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Pershing Square Holdings (“PSH”) was the most significant contributor to performance, adding +91bps to returns. This was driven by strong NAV growth (+10%), which was partially offset by a slight headwind of discount widening to 30%, resulting in a local (USD) return of +9%. Dollar strength vs Sterling improved returns experienced by AGT shareholders to +11%.

Largest holding Universal Music Group (“UMG”) – which we estimate accounts for 27% of PSH’s NAV – was the greatest contributor to NAV growth in March, as the shares returned +19%, following a period of weakness.  Our prior research on UMG when it was owned by Vivendi, and on Sony Music given our large position in Sony Group Corp, led us some time ago to appreciate the secular growth attractions of the music industry and the advantaged positioning of content owners in the value chain. Streaming has transformed the industry in terms of both growth and quality of earnings. We see a long growth runway ahead as streaming subscription services penetrate further into emerging markets and as subscription prices rise in developed markets, and as music becomes increasingly monetised on social media and in gaming with the profits from such inuring disproportionately over time to UMG and other content owners. Readers should note that AGT owns a direct position in UMG in addition to our indirect exposure via PSH.

PSH’s discount remains anomalously wide (30% at period end) for a company with such a strong performance track record and deft employment of hedges over the past five years. PSH remains AGT’s largest position.

Pershing Square Holdings (PSH) was the largest contributor to returns, adding 146 basis points (bps), with returns driven by a strong NAV (+14%) and a 5% tightening of the discount to 25%. Many of PSH’s holdings, particularly ones affected by lockdown measures, bounced strongly during the month. Fannie Mae and Freddie Mac (together, 5% of NAV) rose +60% in November on the back of speculation that their regulator, the Federal Housing Finance Agency, would push forward plans to privatise the companies before the change in presidential administration. Meanwhile, Pershing Square Tontine Holdings (PSTH), the US-listed SPAC sponsored by the manager, saw its share price increase +17% to place the cash shell on a 30% premium. We see PSH’s option to invest its share of an additional $2bn investment on top of its existing near-$1bn commitment as a source of potentially valuable upside. Just following the end of November, we learned that PSH would be included in the FTSE 100. PSH’s discount tightened substantially in the days prior to the announcement on the back of buying by arbitrage funds anticipating PSH’s entry into the index. While PSH has given up some – but not all – of its discount tightening in the days following the announcement, we note that buying from FTSE 100 tracker funds has not yet commenced and is expected to provide a significant source of demand for PSH in the near future.

Pershing Square Holdings (PSH) was the second-largest contributor to returns, adding 108bps. The combination of a strong NAV (+8%) and a tightening discount (32% to 29%) resulted in a share price return of +13%. Many underlying holdings – Chipotle, Restaurant Brands, Starbucks, Hilton Worldwide, Lowe’s, Agilent – have reported quarterly earnings, giving us a good picture of the companies’ performance. On the whole, revenues declined as might be expected in the current environment, although Lowe’s was a notable exception (a beneficiary of the trend towards DIY home improvement during lockdown).

We are not overly concerned with vicissitudes in quarterly earnings, training our sights instead on the potential for above-average long-term growth and margin expansion across PSH’s portfolio companies. Viewed through this prism, short-term turbulence can enhance long-term prospects; we quote from a recent thoughtful note by Steven Wood of Greenwood Investors: “the read coming from companies in the second quarter […] will be largely irrelevant. But the discussions on what the companies did during this most remarkable quarter and first half will be highly informative. Did the companies retrench or did they have a customer-first and market attacker mindset?”

With that in mind, we are encouraged by Chipotle’s actions during the crisis, which included: (1) the introduction of free delivery through the Chipotle app to drive increased use; (2) introducing some “digital only” menu items to encourage customers to convert to ordering online; and (3) availing of real estate that has become available as competitors re-trench, accelerating new store launches with drive-through “Chipotlanes” to capitalise on changing dining habits. We like management’s opportunistic mindset and believe that Chipotle’s actions have turned a dismal economic environment into a strategic advantage.

PSH’s discount had tightened in the run-up to its potential inclusion in the FTSE 100 index, trading at 26% intra-day at one point, only for some – but not all – of those discount-related gains to be given back upon the news that it had just missed out in this review. Should PSH’s strong run of performance continue, it is likely a case of “when” rather than “if” it enters the index; the passive buying such an event would trigger should be helpful in narrowing a discount that looks anomalous given the stellar NAV returns generated over the last couple of years.

Pershing Square Holdings (PSH) contributed 137 basis points (bps) to returns, with an increase in NAV (+9% vs +5% for the S&P 500) led by largest holding Lowes (+24%) following consensus-busting results that disclosed Q1 comparable sales up +12% on the back of a surge in DIY activity from locked-down customers (note Lowes stores, along with those of other home improvement competitors, were deemed essential enough to be allowed to remain open). A tightening of PSH’s discount from 34% to 32% resulted in share price total returns of +12%. Given the still-wide discount, we are pleased to see the buyback programme continue at an aggressive pace (~10% annualised).

We note that PSH’s latest Transparency Report (as at 31-May-20) shows that PSH had established a new long position in credit default swaps (CDS)1 with a notional value of USD9 billion. For context, the notional value of PSH’s previous highly successful CDS hedge positions peaked at over USD70 billion before being closed by the end of March. The exact nature of the latest hedge remains unknown at this stage, and we await further details with interest.

Pershing Square Holdings (‘PSH’) was the largest contributor in March, adding 57 basis points (‘bps’) to
returns. Its NAV increased by +11% in March compared to the S&P 500’s fall of -12%; for Q1-20, the respective
figures are +3% and -20%, extending its run of outperformance from the prior year. While PSH’s portfolio
materially underperformed the broad market due to its heavy exposures to lock-down-affected consumerfocussed
stocks, an extraordinarily successful hedging programme protected the NAV. Anticipating the
severe economic impact of the measures necessary to “flatten the curve”, the Manager purchased credit
default swaps covering very large notional amounts of US and European pre-dominantly investment grade
credit exposures. The notional amount was reported at $45bn as at end-February, but a seemingly wellinformed
FT article later cited a peak figure of $71bn. In a matter of weeks, the value of the CDS contracts
had jumped as the market selloff intensified and credit spreads widened. The hedge was unwound realising
$2.6bn across all of Pershing’s funds (a gain of ~100x the premium and commissions paid of $27m) in what
one analyst has termed “arguably the greatest trade the UK closed-end industry has ever witnessed.” This
left the Manager in the enviable position of having an enormous amount of capital to deploy into its portfolio
of stocks at depressed levels.

PSH ended the month on a 34% discount, 3% wider than at the start of the month. While we hesitate to
pinpoint what a “fair” discount might be – especially given the consistent widening in the discount over the
past two years – we believe that the current 34% discount is too wide given the quality of the portfolio; the
manager’s actions during the crisis, showing that the fund can offer downside protection and countering the
criticism of “hedge-fund” style fees for managing a long-only portfolio; and the ongoing NAV-accretive
buyback programme which has accelerated as volumes have picked up over the last month.

While our investment in Pershing Square Holdings (PSH) detracted 41bps from returns over February, a month-end NAV almost 4% higher than expected surprised the market. The company later confirmed they have put on hedges against the impact of the Coronavirus, which they expect to have a “substantial negative impact on the US and global economies”. The subsequent NAV – as at 9th March – showed a very material positive impact from these hedges that we estimate to be in the region of +26%. As at the date of this last published NAV, PSH’s NAV was up +2.8% over 2020 vs a 14.7% decline from the S&P 500 despite its portfolio companies underperforming the index over that period. One of the criticisms levelled at PSH despite its very strong NAV performance in 2019 was that investors are paying “hedge fund” fees (1.5% of NAV plus 16% of absolute gains) for a long-only portfolio. This line of attack now looks far less valid and, if management can continue to successfully navigate this market sell-off, we would expect to see PSH’s discount – which we already felt unjustifiable, notwithstanding certain corporate governance concerns – narrow in response to changed perceptions.

Pershing Square Holdings (PSH) was the second-largest detractor, reducing returns by 56bps (over half of this due to currency, however). The NAV fell by -5%, although the discount tightened by 1% to 26%, resulting in share price returns of -4%. Performance at the portfolio level was mixed, with key holding Chipotle Mexican Grill (19% of PSH’s NAV) falling -7% despite a strong quarterly earnings report with beats on sales, profits and margins. Concerns have grown about the company’s ability to maintain high same-store sales growth next year versus more challenging comps, but we believe the runway from menu innovation and further growth in digital orders is very long. Restaurant Brands (18% of PSH’s NAV) declined -8% on worries about slowing growth at Burger King and Tim Hortons. Howard Hughes (8%)’s share price fell -14% as the results of its strategic review made clear that a quick sale of the business is unlikely. That said, sales of non-core assets with the proceeds used for an aggressive buyback programme should prove supportive.

During the month, we wrote a public letter addressed to the Chairman of Pershing Square Holdings (PSH), which is the largest investment in AGT’s portfolio. This followed the announcement that the company planned to issue a $400 million bond with a 20-year maturity. Our view, expressed in detail in the letter, was that the issue of such long-dated debt would act as a poison pill in constraining the ability of the company to tackle its ballooning discount to NAV which, at the time of writing, sits at 31%. While the eventual terms of the debt showed some concessions (e.g. caps after ten years on the make-whole premium due in the event of early repayment, offering some protection against further falls in rates), and hinted at a portion of the proceeds being used to refinance existing debt, these do not change our fundamentally negative view of the issue.

Taking a step back, it is highly debatable whether PSH should be refinancing its debt at all, let alone using very long-dated debt to do so. Given the existing debt has been cited frequently in the past by the Board and by the Manager as an impediment to more aggressive share buybacks and/or tender offers, or other more structural solutions, there is a strong argument that it should be repaid in full at its maturity in 2022 and that the company should either be run on an unleveraged basis or levered using more flexible debt.

Aside from limiting the company’s ability to manage its discount, the additional gearing increases the option value of the manager’s performance fee (as performance fees can be viewed as a call option on NAV growth with the strike set at the high water-mark, the more leveraged the company is, the more volatile its NAV will be, and the more valuable is that option).

This is just one way in which the interests of the Manager are not entirely aligned with shareholders. Other obvious conflicts relate to their fees earned, which would diminish in line with any shrinkage in PSH’s asset base. There is another, which can also be understood and analysed as an option. While the Manager has made a very large personal investment in PSH, which we welcome wholeheartedly, it would be a mistake to see this as resolving the misalignment of interests found in almost all closed-end funds needing to act on their discounts. Given the Manager owns 20% of PSH’s share capital, is indelibly associated with the vehicle that bears its name, and that the fund was raised on the strength of its track record and distinctive investment strategy, it does not seem unreasonable to assume that the Manager could in effect elect to wind up the fund at their own discretion at a time of their choosing. As such, the Manager effectively owns a put option with a strike price set at a zero discount to NAV. As the discount to NAV widens, that put option increases in value to compensate for the mark-to-market loss on the PSH shares they own. Non-management shareholders have no such protection.

Taking yet another step back, the uncomfortable truth is that PSH owns a portfolio of highly-liquid large-cap stocks yet trades on a discount to a fully-marked-to-market NAV of 31%. We are old enough to remember the Manager commenting back in late-16 that they “find the current discount [then 21%] unacceptable”1, and to recall the Board’s comment a few months later that they “are not happy with the level and duration of the discount [then 15%]”2. We wonder what the Manager’s view would be if one of its investee companies traded at a 0.7x price/book ratio and attempted to justify a timid rate of share buybacks by decrying shareholders calling for more as short-term. Indeed, we have seen companies on the receiving end of activist campaigns by the Manager respond in such a fashion. Regardless of the Manager’s stance, one of the key attractions of closed-end funds is their independent boards of directors who have a duty to represent the best interests of shareholders. We have grave concerns that the Board of PSH seem to have been blind to the consequences of and conflicts surrounding the recent debt issue.

We invested in PSH over two years ago having conducted extensive due diligence on its portfolio and the Manager’s investment strategy and have benefitted from the strong NAV returns as performance has turned around. Our investment in the company has been one of AGT’s top contributors over 2019.

We continue to have a favourable view of the prospects for further share price appreciation from PSH’s portfolio of high-quality free cash flow-generative companies with limited CAPEX requirements, high returns on invested capital, and clear idiosyncratic drivers for earnings growth. During July, Starbucks (an estimated 13% of PSH’s NAV) posted its strongest same-store sales growth (+6%) since early-16 with traffic growth returning to the US as management-led initiatives to boost footfall began to bear fruit. Largest holding Chipotle Mexican Grill’s turnaround under its new CEO was confirmed in its Q2 report with a consensus-beating +10% increase in comparable sales, with digital sales a key driver and now accounting for 18% of total sales.

We now await a similar “turnaround” from the Board who bear responsibility for the discount suffered by shareholders.

The level of support from fellow shareholders following our public letter has been gratifying, and we thank those who got in touch. Any other shareholders in PSH wishing to discuss their views on the future of the company are invited to contact us at tom.treanor@assetvalueinvestors.com

We have been engaged with the Board and management of Pershing Square Holdings (PSH) throughout our ownership on the need to tackle the extraordinarily wide discount at which the company’s shares trade. During the month, PSH announced a buyback programme for up to 3% of outstanding shares. While we believe the quantum of the buyback is insufficient, it is a small step in the right direction.

Pershing Square Holdings (PSH) continued to perform well in 2019,
outperforming the US market (S&P +3% in USD) with its NAV increasing
by 9% in February. Our long position added 48bps to performance, and
the hedged position added a further 2bps. As a reminder, 45% of our
total long exposure to PSH is hedged by shorting a pro rata amount of
the underlying holdings, which provides us with the potential for equitylike
returns from discount tightening from the current very wide level,
without taking additional equity market risk.

Chipotle was the star performer in PSH’s portfolio this month, with its
share price increasing +15% on the back of an earnings report which
showed that same-store sales were up +6% (including a +2% boost
from traffic) – providing further evidence that the new CEO’s strategy is
bearing fruit. When we consider that Chipotle’s restaurant unit sales
remain some 20% below the peak – and we add in the fact that it has
only just begun to harness the potential for online sales – the quantum
of potential future growth and associated benefits from operating
leverage appear extremely compelling.

Hilton Worldwide also reported consensus-beating results in February,
resulting in the share price increasing +12%. Other companies within
PSH’s portfolio performed well, including Automatic Data Processing
(+9%), Lowe’s (+9%), United Technologies (+7%) and Starbucks (+4%),
all of which also posted strong results in the prior month.

Despite the continued strong performance, the discount remains
unsustainably wide at c. 25%. PSH announced that it will introduce
dividend payments equating to a c. 2.5% yield which, while a marginal
positive, will not, we believe, be a major contributor to discount
tightening. It remains obvious to us that the company should use the
proceeds from the recent sale of Element Solutions to fund a material
buyback and/or tender offer.

Pershing Square Holdings (PSH) substantially outperformed a strong
US market (S&P 500 +8% in USD) with its NAV increasing by +18%
over the month. Our long position in PSH added 68bps; our hedged
position added a further 11bps. As a reminder, 45% of our total long
exposure to PSH is hedged (i.e., 4.2% of BTEM NAV versus 5.3% for
the outright long position) by shorting a pro rata amount of the
underlying holdings, which provides us with the potential for equity-like
returns from discount tightening from the currently very wide levels
without taking additional equity market risk.

In a mixed US earnings reporting season, results released in January
for PSH’s portfolio companies exceeded expectations and confirmed
their secular growth prospects, with positive share price reactions for all
those reporting: ADP, Restaurant Brands International, United
Technologies, and Starbucks. Chipotle reported shortly after month-end
and provided more evidence of the turn-around spearheaded by its new
CEO with same-store sales up +6% including a +2% boost from traffic.

An additional strong tailwind was provided by positions in Fannie Mae
and Freddie Mac which, while only accounting for a relatively small part
of the portfolio, more than doubled in price on the back of hopes for
housing market reform in the US. As option-style positions with
asymmetric return profiles and limited equity market correlation, we do
not short these exposures in our hedged investment in PSH.

Despite the turn-around in PSH’s performance, the discount remains
unsustainably wide (c. 25%). It seems obvious to us that the company,
having been fully invested up until the recent sale of their holding in
Element Solutions (formerly Platform Specialty Products), should use
the proceeds from the sale of this investment to fund a material
buyback and/or tender offer.

We discussed in our October newsletter our initiation of an additional hedged
position in Pershing Square Holdings (PSH). PSH was already our largest
single holding and, while we still saw (and continue to see) a lot of value in
PSH’s portfolio from multiple idiosyncratic drivers of returns, our rationale
was that an incremental investment on a hedged basis had the potential to
produce equity-like returns without taking additional equity market risk. At
month-end, 30% of our total long position in PSH was hedged by selling
short an appropriate amount of the underlying holdings – in doing so, we are
seeking to isolate returns from the discount narrowing in from the 24% level
at which we purchased the additional PSH shares and placed the hedges.
PSH’s NAV fell -11% in December, in line with the S&P 500 index move if
one adjusts for PSH’s gearing, with the holdings in United Technologies,
Platform Specialty Products, and Howard Hughes falling the most. While the
unhedged position in PSH was thus our second largest individual detractor
behind TBS, the hedged position registered a small gain on the back of a
marginally tighter discount.

Having previously been on course to register its first positive full-year return
since inception, the Q4 sell-off meant PSH’s NAV finished the year -0.7%
down. While this was still some way ahead of the S&P 500 (-4.4%), the very
poor (relative and absolute) returns in prior years mean the manager has a
lot of catching up to do to restore their reputation. The portfolio has enjoyed a
strong recovery in the early days of 2019, but we maintain that a discount of
24% for a portfolio of liquid large-cap listed holdings is unsustainable.

Pershing Square Holdings (PSH) continued its recovery with its NAV up
+3.1%, driven by strong share price performance at ADP, Chipotle, and
Lowe’s. PSH’s discount continues to remain extraordinarily wide (24% at the
time of writing) for a portfolio of large-cap, liquid listed US equities.

Notwithstanding PSH’s turn-around and what we deem to be a very attractive
portfolio, it remains our base case that PSH needs to shrink further to
properly address its discount.
NB Private Equity benefitted from a narrowing discount, in from 17% to 13%
before an impressive write-up in its official year-end NAV (revised up +4%
from its previously released figure) announced after month-end pushed its
discount out again. A series of important initiatives were recently announced:
the dividend policy was tightened up to fix the pay-out at 3% of NAV (with a
bias against reducing the nominal amount in the event of short-term NAV
fluctuations), which led to an immediate +12% increase in the dividend level;
one of the two NB representatives on the Board will resign at the 2018 AGM
and the Chairman will do likewise at the 2019 AGM, with two new
independent directors to be appointed; half of the legacy funds portfolio will
be put up for sale in the secondary market; and a new buyback agreement is
being entered into with one of the company’s corporate brokers (although the
announcement cautioned against seeing this as indicative of a “forthcoming
systematic” buyback).

These measures go a long way to addressing some of our concerns, although
we would like to see a fully-independent board (the current situation is now
analogous to being half-pregnant) and the identity and mind-set of the two
new independent director appointees will be critical to ongoing good
governance and strategy. The funds portfolio has held back overall portfolio
growth in recent years and complicates the marketing story, so we welcome
the move to reduce it by half. Our research suggests that a sale of 50% of
the funds portfolio should attract a discount of no more than a couple of
percentage points if the highest-pricing funds are selected for sale, but our
preference is for the whole portfolio to be sold with the proceeds used for an
accretive tender offer to more than offset the greater discount on pricing. All
said, it is important not to be churlish and to recognise that the package of
measures is a clear step in the right direction, and the Board and Manager
should be applauded for their willingness to listen to shareholders. All eyes
will now be whether the Board uses its buyback authority to tackle and take
advantage of the still-too-wide discount to NAV.

The NAV of Pershing Square Holdings (PSH) continued its recovery (+2.5%
in June) with investor returns amplified by discount narrowing (in from 23.7%
to 21.4%). We speculated in last month’s newsletter that the investor day to
be held in June by PSH’s largest holding, pay-roll and employer services
behemoth ADP, would likely see the company raise guidance and this
proved to be the case. While management now expects revenue to grow by
7-9% per annum for the next three years accompanied by an accelerated
pace of margin expansion, Pershing Square Capital Management continue to
contend that even these raised forecasts are too low and that management
is being unnecessarily conservative in both their estimates and their
appreciation of the scope for operational and margin improvements. ADP’s
share price responded well, and gains elsewhere in PSH’s portfolio (from
Mondelez, Howard Hughes, and Restaurant Brands) added to NAV returns.

Pershing Square Holdings (PSH) was amongst the largest contributors for
the second consecutive month with its NAV rising by +10%. Within its
portfolio, ADP (PSH’s largest holding), Restaurant Brands International, and
new investment Lowe’s Corp were the star performers. ADP’s quarterly
results were impressive, and there is growing recognition of the company’s
enormous potential for operating margin improvements. We continue to
believe that Pershing Square have won the argument in this regard despite
losing the proxy battle for seats on ADP’s board, and ADP’s investor day
scheduled for mid-June could well see the company raise guidance. Along
with solid Q1 results, Restaurant Brands International unveiled a new plan to
resolve franchisee discontentment at its Tim Horton’s business in Canada,
and this was well-received by the market. A new investment in Lowe’s
Corp, which rose +15% over the month, was revealed. While we are yet to
hear Pershing’s investment thesis, Lowe’s operates in what is essentially a
duopoly in the US home improvement market with Home Depot (HD) but
has been underperforming its competitor in terms of both sales growth and
margins. The recent appointment of a former Home Depot employee as the
new CEO at Lowe’s following pressure from an activist shareholder has
given the market grounds for optimism that these issues will be addressed.

PSH’s tender offer concluded in mid-May, with the clearing discount of
20.5% in line with our forecast and suggesting capitulation on the part of
some long-standing shareholders. We did not participate in the tender and
thus benefitted in full from the +2% per share accretion generated for
continuing shareholders. We added to our position at a discount of 25%
shortly after the tender offer completed, and continue to see the current
23% level as unsustainable for a portfolio of large-cap, liquid, listed
securities. It was announced after month-end that Bill Ackman has
purchased $160m of PSH shares in the market. While we welcome this
increasing alignment and the nascent recovery in NAV, the managers will
find themselves under increasing pressure if this discount level persists. We
note Fitch has changed its outlook for PSH’s credit rating to negative, but
the level of gearing they state would trigger a downgrade does leave some
headroom for further share repurchases and/or tender offers,
notwithstanding the question of whether investment grade status is deemed
essential given the constraints it places on discount control. In any event,
there exists scope for more innovative solutions to the wide discount than
simply buybacks and tenders.

Pershing Square Holdings (PSH) had a good month with its NAV return of
+3.3% accompanied by a narrowing of its discount (in from 23.7% to
20.8%), and BTEM’s returns on the position boosted further by a stronger
US dollar. PSH’s NAV performance was driven by Chipotle Mexican Grill
(CMG) whose share price rose by 31% over the month, most of which
occurred following an upbeat Q1 earnings call with the new CEO, ex-Taco
Bell supremo Brian Niccol. It is possibly an understatement to say that this
investment in CMG has until recently not gone to plan, with unfortunate food
safety scares and reports of rodents falling from the ceiling at a Dallasbased
outpost delaying the turnaround in consumer sentiment on which
Pershing Square’s investment case was in part predicated. The recent
share price rise has put PSH back in the black on the investment and, while
it is hard to argue that CMG shares look cheap on a near-term multiples
basis, the business has been under-managed for years and has compelling
scope for growth given its relatively limited footprint in its home market of
the US, and its attractive per-unit economics achieved despite hitherto
limited opening hours and ineffective marketing spend. PSH’s tender offer
concludes this month, and our base case for where we expect it to be struck
would generate accretion to NAV per share of c. 2%.

Pershing Square Holdings (PSH) had a good month with its NAV return of
+3.3% accompanied by a narrowing of its discount (in from 23.7% to
20.8%), and BTEM’s returns on the position boosted further by a stronger
US dollar. PSH’s NAV performance was driven by Chipotle Mexican Grill
(CMG) whose share price rose by 31% over the month, most of which
occurred following an upbeat Q1 earnings call with the new CEO, ex-Taco
Bell supremo Brian Niccol. It is possibly an understatement to say that this
investment in CMG has until recently not gone to plan, with unfortunate food
safety scares and reports of rodents falling from the ceiling at a Dallasbased
outpost delaying the turnaround in consumer sentiment on which
Pershing Square’s investment case was in part predicated. The recent
share price rise has put PSH back in the black on the investment and, while
it is hard to argue that CMG shares look cheap on a near-term multiples
basis, the business has been under-managed for years and has compelling
scope for growth given its relatively limited footprint in its home market of
the US, and its attractive per-unit economics achieved despite hitherto
limited opening hours and ineffective marketing spend. PSH’s tender offer
concludes this month, and our base case for where we expect it to be struck
would generate accretion to NAV per share of c. 2%.

Pershing Square Holdings was again a material detractor on the back of
further discount widening (from 20% to 23%) and its portfolio not being
immune from the sell-off in the S&P 500. Our work on PSH’s portfolio
suggests material upside on several of the holdings, and the current
discount is exceptionally wide for a portfolio of large-cap listed equities.
That said, the potential lifting of the ownership limits following the vote at the
AGM to be held in Apr-18 will help facilitate more radical action should
performance not improve and the discount fail to narrow materially. We
added to our holding at a 24% discount intra-month.
Cosan Ltd’s shares fell -7% in March despite its NAV being up. The
discount thus widened, reaching 37%. We attended Cosan Ltd’s Capital
Market Day in New York during the month, and re-affirmed our conviction
that a collapse of the inefficient holding structure is the ultimate goal of management and the family behind Cosan (there are two additional holding
companies trading at wide discounts below Cosan Ltd). We believe this is
most likely to happen via buybacks aimed at increasing the family’s control,
before an eventual collapse of the structure. Given that Cosan Ltd’s lookthrough
discount is 53%, the share price upside from such a move would be
be very sizable. We added to Cosan Ltd on weakness.

We discussed our investment in Pershing Square Holdings (PSH) at length in
last month’s newsletter, outlining our thoughts on the proposed $300m
tender offer by Pershing Square Capital Management (PSCM) and the
concessions later conceded by the Board/Management in the face of
shareholder opposition. Given our views, we were pleased with the
announcement in February that the tender is being abandoned in favour of a
self-tender (also for $300m) by PSH. The benefits of this are two-fold: 1) a
company-led tender is accretive to NAV per share, unlike one conducted by
management and 2) it eliminates the possibility of the company being “frontrun”
for cheap stock (although this issue had already been substantially
mitigated by the concession of a tighter discount range for the proposed
management-led tender). It is our understanding that PSCM is instead likely
to accumulate shares in PSH in the open market.

At the very end of the month, it was reported that Pershing Square is
winding down its only short investment in Herbalife. While the investment
has been a failure, we view its closing as a positive move given its
disproportionately high profile and demands on management time relative to
the size of its exposure in PSH’s portfolio. At the same time, Pershing
announced a new investment in giant conglomerate, United Technologies,
whose CEO recently discussed the possibility of a break-up. At PSH’s AGM
in Apr-18, shareholders will vote on the removal of the 5% ownership limit
cap; a vote in favour will allow the company-led tender to go ahead, and
gives the necessary flexibility for future returns of capital. PSH was our
second-largest detractor over the month on the back of weakness in largest
holding ADP (on no news) and a widening discount (out to 20% from
16.5%). Since month-end, PSH’s discount has expanded further to 23.5%
at the time of writing, a level which is frankly untenable given the high-profile
nature and investment style of the manager. We added to our holding at
these elevated levels. While the company-led tender is likely to help the
rating, we continue to believe that a more structural solution may be
required.

Although not a material contributor to BTEM’s NAV return due to FX losses
on translation, Pershing Square Holdings (PSH) performed well in local
currency terms on the back of a narrowing discount (in 410bps to 17.4%)
following the announcement early in the month that the manager, Pershing
Square Capital Management (PSCM), is to conduct a $300m tender offer for
PSH shares at a discount range of 16‐24%. To facilitate the tender offer, the
Board of PSH are granting a waiver to PSCM exempting them from the 5%
ownership limit that exists to prevent inadvertent breaches of US tax laws
relating to investments in real estate.

While we would ordinarily welcome a manager aligning themselves further
with shareholders with such a large personal investment, we had several
concerns. Firstly, we believed a vote should be held on whether to restrict
PSH’s investment in real estate‐related holdings (via common stock;
positions could still be replicated via derivatives) and thus allow ownership
limits to be permanently removed for all shareholders. Secondly, we felt that
PSH should be acquiring its own shares in the event ownership limits were
removed, thereby generating accretion to NAV per share which is absent
from a manager-led tender offer. We also believed that if the discount were
to remain wide and a tender were held in future by PSH, then PSCM would
have been given an unfair opportunity to acquire cheap stock ahead of the
company. Having made these points to the Board and Manager, we were pleased that an announcement was made giving three key concessions: 1)
the PSCM tender offer discount range would be tightened from 16‐24% to
10‐16%; 2) a vote would be held at the AGM in Apr‐18 on restricting
investment in real estate/removing ownership caps with PSCM agreeing to
vote their shares in favour; 3) ahead of the vote, a waiver to the ownership
limit would be granted to any shareholder willing to give the required
undertakings regarding real estate investments.
While the PSCM tender will still go ahead before the vote on removing
ownership limits is held, we believe the tighter discount range at which the
tender will take place substantially mitigates the risk of PSCM effectively
“front-running” either PSH itself or other shareholders given the new range
represents an uplift on the current discount level. We are sceptical that the
$300m tender by management will be sufficient to materially narrow PSH’s
discount. At the same time, we appreciate that large-scale returns of capital
could impair the value of what is a highly concentrated and activist portfolio
in which we continue to see considerable scope for upside, and we are
cognisant that more structural solutions to the discount are required. We
continue to engage constructively with the Board and Manager.

Pershing Square Holdings was our most significant detractor as
positive NAV growth was outweighed by a widening discount, which
pushed out from 20% to 24%. This is a very wide discount for a fund
with an entirely listed and liquid portfolio, and we continued to build our
position at these attractive levels. GP Investments, the Brazilian-listed
private equity company, experienced a material de-rating as its
discount widened out by 800bps. After month-end, shareholders in the
US-listed SPAC sponsored by GP approved its merger with Rimini
Street (enterprise software support), thus entitling GP to a 20% stake in
the SPAC at no cost. We continue to see GP’s shares as exceptionally
under-valued on a discount of 40% (47% if investee company Spice
Private Equity is valued at NAV)

We initiated a new position in Pershing Square Holdings (PSH) in early June.
The manager’s reputation has been damaged by the catastrophic losses
experienced in their out-sized position in Valeant Pharmaceuticals, but the flipside
of this is that we were able to make our investment at a 15% discount to
NAV despite the manager’s long-term track record still being outstanding
(14.8% annualised return since inception vs 8.1% for the S&P 500 index).
While PSH does not reveal its portfolio weights directly, SEC filings can be
used to construct an accurate model of its highly concentrated portfolio in
which we see considerable scope for upside. Adjusting for the geared effect of
options, PSH’s position in Mondelez accounts for an effective economic
exposure of over 40% of NAV and we agree with the manager’s thesis that the
company is a prime candidate for a takeover by 3G Capital-backed Kraft
Heinz. Mondelez has a compelling collection of brands with enviable emerging
market exposures, and its sub-par margins (notwithstanding improvements
over the last few years) offer a purchaser huge scope for efficiency gains.
Despite having similar levels of sales (Kraft Heinz’s $26.5bn for FY16 vs
Mondelez’s $26bn), Kraft Heinz’s enterprise value is 1.6x that of Mondelez.
Furthermore, we suspect Kraft Heinz would view Mondelez’s emerging market
and snacks exposures as an obvious way to reinvigorate their own portfolio of
brands which is arguably over-exposed to lower growth US food categories. If
a takeover does not materialise, pressure will be on Mondelez’s management
and board to dramatically increase margins, the benchmark for which has been
raised to new highs by 3G’s entry into the sector. In this regard, we view
favourably reports that the company has begun a search for a new CEO. With
Valeant gone, we see PSH’s overall portfolio – consisting of more durable
businesses/consumer franchises – as much more attractive.

We also believe it is untenable for Bill Ackman, manager of Pershing Square, to
preside over a public vehicle trading at a wide discount to NAV given his high
profile and vocal championing of shareholder rights during his various activist
battles over the years. We are pleased to see that steps have been taken to
address the rating (improving voting rights, moving to a main market London
listing, introducing a buyback), but we will expect further discount control
measures to be implemented should the rating not improve materially. To fund
the purchase of PSH, we sold out of our highly successful investment in AP
Alternative/Athene (44% IRR in USD; 52% in GBP since first investing in mid-
2012).