PSH.L - Pershing Square Holdings

[Gamecock-YT]

What is the logic for the new investment vehicle ?

 

 

 

he can make a boat load of money, I'm guessing

[aryadhana]

What is the logic for the new investment vehicle ?

 

why not issues share of Pershing Square to get more 'permanent capital' to do whatever he wants to do or sale an asset.

I understanding that it has been buying back shares, so issuing share would just reverse that, but still is there a more specific reason to create a mini-Softbank vision fund

 

I think the Articles of Incorporation (and possibly LSE listing rules for funds) disallow the issuing of shares at a discount (or at something more than a nominal discount) without a shareholder vote.  The PSH structure is also not fit for an operating company, which Tontine holdings would presumably become. 

[thowed]

I haven't seen anything about the fact that PSH as of 31 May has CDS exposure again.

 

It'll be interesting to see if he pulls it off again, or if he was just lucky last time.

 

[rb]

I think he just got lucky then with the liquidity drying up back in March. I don't think you get lucky again with the fed pointing a firehose of liquidity at the markets.

[buffetteer1984]

Where did you see this?  According to the performance report for may as of may 31, 2020 pershing's exposure to total CDS is $0.  His nav has been dropping with the latest market decline

 

I haven't seen anything about the fact that PSH as of 31 May has CDS exposure again.

 

It'll be interesting to see if he pulls it off again, or if he was just lucky last time.

 

[TwoCitiesCapital]

I think he just got lucky then with the liquidity drying up back in March. I don't think you get lucky again with the fed pointing a firehose of liquidity at the markets.

 

Well, he definitely paid more for the exposure this time which will certainly limit the % gain, but I think he'll probably do alright the second time around. We're only just beginning to see the economic impact with bankruptcies like Hertz coming through. Credit spreads probably have another spike or two in them as we work through that which will help.

 

Also, he doesn't need to be 100% hedged this time around. He's already got like a 30+% advantage to the S&P 500 this year. Just hedge enough to ensure that's locked in and let the rest of the portfolio fluctuate.

[Gregmal]

He also went bonkers with HHC, something that at least if last time is a precursor, would get annihilated. While I think there is pain in the RE and names that previously got whacked if the economic recovery takes a step back, I am also wondering if this is where some of the clouds circling the more popular stuff start tempering investor enthusiasm for them. Every pop stock but maybe NFLX and MSFT currently have big clouds hanging over them, especially politically.

[thowed]

Where did you see this?

 

It's tucked away in the Transparency Reports.  Listed as 'Long Protection'.  I think it's Indices CDS, so it's confusing as the 0 figure on the Performance Report is for individual and Sovereign CDS.

[buffetteer1984]

Oh man I don't know how I ever missed the transparency reports before.  Thanks!

 

Where did you see this?

 

It's tucked away in the Transparency Reports.  Listed as 'Long Protection'.  I think it's Indices CDS, so it's confusing as the 0 figure on the Performance Report is for individual and Sovereign CDS.

[thepupil]

https://www.renaissancecapital.com/IPO-Center/News/69470/The-biggest-SPAC-ever-just-got-bigger-Pershing-Square-Tontine-Holdings-ups-

https://seekingalpha.com/article/4358226-pershing-square-tontine-holdings-spac-worth-watching

https://www.sec.gov/Archives/edgar/data/1811882/000119312520175042/d930055ds1.htm

 

I view this SPAC development as favorable for PSH NA. The SPAC is clearly highly sought after given there's a bit of SPAC-mania going on in the markets and they upsized the offering.

 

Pershing Square has created a highly sought after IPO and we know that PSH NA will have a very material $1-$3B of guaranteed allocation to that IPO. As the largest SPAC and one of the largest possible equity checks out there, this actually does seem to be a unique source of capital for a company and I think it's possible they are able to secure a good deal. It creates a lot of low risk optionality for PSH.

 

The creation of this vehicle will likely increase reported NAV and intrinsic value over the short and intermediate term.

 

What's even better is you can buy this SPAC (alongside the rest of the portfolio) for 70 cents on the dollar.

 

It's funny that the world is so eager to give Bill Ackman and crew a $4B blank check, but won't invest in his fund that holds that blank check at 70 cents on the dollar.

[BG2008]

The whole SPAC Mania is insane at the moment.  Draft King, Virgin Galactic, really any tech, software, spaceship, story that sounds kind of cool is getting a 40-50% pop upon merger news.  Then you have this crummy plastic packaging company that throws off likely close to $1bn of FCF next year and it trades for 6x that today.  This crummy plastic packaging company can also get debt financing at 1-3% today. 

 

The investing wisdom today is literally "a bird in the bush in 2025 is worth more than 2 birds in your hand today"

[thepupil]

by the way, they are obviously a ratings agency and so are coming from that perspective, but Fitch covers all that's going on with PSH pretty thoroughly in a few short paragraphs. hihglighted what I think is most relevant in bold.

 

After meaningfully underperforming benchmark indices during the 2015-2017 period, management implemented several process changes that included stricter adherence to its core investment principles and substantially reducing the time Ackman allocated to capital raising activities for PSCM's open-ended funds and media relations. PSH's performance has rebounded sharply over the past three years, outperforming (net of fees) the SP 500 index in 2018 (+3.7%), 2019 (+26.6%), and 1H20 (+32%). Importantly, the strong performance in 2019 was broad-based, with all of its investments contributing positive performance.

 

As of May 31, 2020, PSH's assets under management (AUM) stood at $8.6 billion and PSCM's total strategy AUM stood at $10.3 billion, up 41% and 25%, respectively, from a year ago. Although still down from the peak levels of over $19 billion in 2015, Fitch believes the increase in AUM is constructive toward PSCM being able to effectively execute its activist strategy with larger capitalization companies while maintaining sufficient portfolio diversification.

 

As the effects of the coronavirus pandemic were becoming more apparent in February 2020, PSCM grew increasingly concerned that the spread of the virus could result in significant economic damage to the global economy, which would have severe negative implications on the performance of its portfolio. Consequently, PSCM began purchasing credit default swap (CDS) protection on U.S. and European investment grade and U.S. high yield bond indices in February and March, whose notional amount was significantly larger than PSCM's AUM at the end of January. Management chose CDS to hedge the portfolio as it believed it provided asymmetric risk in the sense that spreads on investment grade and high yield bonds were trading at historically tight spreads while its downside was limited to the cost of carry (premiums). Management expected credit spreads to widen considerably once the impact of the coronavirus on the global economy became more apparent.

 

The hedge was highly effective in offsetting unrealized losses on PSH's equity portfolio, as credit spreads widened considerably and the value of the CDS increased sharply. PSCM decided to unwind its entire CDS position in mid March after the position had increased to 40% of NAV as a result of market value appreciation in the CDS combined with declines in its equity positions, and management became more comfortable with government actions aimed at containing the virus. PSCM generated a gain of $2.6 billion ($2.1 billion for PSH) on the CDS positions versus premiums and commission paid of $27 million, which more than offset the unrealized losses on its equity portfolio. PSH's returns in March were 11.1% compared to a 12.4% loss for the SP 500 index.

 

 

 

While Fitch believes the actions taken by PSCM to manage the macroeconomic risks stemming from the coronavirus were effective and critical to PSH's outperformance in the first half of this year, the trades could have resulted in material losses in the event that CDS spreads tightened further, particularly given the notional size relative to PSH's long equity portfolio. Since the gains from the CDS were larger than the losses on the positions it aimed to hedge, despite the bond indices having lower implied volatility, it suggests the position was outsized in relation to the risk being hedged. In this regard, Fitch would view the establishment of formal risk management policies, including risk limits, favorably. If management were to make outsized speculative investments in derivative products (including CDS) a core and continuous part of its investment strategy, Fitch would view it unfavorably and it could result in negative rating actions.

 

On June 22, 2020, Pershing Square Tontine Holdings, Ltd. (PSTH), a newly formed SPAC, filed an S-1 with the SEC, with plans to issue shares via an IPO in coming weeks. PSTH is being sponsored by an affiliate of PSCM that is owned by PSCM's three fund vehicles including PSH, and has appointed Ackman as chairman and CEO. The filing aims to raise $4 billion from third party investors and has an additional $1 billion commitment from PSCM's funds, including PSH, through a forward purchase agreement. PSCM's funds also have the option to acquire an additional $2 billion in stock units at the IPO price. The $3 billion of aggregate commitments from PSCM's funds, which will also include one-third of a warrant per stock unit purchased, must be completed no later than the time of closing of a business combination (acquisition) by the SPAC vehicle.

 

The SPAC could raise up to $7 billion in aggregate and will seek to acquire a minority interest in a large private company that is consistent with PSCM's core investment principles. Fitch views PSCM's ability to raise substantial capital through external vehicles as constructive to its activist strategy since PSH's significant discount to NAV prevents it from raising equity capital to support new investments. PSCM's ability to raise $4 billion from third-party investors, in what would be the largest IPO of a SPAC to date if completed, is also indicative of PSH's franchise strength, and reduces to some degree Fitch's prior concerns of reputational damage caused by PSCM's underperformance from 2015-2017. However, Fitch would view an outsized investment by PSH in PSTH such that it represented more than 20% of PSH's portfolio unfavorably.

 

The discount to NAV on PSH shares has widened further despite PSH's strong outperformance over the past two years; expanding to 32% at June 30, 2020. The discount to NAV is relevant to debtholders to the extent management takes additional shareholder friendly actions, such as share repurchases, in order to seek to reduce the discount. To this end, PSH has announced five separate $100 million share repurchase programs since June 2019. Fitch views share repurchases and other shareholder-oriented actions, such as the establishment of a dividend, as detrimental to PSH's credit risk profile, while reducing the cushion available to absorb declines in the value of underlying investments that could drive PSH's debt-to-equity ratio above Fitch's 0.35x leverage tolerance.

 

On July 25, 2019, PSH issued $400 million of senior unsecured bonds that mature in July 2039 and carry a 4.95% coupon to accounts managed by Guggenheim Partners Investment Management, LLC. The 20-year bonds are subject to substantially the same terms as PSH's existing $1 billion unsecured notes due July 15, 2022, with the exception of the key person provision. After July 15, 2022 (the maturity date of PSH's existing bonds), the death, permanent disability, or withdrawal of Ackman as managing member of the general partner would not constitute a change in control that would enable bondholders to put the bonds to PSH at a price of 101% plus accrued and unpaid interest within 120 days of the occurrence. Rather, if a key person event were to occur after July 15, 2022, PSH's maximum leverage ratio covenant, defined as debt-to-total capital, would decline to 25% from 33%. Thereafter, the maximum leverage ratio covenant would be an incurrence-based test only, not a maintenance covenant. Fitch believes this is notably weaker than the existing key person provision.

 

PSH's leverage of 0.20x as of May 31, 2020, was a tick above 0.19x at May 31, 2019, but down from 0.25x following its July 2019 debt issuance. PSH's leverage is in the middle of its historical range of between 0.14x and 0.27x since it first issued debt in June 2015. However, PSH's leverage remains above the 0.15x at rating inception in June 2015, and Fitch believes PSH's leverage could be volatile given its highly concentrated portfolio, the equity market backdrop and management's periodic capital returns to shareholders. PSH's unencumbered cash represented 18.9% of NAV at May 31, 2020, or roughly $1.37 billion, although Fitch expects a large portion of the cash to be redeployed into investments over the next 12 months.

Strong investment outperformance has driven the decline in PSH's leverage since its July 2019 debt issuance. Based on leverage at May 31, 2020, Fitch calculates that PSH could withstand an additional market value decline of 35.4% of gross assets (37.5% including a reversal of accrued performance fees) before exceeding Fitch's quantitative downgrade trigger of 0.35x. While sustained market declines of this magnitude are rare, they are certainly possible when considered against the backdrop of substantial economic uncertainty stemming from the coronavirus pandemic.

 

PSH's closed-end structure allows it to avoid forced selling to meet redemptions and is viewed as a credit strength relative to open-end fund structures, all else equal. However, market declines and material redemptions at PSH's open-end sister funds have reduced the overall amount of investment capital PSCM has available to exert economic influence on portfolio companies. As of May 31, 2020, PSH's AUM represented 84% of PSCM's strategy AUM, compared to roughly 40% at the end of 2015.

 

PSH's investment strategy is heavily-influenced by Ackman, which suggests that key person risk is elevated. Positively, through July 15, 2022 (or the time at which PSH's 2022 notes are redeemed), senior unsecured debt holders have the right to put the debt to PSH for redemption at a price of 101% plus accrued and unpaid interest within 120 days of the occurrence of Ackman's death, permanent disability or withdrawal as managing member of the general partner to the investment manager. Fitch views this feature as a mitigant to key person risk, given the likely uncertainty that would surround PSH's future strategic direction upon such an event, and thus the removal of this covenant following the maturity or redemption of the 2022 bonds is viewed as a rating constraint.

 

PSH maintains a liquid portfolio, with 104% of its net assets comprised of cash and Level 1 assets at May 31, 2020. Individual investment holdings typically represent minority ownership percentages but may exceed 10% of portfolio companies' outstanding securities. Minority investments reduce the potential adverse market impact of rapid selling, relative to majority investments, but nevertheless, rapidly selling large minority blocks is likely to result in valuation discounts.

 

PSH does not maintain a defined liquidity policy, such as minimum cash and committed liquidity facilities relative to interest expenses and near-term debt maturities. When combined with the expectation of variable levels of balance sheet cash and dividend income from portfolio companies, this may require PSH to periodically liquidate modest portions of investments to service debt obligations and/or pay dividends. This could moderately erode capitalization levels and potentially reduce the ability to exert influence on portfolio companies. Fitch calculates that PSH's upstream dividend and interest income coverage of interest expenses was 1.06x for the TTM ending May 31, 2020, down from 1.58x as of May 31, 2019. Interest coverage is viewed as weak for the rating, but is mitigated by strong asset liquidity.

 

Given the high degree of economic uncertainty stemming from the coronavirus pandemic combined with the recent sale of its position in Berkshire Hathaway Inc., PSH was holding a significant amount of excess cash. At May 31, 2020 PSH's unrestricted cash was $1.4 billion, or 18.9% of gross asset value compared to $186.8 million or 3.2% of gross asset value at Dec. 31, 2019. The liquidity of PSH's investment portfolio remained high with investments that could be liquidated in less than one month, assuming capture of 20% of the trailing 90-day trading volume, at 81.1% of the total investment portfolio (including derivative positions) at Dec. 31, 2019, which was relatively flat with 80.9% at Dec. 31, 2018.

 

The Stable Outlook reflects Fitch's view that PSH's leverage and liquidity positions are appropriate relative to the fund structure, portfolio composition, current market backdrop and assigned ratings.

 

The equalization of the senior unsecured debt rating with PSH's IDR reflects the lack of senior secured debt, the availability of meaningful unencumbered asset coverage, and average recovery prospects under a stress scenario.

[Foreign Tuffett]

So I guess everyone thinks Ackman is smart again now? It was only a few years ago when basically everyone on this board (and on Twitter too) thought he was an investing dunce.

 

Maybe the dunce Ackman was replaced by a doppelganger genetically engineered to be a superior investor? My own personal theory is that Ackman is a guy who bets big, and is right sometimes and wrong sometimes. That can't possibly be it though....the doppelganger theory is probably correct.

[5xEBITDA]

With the amount of equity capital raised I think he is definitely going to be providing a large, PE owned portfolio company with an exit. $4-7 billion on his SPAC alone, plus another $1-2 billion in a PIPE, plus another $4-5 billion from a co-invest partner to keep PSH's commitment a "minority", plus $10 billion or more in debt capacity given the equity cushion range means he can give serious bids to $15 - $25 billion+ enterprise value companies.

[Jurgis]

So I guess everyone thinks Ackman is smart again now?

 

So you think that PSH trading at .70 of NAV indicates that everyone thinks Ackman is smart again? Hmm, OK.  ::)

[Gregmal]

I dont think anything has really changed. Or see how you cant argue that Ackman is quite an investor. Of the merry band of Harvard buddies, Ive always said, Tilson is the idiot, Einhorn is incredibly book smart but continually misses the forest for the trees, and that Ackman is something special.

 

Ackman's problem is overconfidence. His list of successful investments, not to mention pure home runs of the caliber most investments cant even dream of, is quite long. People are obviously entitle to their opinions, but acting like the guy is a moron because of a few bad investments its plainly stupid. He both succeeds and fails on a large stage, but given where he is and his overall performance numbers, not to mention coming back from a few horrible years, is impressive, if not admirable.

 

And yea, closed end funds or captive vehicles always trade at discounts to NAV. So Im not sure there is much to make of that with PSH.

[Foreign Tuffett]

So I guess everyone thinks Ackman is smart again now?

 

So you think that PSH trading at .70 of NAV indicates that everyone thinks Ackman is smart again? Hmm, OK.  ::)

 

Did I say anything about valuation? No.

 

My comment was more about the general tone of the comments I have seen recently vs the criticism that was omnipresent several years ago. Peeps appear to be overweighting the most recent developments instead of thinking more holistically about Ackman's entire career.

 

Agree with Greg that Ackman isn't a moron, but it's hard for me to be a fan of someone who has blown up two hedge funds. 

[Jurgis]

So I guess everyone thinks Ackman is smart again now?

 

So you think that PSH trading at .70 of NAV indicates that everyone thinks Ackman is smart again? Hmm, OK.  ::)

 

Did I say anything about valuation? No.

 

My comment was more about the general tone of the comments I have seen recently vs the criticism that was omnipresent several years ago. Peeps appear to be overweighting the most recent developments instead of thinking more holistically about Ackman's entire career.

 

Agree with Greg that Ackman isn't a moron, but it's hard for me to be a fan of someone who has blown up two hedge funds.

 

My point is that you are overclaiming that "everyone thinks Ackman is smart again". And the valuation shows that you are overclaiming. If everyone thought that Ackman is smart, PSH would not trade at 0.7 NAV.

[thepupil]

Peeps appear to be overweighting the most recent developments instead of thinking more holistically about Ackman's entire career.

Agree with Greg that Ackman isn't a moron, but it's hard for me to be a fan of someone who has blown up two hedge funds.

 

I count 3 blow ups: Gotham, Target SPV, and the 40% peak to trough drawdown 2014-2016.

 

Gotham was a $300mm fund that became overly concentrated in illiquid investments and shut down as it faces too many redwmption. I do not know the end results with respect to returns. I know that Gotham Golf was like 20% of the fund, that the fund was flat in 2002 and had generated 20%/year sine 1993. All from a WSJ article. I’m not sure of subsequent write downs or end results. I suspect that the overall record is “not bad” but there’s plenty of negative headlines about them being forced to shut down. If you have more data on this, I’d appreciate it.

 

EDIT: "What I'm most proud of is that all five of my investors that got into Gotham in 2002, and therefore lost money, decided to re-up in Pershing and have been made whole," he says.

https://www.wsj.com/articles/SB113356721431912937

 

Note this quote from Ackman. This implies that all investors who invested previously made money. Therefore it's not likely at all to me that Gotham impaired capital. Considering Pershing Square killed it from 2004-2014 and Gotham killed it 1993-???early 2000's?, it's likely that Ackman has made money (in many cases significant amounts) for the vast majority of his investors. Even those who piled into PSH @ $25 in 2014 have seen NAV grow from $25-->$34/5, though de-rating has sapped their returns. I therefore make a motion to reduce Ackman's number of blow-ups to 2: the Target SPV and the temporary 40% drawdown driven by Valeant

 

The Target SPV lost 90%+. I will avoid a concentrated investment in a single company levered vehicle preceding a financial crisis (maybe The SPAC investors clamoring for allocation should think about that lol)

 

The Valeant debacle is what it is and is included in PSH’s impressive 2004-2020 track record. PSH could certainly draw down by 40% again; I doubt it would be idiosyncratic (not accompanied by a big market sell off given the current portfolio and changes to investment process) but he could make mistakes.

 

I just don’t see why I should weight either the Gotham episode (where he now has permanent capital which entirely mitigates the risk of a redemption cycle) or the Target episode too much in my evaluation of him as an investor. Joe Steinberg invested in the Target vehicle and still maintains a relationship (he’s on SPAc’s board) so I guess Joe is a forgiving soul as well.

 

I understand rcency bias, but I just don’t see how the mistakes of the past should be weighted more than the wins. PSH actually appears to solve a couple of the issues that have proved problematic for billy.

[BG2008]

I would just say to pay attention to who Ackman is dating, divorcing, or marrying.  Seems like his bad returns was also during a period when he was divorcing his ex wife.

[Spekulatius]

So I guess everyone thinks Ackman is smart again now? It was only a few years ago when basically everyone on this board (and on Twitter too) thought he was an investing dunce.

 

Maybe the dunce Ackman was replaced by a doppelganger genetically engineered to be a superior investor? My own personal theory is that Ackman is a guy who bets big, and is right sometimes and wrong sometimes. That can't possibly be it though....the doppelganger theory is probably correct.

 

Ackmanns last special vehicle was a single levered bet on Target before the Great Recession. It was a zero if I recall correctly.

[thepupil]

Ackmanns last special vehicle was a single levered bet on Target before the Great Recession. It was a zero if I recall correctly.

that's correct. it realized a loss of over 90%. I believe that fatal error was use of options/margin lending.

[Foreign Tuffett]

thepupil -- Interesting response with plenty to chew on. Yeah, he has permanent capital now, but that doesn't eliminate the possibility of him making another big error. Ackman swings the bat really hard. When you do that sometimes you strike out and sometimes you hit a home run. I think Ackman's track record managing large sums of money is probably about what one would expect.

 

Spekulatius -- Good point, I had entirely forgotten about the Target debacle.

 

BG2008 --  Einhorn went through a (apparently protracted) divorce as well.

 

More generally, I think one underrated aspect that has contributed to Buffett's success is how stable his personal life has been (same house since 1958, with Susan for 25 years before she left for San Fran, no apparent health problems prior to the age of 80, etc)

[gfp]

So I guess everyone thinks Ackman is smart again now? It was only a few years ago when basically everyone on this board (and on Twitter too) thought he was an investing dunce.

 

Maybe the dunce Ackman was replaced by a doppelganger genetically engineered to be a superior investor? My own personal theory is that Ackman is a guy who bets big, and is right sometimes and wrong sometimes. That can't possibly be it though....the doppelganger theory is probably correct.

 

Ackmanns last special vehicle was a single levered bet on Target before the Great Recession. It was a zero if I recall correctly.

 

Wasn't Ackman / Pershing Square one of the early backers of Martin Franklin's "Platform Acquisition Holdings," which became Platform Specialty Products and is now called Element Solutions?  Don't think that SPAC created a lot of value.

[thepupil]

yes, PAH went from $10-->$28-->$6-->$11. I can't find the great ackman slide presentation about compounders and Martin Franklin that came just before the fall.

 

he was also behind Justice and still owns 13% of QSR (burger king/popeyes)