PSH.L - Pershing Square Holdings

[giofranchi]

Today I have used my cash reserve to invest in Pershing Square Holdings.

 

I think it has many characteristics that I like in this environment:

 

1) First of all I think Ackman has learnt an hard lesson about investing in low quality businesses... And from now on he will concentrate on businesses that generate steady free cash flow, with low or no debt. Given the overall environment, that's where I want to be invested too.

 

2) His activism is much like investing with a catalyst... Another thing I like and look for these days! Not only his targets generate healthy levels of fcf, but (if Ackman is successful) the market will also see new strategies that get implemented to further increase those levels of fcf, and will revalue those companies accordingly.

 

3) I like very much his way of concentrating capital in just 3-4 ideas each year: it gives him the time needed to pursue and implement the right changes, and gives me the possibility to follow and try to understand each major decision of his. If I find the thesis of his next very large investment too risky or too difficult to understand, hopefully I will be able to get out without losing much capital, and to watch from the sidelines.

 

4) With $18 billions of AUM (6.5 of which are now permanent capital) Ackman has the firepower to push for changes in any kind of medium and large cap companies. His universe of possible investments is huge, he is only 48, and therefore could go on compounding at high rates of return for many years to come.

 

5) The share price is trading around NAV, therefore I am not paying a premium due to Ackman's 2014 stellar performance.

 

Gio

[moody202]

How would I buy this in US?

[abyli]

Use IB, buy in IRA account. :)

[moody202]

Use IB, buy in IRA account. :)

 

why IRA?

[abyli]

It is a foreign closed hedge fund. PSH is listed in Holland because it is illegal for hedge fund to go public in US. Now US has very complicated tax rules about buying foreign funds. Google keyword PFIC.

[handycap5]

could you explain a couple of things that confused me on PSH:

1) what are the fees and expenses the fund will pay?

2) how do the taxes work?

 

thanks, handy

[gfp]

The fees are lower than the other Pershing Square funds.  Like someone else mentioned, if you are US investor it is best to understand the PFIC rules and hold it in an IRA if your tax adviser says that works for you.

 

Everything you would want to know is in the prospectus - tax info on page 199, Fees on page 12:

 

http://pershingsquareholdings.com/media/2014/09/Prospectus-Dated-2-October-2014.pdf

 

The above homepage also has links to the weekly NAV reports.  It trades at a small discount to last reported NAV.

 

could you explain a couple of things that confused me on PSH:

1) what are the fees and expenses the fund will pay?

2) how do the taxes work?

 

thanks, handy

[giofranchi]

Handy,

Compensation is the one Ackman asks to any other client of his: I guess it should be the classic 2 and 20. His results net of fees and expenses imo justify such a generous compensation.

 

As far as taxes are concerned, I have held Third Point Offshore for two years and was very pleased with its fiscal regimen. PSH is based in Guennersey, just like TPOU, therefore I don't expect any difference.

 

Cheers,

 

Gio

[merkhet]

Today I have used my cash reserve to invest in Pershing Square Holdings.

 

I think it has many characteristics that I like in this environment:

 

1) First of all I think Ackman has learnt an hard lesson about investing in low quality businesses... And from now on he will concentrate on businesses that generate steady free cash flow, with low or no debt. Given the overall environment, that's where I want to be invested too.

 

2) His activism is much like investing with a catalyst... Another thing I like and look for these days! Not only his targets generate healthy levels of fcf, but (if Ackman is successful) the market will also see new strategies that get implemented to further increase those levels of fcf, and will revalue those companies accordingly.

 

3) I like very much his way of concentrating capital in just 3-4 ideas each year: it gives him the time needed to pursue and implement the right changes, and gives me the possibility to follow and try to understand each major decision of his. If I find the thesis of his next very large investment too risky or too difficult to understand, hopefully I will be able to get out without losing much capital, and to watch from the sidelines.

 

4) With $18 billions of AUM (6.5 of which are now permanent capital) Ackman has the firepower to push for changes in any kind of medium and large cap companies. His universe of possible investments is huge, he is only 48, and therefore could go on compounding at high rates of return for many years to come.

 

5) The share price is trading around NAV, therefore I am not paying a premium due to Ackman's 2014 stellar performance.

 

Gio

 

Unclear whether Ackman was merely talking his book, but in a Bloomberg Europe video, he mentioned that vehicles like this usually trade for 2x+ book value. If that's true, and he can continue his 20% CAGR, then this will be an incredible steal.

[giofranchi]

The fees are lower than the other Pershing Square funds

 

Ok! Even better! :)

 

Gio

[gfp]

"Unclear whether Ackman was merely talking his book, but in a Bloomberg Europe video, he mentioned that vehicles like this usually trade for 2x+ book value. If that's true, and he can continue his 20% CAGR, then this will be an incredible steal."

 

What is he talking about?  TPOU is almost identical and trades at almost exactly NAV.  Most closed end funds trade at discounts.  The only thing he can point to is Berkshire at a few points in the distant past, but Berkshire had leverage from Float that PSH doesn't have.

 

It has traded at a persistent discount since the IPO.  I have purchased PSH several times when the discount was wide but a recent article closed the gap significantly.

[peter1234]

What is he talking about? 

What he is trying to say is that companies with ROE of 20%+ trade for 2x+ book value.

However, closed end funds usually do not trade like this.

 

[giofranchi]

It has traded at a persistent discount since the IPO.  I have purchased PSH several times when the discount was wide but a recent article closed the gap significantly.

 

As I have tried to explain, I don't think about PSH as a vehicle to be traded in when the discount to NAV is large, and out when the discount has shrunk.

Though of course that could be one way to look at it! ;)

 

Gio

[Picasso]

The argument that this should trade at 2x book because he has been shown to compound at 20% is ridiculous.  This vehicle will trade at 0.7-1.3x book for a long time and the performance will come as he improves book value.  If Ackman gets hit by a bus, the 20% ROE goes away.  This isn't some regular business with perpetual 20% returns.  Nevermind the harder it is to make 20% consistently in a low interest rate environment with tens of billions of capital.

 

Ackman is so frustrating.  I really like how he approaches the investment process, but then he gets promotional and emotional about things when the process should speak for itself.  Does he really think shareholders are so stupid to believe that line of 2x book for a closed end hedge fund?

 

That said I bought some PSH under $24 because of the discount to NAV and exposure to FNMA that I don't feel comfortable doing on my own. 

[petec]

This isn't some regular business with perpetual 20% returns. 

 

 

If you know of any companies with perpetual 20% returns please do let me know ;)

[gfp]

Since we're talking about Return on Equity, there are several examples and they usually trade at big premiums to net worth.  Microsoft is the easiest example off the top of my head - http://ycharts.com/companies/MSFT/return_on_equity

 

Ackman really wants people to equate PSH with Berkshire but he has said he will continue with his current strategy of buying stakes in public companies.  He's not going to get an operating company multiple on book.  The present value of the fees would suggest a small discount is fair.

 

This isn't some regular business with perpetual 20% returns. 

 

 

If you know of any companies with perpetual 20% returns please do let me know ;)

[Liberty]

I expect Pershing to do well over the long term. Probably better than non-activist big funds, since they kind of auto-catalyze their investments.

 

Glad to see you deploying capital, Gio :)

[giofranchi]

I expect Pershing to do well over the long term. Probably better than non-activist big funds, since they kind of auto-catalyze their investments.

 

I look at PSH more as an holding company than a fund.

 

It is true they don't have any operating business... But it is also true they concentrate their investments in just a few names they know very well and hold for the long term... To hold for the long term doesn't mean to hold "forever"... And that's why they don't have any wholly owned business.

 

Imo they hold an investment until they see the opportunity to implement changes in order to achieve outsized returns. Then they sell and go looking for the next business that is underperforming because of mismanagent.

 

It is not clear, to me at least, which vehicle is more valuable: an holding company with wholly owned businesses, or a vehicle which is built to do what PSH does. To have a permanent stream of cash is useful indeed, but, once the business has been "fixed", incremental return on capital cannot stay as high as when changes are successfully implemented. Selling and looking for the next business which needs the same treatment, might not be a bad idea after all. :)

 

Gio

[Liberty]

I expect Pershing to do well over the long term. Probably better than non-activist big funds, since they kind of auto-catalyze their investments.

 

I look at PSH more as an holding company than a fund.

 

It is true they don't have any operating business... But it is also true they concentrate their investments in just a few names they know very well and hold for the long term... To hold for the long term doesn't mean to hold "forever"... And that's why they don't have any wholly owned business.

 

Imo they hold an investment until they see the opportunity to implement changes in order to achieve outsized returns. Then they sell and go looking for the next business that is underperforming because of mismanagent.

 

It not clear, to me at least, which vehicle is more valuable: an holding company with wholly owned businesses, or a vehicle which is built to do what PSH does. To have a permanent stream of cash is useful indeed, but, once the business has been "fixed" incremental return on capital cannot stay as high as when changes are successfully implemented. Selling and looking for the next business which needs the same treatment, might not be a bad idea after all. :)

 

Gio

 

That's certainly how Ackman has been selling it, and I tend to agree with him to a certain degree, though unlike a pure holding company, he does have non-permanent capital that can flee at the worst time, he's charging fees, and he's regulated as a hedge fund. That does make a difference.

 

When I made my comment about big funds, I was thinking of Fairholme (whether that's a fair comparison or not, they both are pretty huge), ie, big enough that it becomes harder to play in small and mid caps and move the needle.

[giofranchi]

Liberty,

What you say is right of course!

But I don't see why what "non-permanent" capital does should affect "permanent" capital. After all they are invested through different vehicles, aren't they?

 

In other words PSH is not subject to redemptions.

 

Gio

[Liberty]

Liberty,

What you say is right of course!

But I don't see why what "non-permanent" capital does should affect "permanent" capital. After all they are invested through different vehicles, aren't they?

 

In other words PSH is not subject to redemptions.

 

Gio

 

That's where the nomenclature gets confusing. I was talking about Pershing as a whole, sorry for the confusion.

[handycap5]

as a US owner, are you buying into low tax basis stock? is it similar to ruane cuniff where you buy into a large tax liability?

 

also, re: fees and expenses, i would love a full explanation. for instance, they are paying a promote for the zoetis idea, i'm sure this is not in the fees.

 

appreciate the groups thoughts.

[obtuse_investor]

Congratulations Gio on your purchase. I think you will do very well.

 

Any Canadians here who have looked into or has purchased PSH shares?

 

I am seriously considering it but am not sure of the tax implications, if any.

[james22]

Introductory:

 

http://www.insidermonkey.com/blog/bill-ackman-talks-about-pershing-square-holdings-ltd-psh-ipo-likes-restaurant-brands-international-inc-qsr-had-plans-to-invest-in-tesco-plc-tsco-337738/

 

http://www.institutionalinvestor.com/inside-edge/3390303/pershing-square-ipo-great-for-ackman-but-investors-have-questions.html

 

Thanks for bringing to attention, Gio.

 

 

[mcliu]

Why not just mimic his investments?

 

I mean his strategy is to take large activist positions in large publicly-traded companies in the U.S. or Canada. In most instances he would have to file 13-Fs to disclose his positions, so you're basically able to figure out what he's invested in through his filings. Even if the stock pops on his initial 13-F, his activist strategy usually requires a couple of years to play out, allowing you plenty of time to accumulate shares.. That way you're also saving 2/20 in management fees which is pretty substantial..

 

This is probably why it's unlikely that PSH will trade at 2x NAV. I mean, why pay a 2x the FMV of his holdings + 2/20 management fees, when you can purchase the holdings on the market for 1x NAV?

 

Also since there's no reinsurance business, it's not like PSH has access to low-cost leverage that's available like some of the other hedge fund vehicles GLRE or TPRE or BRK/FFH/MKL..