Pershing Square Holdings trades at a 10% discount to its NAV ($15.73 to $17.43). Historically, the discount has averaged around 5% since the IPO. The holding IPO’ed in 2014.
It’s not uncommon for holding companies of star managers to trade at a slight premium when they go on a winning streak. Ackman is very much not on a winning streak. In fact, he is getting taken to the cleaners in a very public way because of his Valeant (VRX, Financial) investment.
Back in 2014 he was absolutely revered and now he is vilified for his investing style that has been fairly consistent. There is even someone taking out ads to discredit him (I marked the ad in red; if you search on PS or his name you'll see it):
It’s a shame his recent disastrous picks drown out his achievements over the years. If you review Pershing Square's history of returns, you’ll see they are pretty remarkable:
Source: Pershing Square Holding annual report
These results are achieved through a fairly consistent strategy of Pershing Square buying up a concentrated position in an undermanaged company with underutilized assets or margins that are thin compared to similar peers. Pershing helps or forces changes and adds value to its portfolio this way. Because it takes a lot of legwork and focus to achieve positive results at target, the fund needs to be highly concentrated.
All that activist-generated alpha comes at a price as Ackman charges a typical hedge fund management and performance fee. Fortunately, investors in Pershing Square aren’t paying performance fees for awhile because of Ackman’s disastrous 2015 and equally disastrous start to 2016. The layer of fees could usually serve to justify a discount to NAV which makes it all the more interesting it is trading at a 10% discount while it can’t charge any for awhile. Keep in mind the historical results shown above were achieved net of the hefty fee structure.
One risk that’s definitely worth mentioning (aside from the concentrated portfolio and the sizeable Valeant position) is the use of derivatives and options. The holding also issued $1 billion worth of bonds that are due in 2022 paying a 5.5% coupon. The bonds do not have any mark-to-market covenants that could potentially force Ackman to sell at exactly the wrong time –Â in contrast to how leverage through margin debt sometimes can.
If there is a time to invest in Pershing Square, it’s gotta be now. Ackman has a track record that has me green with jealousy, his strategy is simple and likely replicable, he appears prideful enough to really, really want to make a comeback, we don’t have to pay performance fees for awhile, and we are getting the underlying NAV at a sizeable 10% discount. What’s not to like?
For additional background on Pershing’s current holdings read the notes on the recent Pershing Square earnings call.
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