PSH.L - Pershing Square Holdings

[handycap5]

Did we ever resolve whether PSH NA is subject to PFIC rules for US-taxable investors? I'm amazed it isn't more simple to figure this out on their website...

[Patmo]

Ackman recently swapped APD stock for mostly APD options as a way to raise cash.  He'll probably do this with other positions.

 

Because the Target fund wasn't a good lesson on putting on massive option trades...

 

On March 8, 2016, certain of the Reporting Persons acquired on behalf of PS, PS II, Pershing Square International, and PSH American-style over-the-counter call options referencing 12,947,936 shares of the Issuer with Expiration Dates as set forth in Exhibit 99.4. Simultaneously with this acquisition, certain of the Reporting Persons sold on behalf of PS, PS II, Pershing Square International, and PSH 12,947,936 shares of the Issuer.

 

The counterparty to such over-the-counter options is Nomura Global Financial Products Inc.

 

 

If the fund manager is deploying the cash proceeds into other investments (either common stock or OTC options) then this fund has embedded leverage and increased the overall  leverage of the portfolio for PSH - readers of the PSH annual report may not realise the portfolio has increased its leverage via call options. So PSH has long term debt of US$996mn that they issued in June 2015, then there is the leverage via its positions in options.

 

Leverage on the leverage to bet the farm on a heavily leveraged play? What could possibly go wrong...........................................

 

This value investing thing is becoming too next level for me, I think I'll go back to videogames...

[kiwing100]

Ackman recently swapped APD stock for mostly APD options as a way to raise cash.  He'll probably do this with other positions.

 

Because the Target fund wasn't a good lesson on putting on massive option trades...

 

On March 8, 2016, certain of the Reporting Persons acquired on behalf of PS, PS II, Pershing Square International, and PSH American-style over-the-counter call options referencing 12,947,936 shares of the Issuer with Expiration Dates as set forth in Exhibit 99.4. Simultaneously with this acquisition, certain of the Reporting Persons sold on behalf of PS, PS II, Pershing Square International, and PSH 12,947,936 shares of the Issuer.

 

The counterparty to such over-the-counter options is Nomura Global Financial Products Inc.

 

 

If the fund manager is deploying the cash proceeds into other investments (either common stock or OTC options) then this fund has embedded leverage and increased the overall  leverage of the portfolio for PSH - readers of the PSH annual report may not realise the portfolio has increased its leverage via call options. So PSH has long term debt of US$996mn that they issued in June 2015, then there is the leverage via its positions in options.

 

Leverage on the leverage to bet the farm on a heavily leveraged play? What could possibly go wrong...........................................

 

This value investing thing is becoming too next level for me, I think I'll go back to videogames...

 

Value investing is buying securities for less than their intrinsic value with a margin of safety.

 

If you choose to finance your purchase using leverage (or use securities with embedded leverage such as options), then that is a different ball game...

 

There is a quote that summarises this difference succinctly - "to finish first, you must first finish".

 

Look at what happened to Martin Ebner ...

http://www.economist.com/node/1277304

 

 

[muscleman]

Did we ever resolve whether PSH NA is subject to PFIC rules for US-taxable investors? I'm amazed it isn't more simple to figure this out on their website...

 

It is. PSH last year went out as far as asking shareholders to submit their info so they can prepare the tax forms for each shareholder. That's why I sold back in 2014, only a month after I realized it is a PFIC.

 

I am really glad that I sold at that point. That's definitely luck instead of Alpha skill.

[dorsiacapital]

Ackman recently swapped APD stock for mostly APD options as a way to raise cash.  He'll probably do this with other positions.

 

Because the Target fund wasn't a good lesson on putting on massive option trades...

 

On March 8, 2016, certain of the Reporting Persons acquired on behalf of PS, PS II, Pershing Square International, and PSH American-style over-the-counter call options referencing 12,947,936 shares of the Issuer with Expiration Dates as set forth in Exhibit 99.4. Simultaneously with this acquisition, certain of the Reporting Persons sold on behalf of PS, PS II, Pershing Square International, and PSH 12,947,936 shares of the Issuer.

 

The counterparty to such over-the-counter options is Nomura Global Financial Products Inc.

 

 

If the fund manager is deploying the cash proceeds into other investments (either common stock or OTC options) then this fund has embedded leverage and increased the overall  leverage of the portfolio for PSH - readers of the PSH annual report may not realise the portfolio has increased its leverage via call options. So PSH has long term debt of US$996mn that they issued in June 2015, then there is the leverage via its positions in options.

 

Leverage on the leverage to bet the farm on a heavily leveraged play? What could possibly go wrong...........................................

 

This value investing thing is becoming too next level for me, I think I'll go back to videogames...

 

Value investing is buying securities for less than their intrinsic value with a margin of safety.

 

If you choose to finance your purchase using leverage (or use securities with embedded leverage such as options), then that is a different ball game...

 

There is a quote that summarises this difference succinctly - "to finish first, you must first finish".

 

Look at what happened to Martin Ebner ...

http://www.economist.com/node/1277304

 

Leverage is incredibly dangerous, but I think wise use of leverage still counts as value investing depending on the terms.

 

For example, stealing from Greenblatt, the Black-Scholes model is standardized and not designed to anticipate upcoming special situations that may cause fluctuations in the stock price. So, for example, say there's a stock with a spinoff coming up that's been trading relatively flat. If you think the spinoff is a catalyst, then using LEAP call options could be particularly profitable because the volatility is misvalued.

 

A good example of this recently was Vodafone a few years ago where the market (arguably) wasn't even valuing its minority ownership in Verizon Wireless. The stock, like a good dividend paying telecom, had been trading very flat around 20-ish. Multi-year leaps were like $2.  People noticed the Verizon Wireless Asset, the stock went up to 35-40 (I think), and the calls went up a whole bunch.  Greenblatt in Genius talks about this with Wells Fargo in the early 1990s where Berkowitz made his career call. Kevin Byun at Denali has mentioned this in a letter or two as well.

 

Ackman's $VRX option play, however, was not a wise use of mispriced leverage (the volatility on Valeant since September has been incredibly high).  It was simply a way to short-term double up on the cheap.  (Total side note but it drove me irrationally crazy that financial media would say he increased his ownership stake from 5 to 9.9% without explaining mechanism of buying otm call options.) 

 

Ironic that potentially the reputational kiss of death for Ackman will be a positive carry trade (selling naked puts) on a stock whose entire business model was a positive carry trade (rising drug prices > cheap debt repayments).

 

 

[handycap5]

Did we ever resolve whether PSH NA is subject to PFIC rules for US-taxable investors? I'm amazed it isn't more simple to figure this out on their website...

 

It is. PSH last year went out as far as asking shareholders to submit their info so they can prepare the tax forms for each shareholder. That's why I sold back in 2014, only a month after I realized it is a PFIC.

 

I am really glad that I sold at that point. That's definitely luck instead of Alpha skill.

 

Muscles, thanks for answering this key question for me. Life is too short for PFIC. I found this comment online, which confirms your take (by the way, this world wide web thing is going to be huge!):

 

http://www.stockgumshoe.com/2015/05/microblog-buying-pershing-square-holdings-on-otc/

 

[physdude]

From my Reuters feed:

 

BRIEF-S&P says Pershing Square's 'BBB' ratings placed on creditwatch negative

    March 17 (Reuters) - S&P On Pershing Square 

    * Pershing square holdings ltd. 'BBB' ratings placed on creditwatch negative on higher leverage and weak performance

    * Creditwatch negative reflects the fund's weak investment performance,  which has resulted in higher leverage

    * Could lower Pershing's Rating If Valeant files for bankruptcy Or If PSH materially reduces free cash before Valeant's stock price has substantially recovered

    * Placed ratings on creditwatch negative to reflect substantial drop  in psh's nav over past 5 months as a result of very weak investment  performance

 

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

 

Not too surprising given what is going on but a downgrade doesn't bode well for the fund.

[TwoCitiesCapital]

If someone ::cough cough Icahn:: really, really wanted to squeeze Ackman at this point, all it would take is an announcement that he's increasing his long position in a certain supposed fraud that Ackman is massively short...

[muscleman]

If someone ::cough cough Icahn:: really, really wanted to squeeze Ackman at this point, all it would take is an announcement that he's increasing his long position in a certain supposed fraud that Ackman is massively short...

 

Or Icahn could simply buy VRX bonds and declare its technical default. Ackman has never been as vulnerable as this moment.

[thepupil]

If someone ::cough cough Icahn:: really, really wanted to squeeze Ackman at this point, all it would take is an announcement that he's increasing his long position in a certain supposed fraud that Ackman is massively short...

 

Or Icahn could simply buy VRX bonds and declare its technical default. Ackman has never been as vulnerable as this moment.

 

with almost half of capital being permanent, downside on the HLF position capped via derivatives, his VRX investment down 80% of max loss, and having just raised $800MM of cash via sale of MDLZ stock, I don't think he is incredibly vulnerable to external pressures. HE can still blow himself up, but this is a low gross exposure, long biased almost unlevered firm with a bunch of locked up an/or permanent capital.

 

If I had the money to size the PSH bonds appropriately (I don't), I'd be a nibbler here and a buyer on down moves (maybe forced selling when they get downgraded?). I think the chances of a 70%+ drawdown from here are low.

 

wouldn't buy the stock because I don't think the other holdings are compelling.

[TwoCitiesCapital]

If someone ::cough cough Icahn:: really, really wanted to squeeze Ackman at this point, all it would take is an announcement that he's increasing his long position in a certain supposed fraud that Ackman is massively short...

 

Or Icahn could simply buy VRX bonds and declare its technical default. Ackman has never been as vulnerable as this moment.

 

with almost half of capital being permanent, downside on the HLF position capped via derivatives, his VRX investment down 80% of max loss, and having just raised $800MM of cash via sale of MDLZ stock, I don't think he is incredibly vulnerable to external pressures. HE can still blow himself up, but this is a low gross exposure, long biased almost unlevered firm with a bunch of locked up an/or permanent capital.

 

If I had the money to size the PSH bonds appropriately (I don't), I'd be a nibbler here and a buyer on down moves (maybe forced selling when they get downgraded?). I think the chances of a 70%+ drawdown from here are low.

 

wouldn't buy the stock because I don't think the other holdings are compelling.

 

Permanent capital will help, but it would hardly matter if he has to liquidate more holdings to cover the margin on a short position that went up by 10 -15% in a single day right after his largest holdings has tanked by 60% in the past week....

[sampr01]

He specifically stated "he is NOT using any leverage".

 

[thepupil]

Two cities, can you elaborate? he has very low gross exposure (in the context of hedge funds), 1 short position that is primarily long term OTC put options, he lost like 8% of NAV on the VRX move; it's not like he has a 100% position.

 

I simply don't understand how this turns into a margin / leverage issue. He's pretty much unlevered.

[Picasso]

Two cities, can you elaborate? he has very low gross exposure (in the context of hedge funds), 1 short position that is primarily long term OTC put options, he lost like 8% of NAV on the VRX move; it's not like he has a 100% position.

 

I simply don't understand how this turns into a margin / leverage issue. He's pretty much unlevered.

 

Agreed, the damage is already done.

[dorsiacapital]

Two cities, can you elaborate? he has very low gross exposure (in the context of hedge funds), 1 short position that is primarily long term OTC put options, he lost like 8% of NAV on the VRX move; it's not like he has a 100% position.

 

I simply don't understand how this turns into a margin / leverage issue. He's pretty much unlevered.

 

Agreed, the damage is already done.

 

Do think that Ackman isn't that over leveraged (really only the 800 million put on Valeant andthe 1 billion in bonds ), but I would love a hedge fund poet (dramatic irony capital?) who  bought HLF otm call options for just a little vig and let the  hedgers do the squeezing.

 

I know you shouldn't chase returns, process blah blah process, but if there aren't some redemptions this year, I think best way for Ackman to get above high water mark is find a way to commercialize with Franklin whatever he sells in these pitch meetings to institutions.

 

More generally, is anybody really fond of any of his long positions? I guess at this point Platform could spring upwards, but the hidden thesis of  many of his plays appears to be M&A (either being bought, Zoetis, Mondelez) or buying (CP), and I think that thesis is for now somewhat constrained by the HY debt market.

[Picasso]

Probably the only thing I like in his portfolio is ZTS.  That can turn into an animal version of Valeant with the right capital allocation.  Well, 2010-early 2015 Valeant.  Hopefully not late 2015-2016 Valeant....

 

While PAH is beaten down, I thought it was worth a look around $5 but at $9-ish it's close to fully priced imo.  There's no rush for 3G to acquire MDLZ either.  APD is too cyclical, same with CP.  It's hard to get excited about the rest of the portfolio.

 

Maybe FNMA/FMCC works out and he makes $5 billion on that trade.  It just seems like he's turned into Lampert or Berkowitz in terms of portfolio composition.  The portfolio is getting bogged down by value traps and instead of moving on, he's either trapped or doesn't want to admit defeat.  And it shows with some of the "asymmetric" bets in the portfolio such as currency puts or FNMA.

 

If Valeant goes to zero for some reason, I think redemptions will pick up in a big way.  Maybe it's not affecting him yet because he's playing full court defense claiming it's worth many multiples of the current share price, but hitting zero will leave a really sour taste in his investors mouths.  He literally top ticked it and rode his biggest investment ever down to zero.  How does he not face heavy redemptions at that point? 

[dorsiacapital]

Probably the only thing I like in his portfolio is ZTS.  That can turn into an animal version of Valeant with the right capital allocation.  Well, 2010-early 2015 Valeant.  Hopefully not late 2015-2016 Valeant....

 

While PAH is beaten down, I thought it was worth a look around $5 but at $9-ish it's close to fully priced imo.  There's no rush for 3G to acquire MDLZ either.  APD is too cyclical, same with CP.  It's hard to get excited about the rest of the portfolio.

 

Maybe FNMA/FMCC works out and he makes $5 billion on that trade.  It just seems like he's turned into Lampert or Berkowitz in terms of portfolio composition.  The portfolio is getting bogged down by value traps and instead of moving on, he's either trapped or doesn't want to admit defeat.  And it shows with some of the "asymmetric" bets in the portfolio such as currency puts or FNMA.

 

If Valeant goes to zero for some reason, I think redemptions will pick up in a big way.  Maybe it's not affecting him yet because he's playing full court defense claiming it's worth many multiples of the current share price, but hitting zero will leave a really sour taste in his investors mouths.  He literally top ticked it and rode his biggest investment ever down to zero.  How does he not face heavy redemptions at that point?

 

Ixnay on the Valeant comparisons Pablo. I think we're now back to saying Transdigm ;-)

 

So much of his portfolio is: Chose the wrong day to become super leveraged near end of a commodity/debt cycle. Could be interesting in a few years, if the equities are playing like options on the capital structure.

 

Fannie Mae panel just got drawn; 2 conservatives, one liberal, not sure what political valence of issue is....

[kiwing100]

Probably the only thing I like in his portfolio is ZTS.  That can turn into an animal version of Valeant with the right capital allocation.  Well, 2010-early 2015 Valeant.  Hopefully not late 2015-2016 Valeant....

 

While PAH is beaten down, I thought it was worth a look around $5 but at $9-ish it's close to fully priced imo.  There's no rush for 3G to acquire MDLZ either.  APD is too cyclical, same with CP.  It's hard to get excited about the rest of the portfolio.

 

Maybe FNMA/FMCC works out and he makes $5 billion on that trade.  It just seems like he's turned into Lampert or Berkowitz in terms of portfolio composition.  The portfolio is getting bogged down by value traps and instead of moving on, he's either trapped or doesn't want to admit defeat.  And it shows with some of the "asymmetric" bets in the portfolio such as currency puts or FNMA.

 

If Valeant goes to zero for some reason, I think redemptions will pick up in a big way.  Maybe it's not affecting him yet because he's playing full court defense claiming it's worth many multiples of the current share price, but hitting zero will leave a really sour taste in his investors mouths.  He literally top ticked it and rode his biggest investment ever down to zero.  How does he not face heavy redemptions at that point? 

 

Just to point out - that PSH is a closed end fund and not subject to redemptions.  Pershing Capital Management's other assets under management may be in an open ended investment vehicle structure and may be subject to redemptions.

 

Even if Pershing Capital Management were to get massive redemptions in the other open ended funds, Pershing Capital Management will continue to manage PSH.

 

[Picasso]

He'll continue to manage PSH but it's hard to invest in any idea when you're busy liquidating what you can.  Trying to manage a fund when 30-50% of the assets are flowing out the door isn't a great situation.  You're forced to sell cheap and buy cheaper since you'll still find, say, MDLZ attractive but now you need even cheaper to catch up.  He has the permanent capital but he's already blown through half of it.  He keeps the same allocations across PSH as the funds, so redemptions in the fund will make him sell off positions in PSH.  Just a crappy position to be in for a PSH shareholder and I can see why it trades at a 20% discount to NAV, although that should narrow over time.

[Guest roark33]

Picasso, from what I have read Ackman has a fairly tight lock-up, i.e. it takes you 8 quarters to redeem your entire position in the fund.  He only had 2% redemptions in Feb (post-Citron/VRX), so the max outflows he could have this year is around 40% and that's if everything redeems, starting in May.  I seriously doubt that will happen, but who knows...

 

 

[Picasso]

Right, that's why I think the damage is already done.  But those 2% redemption figures were before the 50% VRX single day drop so we'll see how the May redemptions look like.  For some reason LP's in his funds have major stockholm syndrome.  He can blow up capital all the time and they say they're sticking with him, he's super bright, does a ton of work, has a great track record, etc.  But I think at this point if Valeant goes to $0 he probably loses half of his outside or non-permanent capital.  That might put him back at $8-9B of AUM.  Obviously not the end of the world....

 

It must be those cerulean blue eyes and silver hair. 

[kiwing100]

FYI, PSH's activity in MDLZ. 

 

It looks like PSH sold out of various common stock and OTC equity forward positions (equivalent to 12.29mn shares) to raise US$379.78mn in proceeds.

 

Then it used US$65.3mn of those proceeds to purchased 61,062 call options (representing 6,106,200 shares) on MDLZ with a strike price of US$30.00.  Expiry  is on various dates in September 2017.

For the US$65.3mn in option premium paid, PSH has notional exposure of US$249mn, so leverage of about 3.8x

The option premium of US$65.3mn represents about 1.3% of estimated gross assets of PSH.

 

 

 

Here is the link to the disclosure filing:

http://www.sec.gov/Archives/edgar/data/1103982/000119312516507074/d118679dex997.htm

 

 

 

 

[dorsiacapital]

Semi-contrarian take is that a significant drop in AUM would really help Ackman's ability to generate alpha by broadening potential universe of activist targets. In the last few years at least, it seems he's been working in a universe of 10 billion + with exception of the Franklin projects.

 

Also, totally underworked thesis, but right now only quite big companies will move the needle for Ackman, but a) quite big companies may tend to be somewhat better run; b) size of quite big companies means that textbook activist tricks don't move the needle as much as they could at medium companies.

 

Put another way, I wonder if Ackman would/could have invested in GGP when it was trading at 30 cents with his current AUM. Maybe he'd just have bought the whole thing but I wonder.

[Jurgis]

What concerns me is the position conversions to options. IMHO, while the positions may or may not be attractive, with options he can continue to blow up just because of timing. In other words, I am not sure if he or much anyone else can show great results by doing options. (Sorry you option guys here ;) ).

[benhacker]

What concerns me is the position conversions to options. IMHO, while the positions may or may not be attractive, with options he can continue to blow up just because of timing. In other words, I am not sure if he or much anyone else can show great results by doing options. (Sorry you option guys here ;) ).

 

I think Picasso has coined a good and accurate term for this... "Deep YOLO".

 

I think it's accurate frankly.