Description

Pershing Square Holdings (PSH)

Investment Thesis:

Pershing Square Holdings (PSH) is trading with 21.5% discount to NAV. We expect that gap to close to approximately 12-14% discount to NAV once it has further seasoned on the London Stock Exchange and Ackman has further implemented his buyback program. Given the liquidity, long term track record, concentrated portfolio (hedgeable) and low current fees, we could imagine that projection being conservative.  This idea is very hedgeable given how concentrated the portfolio is and how infrequently it turns over, which makes this trade attractive in today’s market. We think of this as an 8-10% gross that should be realized over 6 months, leading to a hedged ~17-21% IRR. It also allows investors to pick and choose the investments they like (Howard Hughes as an example) to leave unhedged.

While the recent results of Pershing have been poor, the long-term results remain strong and the model is not broken. Given the distance to go before the high-water mark, the fees remain a relative bargain compared to other investment vehicles out there. And beyond that, the structural set-up of PSH is significantly more shareholder friendly than other publicly traded hedge fund vehicles like Third Point.

As a last catalyst, assuming you put this on as a hedged trade, you can neutralize movement in all disclosed positions. But that leaves you with upside to pops as Pershing announces new activist positions. Historically those pops have been significant, and an investor in PSH will benefit from those moves.

Background on Pershing Square:

Please follow these links to get more of a background on Pershing Square and Bill Ackman:

https://assets.pershingsquareholdings.com/media/2017/01/26223015/2016-PSH-Annual-Update-Presentation-FOR-DISTRIBUTION.pdf

https://assets.pershingsquareholdings.com/media/2014/09/24092735/2017-Annual-European-Investor-Presentation-FINAL.pdf

Ackman has obviously been much maligned recently and if you believe he is a completely incompetent investor, it may be best to move on from this writeup. But we think his cumulative net return from 2004-2016 of 503% versus 163.4% means that while he may be aggressive and arrogant, he has some talent. This is an unpopular position today, but we believe this perception will soften over time. Valeant was obviously a huge mistake, but there are other “smart” Investors who made the same mistake. Ackman appears to be biding his time to find his next big investment while keeping his head down; we approve of this strategy.

We believe Pershing continues to be a desirable place to work for talented investors. The long term incentive plan put in place recently was also a smart move, and incentivizes talented investment team members to stick around Pershing.  So, while redemptions have been rough, we think Pershing is a stable organization that has franchise value.

Background on PSH Holdings:

Pershing Square Holdings IPO’ed in Amsterdam in October of 2014, raising $2.73B of capital. This was created as a permanent capital vehicle for Ackman/Pershing, with Ackman hoping to over time have this vehicle trade at or above NAV and allow him to grow Pershing into a more Berkshire like vehicle. To the end, Pershing put lower fees on this structure than its traditional vehicles, charging 1.5% plus 16% incentive as well as giving PSH 20% of the incentive fees of the other non PSH, Pershing vehicles. With the current composition of assets, assuming PSH were above its high-water mark (it’s not) PSH investors would net pay 1.5% management fee and ~11-12% incentive fees. In reality, there are not incentive fees until PSH goes up to $26.37. This makes PSH a comparatively low fee vehicle.

Ackman (unlike Loeb on Third Point Public) continues to care about the discount to NAV. He wants PSH to trade at NAV and has initiated a buyback and dual listing in London to achieve this goal.  We believe he will continue to focus on closing the discount to NAV; his decision to amend the buyback on 11/8/17 to permit share purchases on both the Euronext and LSE supports this view.

NAV Calculation: (using SPY as proxy for undisclosed)

Projected Returns:

Discount to NAV over Time:

Comp Set:

There are 88 comparable investments trusts (equity and developed markets focused) listed on the London Stock Exchange with an average discount to NAV of 6% (Pershing trades ~21.5% discount). Pershing’s discount to NAV would place it between number 84 and 85 on our list. However, unlike many of the funds listed on the London Exchange, Pershing has a concentrated, easy to hedge portfolio with quarterly portfolio level visibility (quarterly 13f filings and investor calls).

Catalyst

PSH is also in process of buying back 5% of their shares.

Investment Results stabilize and investors begin to view Ackman based on long term track record and move past Valeant debacle

Announcement of new activist position (and ensuing pop)