QuotedData on Pershing Square
QuotedData sent an analyst along to a meeting with Bill Ackman (manager of Pershing Square Holdings), some of his team and the chairman, Anne Farlow. The company has had a great year – the manager’s best ever apparently, with the NAV up 41.4% over the year to the 30th of July 2019, according to Morningstar – yet Pershing Square trades on a discount of 29.5%. Much of the meeting was about exploring why that might be and what can be done about it.
First, a quick roundup of the situation:
- Pershing Square is big, a market cap of £3.9bn. If it traded at asset value, it would probably end up being one of the 100 largest companies in the UK.
- It started off life as a Guernsey company listed on the Amsterdam exchange and, for a while (and maybe even today), they were keen that it wasn’t seen as a conventional investment company. The London listing and, more recently, the introduction of a dividend were designed to broaden Pershing Square’s appeal.
- For tax reasons, it is important that the company is not controlled by US investors (Bill and others members of the team have vast amounts invested). To get around that, it has an unusual voting structure – which we dislike but is probably necessary.
- Bill runs a concentrated portfolio of US companies that he believes are undervalued and where he can see a catalyst for a re-rating – sometimes he and his team will be trying to nudge these companies in the right direction. He values companies by discounting his estimate of their future cash flows into present day money.
- He had a long run of success and then a couple of high profile problems – a big bet on Valeant Pharmaceuticals and a short position on Herbalife. Pershing Square lost quite a bit on these two positions and investors’ confidence in Bill was knocked – he admits that these investments were out of the ordinary. It was the cause of a great deal of introspection within the management team.
- The company is quite geared – Bill is an admirer of Warren Buffett. He thinks, however, that much of Warren’s success can be attributed to his ‘borrowing’ money at very low costs and using that to amplify his returns. Mr. Buffett’s ‘borrowing’ comes in the form of his reinsurance business. Bill doesn’t think he could replicate that, so Pershing Square borrows more conventionally – by issuing bonds. $1bn of senior notes with a coupon of 5.5% due on 15 July 2022 were issued in 2015. These are trading on a yield in the 3s currently. On 25 July 2019, the company issued $400m of bonds with a coupon of 4.95% due for repayment on July 15 2039. This puts the company on a loan to value ratio of about 20% – equivalent to 25% gearing. They might refinance all the debt -replacing it with something with a 5-7 year maturity – in a year or two. He thinks this could be done at a lower rate.
- One way they have been trying to tackle the discount is through share buybacks. They don’t like tenders and don’t think they narrow discounts in the long run. They are happy to buy back 6%-8% of the company each year while the discount is wide.
- Returns on the strategy since launch have been about 15% a year on average. Bill points out that a trading company that achieved that would be trading on a big premium to book value.
- On the face of it, management fees are fairly high but no performance fee has been earned in a while. This might kick in again soon.
Why is it on a discount?
This is the question that Bill put to the assembled analysts and various ideas were forthcoming. We think:
- It takes a while for investors to regain confidence in a manager when something has gone badly wrong, especially when the reason for this is that they have gone off-piste.
- The performance improvement is great but the market has been strong and sterling weak – there might be some fear that both will reverse.
- The gearing is fairly punchy for an equity fund and the interest rate on the debt looks expensive to UK and European investors.
- The fund is just not very well known/understood. It probably wouldn’t be the first thing you’d think of when looking for US exposure. Maybe it just needs to raise its profile a bit more.