Pershing Square Holdings, Ltd., an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. For the first half of 2021 and year-to-date through August 17, 2021, the Company’s NAV per share, including dividends, increased by 7.3% and 5.8%, respectively, and the Company’s share price increased by 4.7% and 2.0%, respectively, compared with the S&P 500 which returned 15.2% and 19.5% over the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Pershing Square Holdings, the fund mentioned its very own Pershing Square Tontine Holdings, Ltd. (NYSE: PSTH) and discussed its stance on the firm. Pershing Square Tontine Holdings, Ltd. is a United States-based blank check company with a $3.9 billion market capitalization. PSTH delivered a -28.90% return since the beginning of the year, while its 12-month returns are down by -12.98%. The stock closed at $19.75 per share on September 27, 2021.
Here is what Pershing Square Holdings has to say about Pershing Square Tontine Holdings, Ltd. in its Q2 2021 investor letter:
“Our largest negative contributor for the first half and year to date is a mark-to-market loss of 4.7% and 6.4% of gross assets, respectively, due to the decline in PSTH’s share price. While we do not currently own publicly traded shares in PSTH, we are required to mark to market the PSTH Sponsor Warrants and our Forward Purchase Agreements (“FPAs”), which are considered derivatives, in this case a commitment to invest a minimum of $1 billion, and an option to invest an additional $2 billion in PSTH’s initial business combination (“IBC”).
The market value of SPACs in general and PSTH, in particular, declined since the beginning of the year, which along with PSTH’s failure to consummate the Universal Music Group transaction likely contributed to PSTH’s stock price declining to a level approximating its $20 per share cash in trust. On Friday last week, PSTH’s share price declined to slightly below NAV for the fi rst time.
Nearly all pre-merger SPACs have traded at discounts to NAV since earlier this year. We believe this is due to many poor outcomes for investors in conventional SPACs after they have completed their merger transactions. The poor incentives of conventional SPACs – enormous compensation for a SPAC sponsor for just getting a transaction done regardless of the outcome for shareholders, combined with limited Sponsor “skin in the game” – are the principal problems.
By comparison, PSTH’s sponsor, which is wholly owned by the Pershing Square Funds, owns no founder stock, is not entitled to receive compensation of any kind, and has a lot of skin in the game. By virtue of our Forward Purchase Agreements, we will have the largest investment of any of our shareholders in PSTH’s target company of $1 billion or more. Our only additional incentive beyond our large FPA commitment is our ownership of Sponsor Warrants, for which the Pershing Square Funds paid $65 million, their fair value at the time of PSTH’s IPO as determined with the assistance of a nationally recognized valuation fi rm. Unlike our shareholders, who have the right to receive a return of the $20 per-share cash in trust if we don’t get a deal done, our warrants become worthless in that event.
If our $65 million investment at the time of the IPO had been used to purchase PSTH common stock instead of warrants, it would have made Pershing Square the sixth-largest shareholder of the company. Like other shareholders, we have skin in the game and suff er opportunity cost while we seek to complete a transaction, and suff er a total loss of our $65 million investment if we fail to complete a deal within PSTH’s remaining term…” (Click here to see the full text)
Based on our calculations, Pershing Square Tontine Holdings, Ltd. (NYSE: PSTH) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. PSTH was in 36 hedge fund portfolios at the end of the first half of 2021, compared to 35 funds in the previous quarter. Pershing Square Tontine Holdings, Ltd. (NYSE: PSTH) delivered a -12.12% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
