Pershing Square Holdings was last night confirmed as a FTSE 100 company from 21 December. We recently spoke to its CEO Bill Ackman who told us how shareholders received a $2bn gift following a successful trade and why shares in his Pershing Square investment vehicle are still so cheap.
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Lee Wild, head of equity strategy, interactive investor:
Hello. Today I have with me Bill Ackman, one of the world's best-known investors and the man behind hedge fund Pershing Square Holdings (LSE:PSH). Hello, Bill, thanks for joining me.
Bill Ackman, founder and chief executive, Pershing Square Holdings:
Thanks for having me.
First of all, could you please tell us a little bit about your UK listed fund, Pershing Square Holdings, and what it actually does?
Sure, so we actually think of Pershing Square Holdings as an investment holding company that's structured as a closed end fund. And, you know, my mentor in the business – let's say my informal, unofficial mentor - is Warren Buffett, and Warren Buffett for 15 years ran an activist hedge fund that started in 1956. And then in 1969, he merged it with what he called a “crappy textile company” called Berkshire Hathaway (NYSE:BRK.B). And I've learned a lot from Mr Buffett, reading everything he's written, watching as many speeches as he's given. And Pershing Square started out as an activist hedge fund in January 2004.
And then over time, our ambition was to get to manage a public company which had effectively permanent capital and that was what Pershing Square Holdings’ ambitions have been. We took the entity public in October 2014 - at that time, it represented only about a third of our capital - and now it's our principle vehicle by which we invest capital. So its entity today has an equity value of $9.2 billion. We've got $2 billion or $2.1 billion of unsecured bonds, long-dated bonds that we have outstanding, although a portion we'll be refinancing in about two years.
And we own 10 companies, so think of this as an investment holding company where we have 10 companies and we are a meaningful and influential investor in each of them, by virtue of being typically one of the largest shareholders, often with representation on the Board of Directors, and fairly large cost trade conditions. And our goal is to compound our NAV [net asset value] at a high rate over a very long period of time through this entity.
The employees of Pershing Square, the managers, own a little more than 25% of the outstanding shares of the entity, so we do view it as our personal investment vehicle in the sense that we have a very large stake individually. And the benefit of this structure, why are we, a US manager, based in Europe? The benefit here is we can operate like an investment holding company without having to pay entity level taxation.
So if this entity were in the US, we'd have to pay 35% - or now 21% corporate tax – and here we can operate much more efficiently. But the ambition is to own the greatest businesses in the world, own businesses we can own for a decade or more and help them operate and improve their businesses over time.
Investors clearly like the business. The share price is up around 62% in 2020 so far, and that's despite you having no tech investments. So obviously, tech stocks have grabbed all the headlines this year, with stunning gains. How has your fund done it?
The answer is that we've owned some remarkable businesses. Our strategy is to buy what we call simple, predictable, pre-cashflow generative businesses, businesses that Warren Buffett would describe as having a moat around them. There are very high barriers to entry, what we call super- durable growth companies with strong balance sheets. And if you own super-durable growth companies with strong balance sheets and you buy them at the right price, regardless of the economic environment, you can do very, very well.
And so, one, the assets of the companies that we've owned, you know, Starbucks (NASDAQ:SBUX), even businesses like Hilton (NYSE:HLT), Lowe's (NYSE:LOW), Agilent (NYSE:A), you know, Chipotle (NYSE:CMG), restaurant brands, these companies can survive the great flood and they were prepared for and in fact we think are long-term beneficiaries, I have to say, of the pandemic. The other way we made money this year, which was unusual, although this sort of the second time we've faced this time of environment, is we were very early to be concerned about the pandemic as both a health threat and also an economic, a global economic threat.
And rather than sell our portfolio, which we thought would be impacted in the short term, we built a very large notional hedge in late February. So we bet that, if you will, that credit spreads on bonds would widen substantially. And it was a very asymmetric bet, because at the time we put the – it really was a trade – by the time we put the trade on, or bought insurance against the credit markets, credit markets were at the all – pretty close to the all-time tightest levels.
So it was hard to envision a scenario in which a global pandemic's spreading widely in what we believed would be a series of economic shutdowns, perhaps a global economic shutdown, that would cause credit spreads to widen. So we spent really pennies on premium, ultimately $27 million buying insurance, and we realised that $2.6 billion of proceeds in the middle of March, and then we redeployed those proceeds buying equities, and so we bought more of our existing holdings.
And so if you were a shareholder in Pershing Square Holdings in the beginning of the year, you had the benefit of our protecting you from the declines, the realisation of those profits, and then the reinvestment of those profits in pretty much the same portfolio but at much more attractive prices. One way to think about it is if we had an investor show up and put $2 billion into Pershing Square Holdings at NAV and not take any shares. It was like a gift. And we took the gift and we redeployed it in the existing assets.
And then as markets have recovered, which was our expectation, you know, our companies have recovered, and some have done quite well. Just looking at the screen, you know, Agilent's up 35% year to date, Chipotle's up 52% year to date, Lowe's is up 29% year to date, Starbucks is up 12% year to date. Those are really a number of our largest holdings, and the others are not – with a few exceptions, Howard Hughes is down 40% year to date - it's a real estate development company in the US – but overall, our investments have done well and we had the benefit of this large hedge in the deployment of the capital.
Now, Bill, the fund is trading at a discount to asset value of about 30%, but what are you planning to do about it?
Sure. So we find that to be, first of all, an extraordinary discount. We own 10 liquid New York Stock Exchange listed companies, and you can actually calculate our NAV every day. So it's not a question of transparency; we've bought in 50 million of the 250 million shares that are outstanding at a discount to NAV, so it's not about the Board's interest in taking advantage of a discount. But I think it's largely due to the fact that you have a US manager, a US domiciled collection of companies, and a UK listed entity that gets ignored because people think of it as a US company. They don't realise that it's available to be purchased in the UK.
But what's interesting is on December 1st the listing panel decides on which companies should join the FTSE 100. If that decision were determined today, we would be the next company admitted to the index. So that's a week away, and so my view is FTSE 100 inclusion is probably the most significant potential catalyst for Pershing Square Holdings. I can't say whether it's going to happen or not, obviously depends on our market cap, but at NAV we'd be actually pretty high up on the list of FTSE 100 companies; it's a remarkable discount at 30% and we'll see what happens on December 1st.
But I think that's an important catalyst. If we were to become part of the FTSE 100, there's only one other closed end fund in the FTSE 100 which trades at or around NAV, and as far as I know, there are no other companies in the FTSE 100 that trade at discount or book value. We don't really think of Pershing Square Holdings as a fund; I think of it as a business that over the last 17 years has generated a 16% return on equity. And if you look at companies over the last 16 or 17 years that generating a 16% return on equity, it traded at least two times book value and often two-and-a-half to three times book value.
We have a company that's earned 16% return on equity for the last 17 years, you know, trading at a 30%, whatever, 70% of book value. Considering that we've earned north of almost, you know, 58%, ROI [return on investment] last year, 62% this year, I just think that at some point people are going to notice. And if we're included in the index, then the index funds need to buy us, and then the active managers that track the FTSE 100 have to at least take a look at us. And I think that increased visibility and just the demand for index funds will be a catalyst in hopefully materially reducing discount.
When we launched the entity in October 2014, we traded at 2% to 5% discount over time. We went through one of the most challenging periods I think in our 17-year history of the firm in circa 15 and 16; we lost some people's confidence, we had a 30% decline due to I would say veering from our core strategy. You put your hand in the fire, it burns, you don't make that mistake again.
We kind of regrouped. Employees and myself purchased 25% of the company, or increased our stake to 25% by buying stock on the open market. I put little tombstones on everyone's desk with our core principles, a bit like Moses's 10 Commandments, and ever since we did that we've made really a remarkable recovery.
We've had three extraordinary years and looking forward to closing this one now on great terms. But at some point, we're going to get noticed, and I think that FTSE inclusion is going to be the catalyst.
Bill Ackman, Pershing Square Holdings, thanks very much for joining me today.
Thank you so much, appreciate it.
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