Pershing Square Holdings (PSH) announced its interim report for the year ended 30 June 2024. For the first half of 2024, the company’s NAV total return increased by 5.7% while the share price increased by 14.7% compared to the benchmark index return of 15.3%. During the period, the discount narrowed from 28.7% to 22.7% The manager noted that for much of the first half of 2024, global equity markets marched higher despite continued concern around central banks’ ability to tame inflation and significant geopolitical uncertainty. In recent weeks, questions as to whether the global economy may be weakening have reemerged which has caused a significant pullback in global markets.
In May 2024, themanager disclosed on its first quarter conference call that it had initiated two investments which have now been disclosed as Nike and Brookfield Corp. Nike had a profit warning at the end of June that triggered a 20% drop in its share price. It is disclosed as one of the largest negative contributors to returns over the six-month period – taking 1.7% off the NAV. However, Bill Ackmann says in his statement that he is not yet ready to discuss the rational for these two investments.[We will have to wait to find out whether the share price fall was an opportunity to add to PSH’s position or triggered a sale of the stake (as happened before with Netflix).]
Discussing the performance, Bill noted:
“The stock market has increasingly been characterized by a growing percentage of the market capitalization of companies being held by effectively permanent owners, principally index funds. We believe that the growing index ownership as a percentage of stock market float has increased the impact that short-term, highly leveraged investors can have on price discovery as they now comprise a growing percentage of the market cap and daily trading of companies, and are important marginal buyers and sellers of a security. These shorter-term investors – which include so-called market-neutral and quantitative funds – use large amounts of margin, derivative, and total return swap leverage in their strategies.
“As highly leveraged market participants, these investors’ tolerance for mark-to-market losses is small, which contributes to stock price volatility as they can become effectively forced sellers when companies disappoint, even in the short term. Equity markets have exhibited an enormous amount of single-name stock price volatility for even the largest companies when they surprise investors with even minimally below-expectation overall results or small misses on certain closely followed business metrics, with Universal Music Group being one such example in our portfolio. Markets are also exhibiting an enormous amount of volatility when macro data surprises occur.
“Greater stock market volatility is the long-term friend of the active investor with permanent capital who seeks to identify high quality companies which are not dependent on the capital markets to implement their business strategies. While an earnings’ miss or other business metric disappointment in a quarter could reflect the beginning of deterioration in fundamentals, in many cases the impact of the disappointment has only a marginal effect on long-term intrinsic value. Pershing Square has been a large, long-term beneficiary of market overreactions to short-term bad news as they can drive business valuations to levels well below long-term intrinsic value, and create buying opportunities coupled with a high degree of liquidity. ”
Pershing Square USA, Ltd.
Regarding the intention to launch a U.S. closed-ended fund, he continued:
“On February 7th, we announced our intention to launch a U.S. closed-ended fund called Pershing Square USA (PSUS), which will largely mirror PSH in its investment strategy and hedging/asymmetric investment approach. With the benefit of the newly modified VPF arrangement, our long-term goal is to reduce PSH’s performance fees to zero with the launch of new funds and strong long-term performance. Over the last two months, we educated potential investors about PSUS and launched the PSUS IPO. When we concluded that these initial IPO efforts would likely lead to a closed end investment company with a market cap below our goals for PSUS and for PSH (the larger the PSUS IPO, the larger the incentive fee reduction for PSH), we withdrew the offering.
“Notably, PSH’s discount to NAV narrowed substantially during the IPO process and has widened somewhat since we pulled the offering. We are in the process of redesigning the PSUS IPO transaction and we are limited in what we can share about these plans due to regulatory reasons, but we will do our best to keep you informed bearing in mind the regulatory constraints.6 We are mindful of the fact that time spent on the operations of an investment business can come at the expense of the mission critical activity of investing. Since our restructuring away from open-end fund management in 2017, the investment team has been able to allocate substantially all of its time to investing as closed end investment companies do not require the constant fundraising and marketing of open-end funds.
“The launch of PSUS is one of a number of strategic initiatives we plan to undertake which we believe will increase the longterm sustainability of Pershing Square Capital Management (PSCM) and will benefit PSH by reducing the performance fees that it pays. To this end, in June, we sold a 10% interest in PSCM, the proceeds of which will be used to anchor new fund launches including PSUS.”
PSH : Pershing Square Holdings trails market in H1, while IPO withdrawn
