PSH) is a publicly listed investment vehicle run by Bill Ackman. You may have heard of him. 

Despite compounding NAV per share at 10% per annum since its listing in 2014 and 24% since 2018, the shares trade at one of the largest discounts to NAV ever at close to 35%. While Ackman may not be everyone's cup of tea, given the hefty discount, nothing heroic must occur here to get an attractive return. If the underlying investments perform just okay, the company continues to buy back shares aggressively (1/4 have already been repurchased, and another 15% was recently authorized), and, at some point in the coming years, the vehicle returns to levels closer to its average discount since inception (22%), it will compound quite nicely from here. 

Pershing Square/Ackman:

If you can't stand Ackman or blocked him on Twitter after one of his 5,000-word posts, you can stop reading here. This is unlikely to change your mind. 

Despite his antics, the data shows that Ackman’s long-term track record is excellent. One way to look at this is by analyzing the performance of Ackman’s disclosed long positions. In the chart below, we calculate how Ackman’s stock picks have performed, using public disclosures, relative to the S&P 500 and Berkshire Hathaway’s underlying stock holdings (not Berkshire itself, to be clear). 

The above estimate only includes Ackman’s long positions, so it does not include his Herbalife short or hedges over the years. Herbalife was a disaster (Ackman has publicly stated that he is finished with activist shorting after that), his hedges have performed incredibly well, and the internet responded to it all with high-quality memes. 

According to the FY2022 PSH investor deck, Ackman's three major hedging trades (GFC, Covid, Inflation/Rates) have generated total proceeds of $6.4b on $475mm of invested capital. These trades are episodic and hard to underwrite going forward, but Ackman’s track record is outstanding. 

NAV Discount:

PSH trades at a 35% discount to NAV today and has traded at an average discount to NAV of 22% since 2012. While PSH is likely to always trade at a discount due to its 1.5% management fee/16% carry (PSH also receives 20% of any carry generated from any other Pershing Vehicles or Funds), we see no reason why the discount should be this wide, especially relative to other listed investment vehicles (see our Sofina short for one example). 

Ackman and the management team at PSH are highly aware of the material discount – PSH has multiple pages dedicated to closing the discount in its updates – and historically have used times like these to repurchase shares. Since its first buyback initiated in 2017, PSH has repurchased ~62mm shares at an average discount to NAV of 28.6% through 8/24/2023. At PSH’s annual meeting this year, an additional buyback of up to 14.99% was authorized. 

Holdings:

PSH provides a high level of transparency on its portfolio, between semiannual updates, regulatory disclosures, and investor updates regarding new positions, activist campaigns, and exits directly to its investor website. The vehicle holds a portfolio of high-quality companies that it typically owns for several years: 

Summary

If Pershing’s underlying assets compound in the mid to high single digits, shares continue to be gobbled up via buybacks, and the discount goes back to something like 20-25%, PSH could easily compound at a double-digit rate going forward. Aside from the overall impact of being long equities (easily hedgable at your discretion – see our Sofina short for one example), we also think downside is relatively limited here. PSH owns high-quality companies, has a track record of protecting capital during periods of market turmoil, and would likely buy back even more shares if the discount to NAV increased.

Catalyst

• Accretive buybacks continue/increase
• Discount goes back to historical average at some point