22.07.2019 – 23:40
Metage Capital Limited: Open Letter to the Shareholders of Pershing Square Holdings, Ltd. Seeking Their Support Against the Company's Proposed Twenty-year Bond
Dear Fellow Shareholders,
Re: the proposed issue of $400m of twenty-year Bonds by Pershing Square Holdings, Ltd.
Metage Funds Limited has been an investor in Pershing Square Holdings, Ltd. ("PSH" or the "Company") since 2016. This is a significant position for us and we wanted to write to other investors to explain why we are against the proposed issue of twenty-year bonds by PSH. We would encourage all shareholders to lobby the Board and Management to fight against this latest anti-shareholder action.
History of PSH
The Company came to market in October 2014 on the back of strong performance by other funds managed by Pershing Square Capital Management LP (the "Manager"). Following the IPO, the Manager had $17.5bn under management, of which $11.2bn was in private funds and $6.3bn was invested via PSH. Shares were issued in the Company at $25 per share.
Since then performance has been dire.
The shares of PSH closed at $18.04 on 19 July 2019. Including dividends, this equates to a shareholder loss of 27% in the 4¾ years since launch. Over the same period the S&P 500 index increased by 72%. Further, the impact of the existing leverage can be seen in the maximum draw down in PSH's share price of 56%, compared to 17% for the S&P 500. Given this performance, it is logical to question the basic concept of leveraging an exceptionally concentrated portfolio.
What has been the response of investors in the Manager's other funds, who had the ability to redeem? They have voted overwhelmingly with their feet. At the end of 2018, only $2bn were left in the Manager's open-ended funds. As investors in the closed-ended PSH cannot redeem, the demand for its shares has fallen and shareholders have been forced to sell at a discount of up to 30.6% to be able to exit. Asset Value Investors, another long-suffering shareholder in PSH, rightly stated in their recent letter that the scale of this discount is exceptional for a portfolio of large capitalization stocks. Such a discount is often indicative that the market is concerned that there are fundamental governance issues.
How does the proposed bond interact with the interests of independent Shareholders?
Any bond with early repayment penalties will act as an economic disincentive to settle these liabilities early. It has the direct impact of extending the likely life of the fund and increasing the value of the management agreement to the Manager. The addition of further gearing to a portfolio with so few positions inevitably creates risk and increases the option value of the performance fee. The high volatility of returns delivered by PSH since IPO is a clear demonstration of why this is not in independent shareholders' interests.
As a lovely bonus for the Manager, the proposed long-term bond also creates a poison pill in the form of key man provisions relating to Bill Ackman. If investors wish to wind-up the Fund or change the Manager, they will first have to repay all of the outstanding bonds.
Why must the Company borrow for twenty years?
Twenty years is an extraordinary term for funding positions in some of the most liquid stocks in the world. A prime brokerage arrangement would enable full flexibility in managing any level of gearing sought and be repayable at will. To ensure that PSH can survive a negative move in the markets is a simple matter of ensuring that positions are not (excessively) leveraged in the first place. Other hedge fund managers have achieved this through market-cycles. It is unclear why Pershing Square Capital Management should be uniquely unable to achieve a similar outcome.
What steps has the Board taken to manage these conflicts of interest?
As far as we are aware, the Board made no effort whatsoever to seek investors' views on this bond issue. This raises the alarming prospect that the Board could not even see the possibility of a conflict of interest. Particular opprobrium must be focused on Anne Farlow and Bronwyn Curtis as Chairman and Senior Independent Director respectively, who have primary responsibility for ensuring the proper governance of the Company and that independent shareholders are appropriately consulted.
This is not the first time concerns regarding the proper operation of the Board have surfaced. In January 2018, Directors proposed an arrangement which would have sanctioned the Manager buying a large block of shares ahead of the Company buyback. Only considerable pressure from Shareholders behind the scenes and in the financial press made the Board reconsider.
Does reducing the size of the Company limit the Manager's ability to deliver future returns?
The Manager has shown a clear tendency to perform worse with larger assets under management. If capital is required for a specific investment, the Manager has shown it is able to raise special purpose vehicles to capitalize on a particular opportunity .
In summary we appreciate the Manager's recent focus on investing and the results it has led to. However, investors' patience has been sorely tested over the last five years and it is unreasonable to expect shareholders to be bound to the current strategy until Bill Ackman reaches the age of 73.
We would encourage all investors to contact the Board to make clear that they are against the issue of this bond, or any similar instrument, and that the proper allocation of capital should focus on returning money to shareholders until such time as the balance of supply and demand for the Company's shares is restored.
Richard Webb, CEO
Metage Capital Limited London Email: email@example.com Tel: +(44) 203 813 8590
 PSH October 2014 Portfolio Update.  Closing price for PSH NA on Bloomberg on 19/7/19.  Based on the maximum percentage draw down in the weekly share price of PSH and the S&P500 total return index. Data source: Bloomberg.  PSH Annual Report 2018; page 7. Total assets $8bn, of which $6bn is PSH; excluding Pershing Square VI, the ADP co-investment vehicle.  NAV for PSH for 18 June 2019 and closing price on Bloomberg.  Public letter from Asset Value Investors to the Chair of PSH; 16th July 2019.  Data 2018 PSH Annual Report; Metage Capital Limited analysis.  See Pershing Square VI fund raised for investments in ADP.
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