Wednesday, August 13, 2014

Pershing Square Q2 Letter

Link to: Pershing Square Q2 Letter
Pershing Square – Reflections After Ten Years

We began investing capital January 1st, 2004 in partnership with a subsidiary of Leucadia National Corp. (NYSE:LUK) which invested $50 million in Pershing Square, L.P. at our launch. At the time of Leucadia’s investment, Gotham Partners did not have regulatory closure with respect to the SEC’s and New York Attorney General’s MBIA-related investigations. Leucadia’s investment, and most importantly, its imprimatur were critical to the successful launch of the firm. We will forever be indebted to Ian Cumming and Joe Steinberg, then Chairman and CEO of Leucadia, who backed us when few others would. As a thank you gesture at the time, we offered Leucadia a substantial minority interest in the management company for no additional consideration, but they asked for nothing but good investment results in exchange for their investment, and for that we are very grateful.

Pershing Square – Returns Since Inception

Over the last ten and one-half years, we have generated net returns to our investors of 626.7% or 7.3 times day-one investor capital. Over the same period, the S&P 500, our principal benchmark, as it has historically comprised most of our holdings, has returned 118.8% or about 2.2 times. Expressed as a compounded annual return, the funds have returned 21% net per annum versus 8% for the S&P 500. In a world in which investors are pleased to earn returns that are one or two percentage points per annum above the S&P over 10-year periods, our approximate 13 percentage point annual net margin over the index is notable.

We are proud of our record and how that record has been achieved. While our returns have been strong, our downward volatility (the only kind of volatility investors really care about) has been minimal. We have had two negative years in our history, 2008 when the funds declined 12% to 13%, and 2011, when the funds declined approximately 2%. While the S&P index is by design a fully invested index, we have generated our returns with negative leverage, i.e., cash has averaged 14% of invested capital since inception
Because we are an active, control and influence-oriented investor, we have avoided being fully invested because of the risk of investor redemptions. For example, during 2009, despite a relatively strong 2008 and a 41% net return in 2009, we had to keep a substantial portion of our assets in cash because of the large amount of investor redemptions we received. We will hopefully begin to address this issue with the initial public offering of Pershing Square Holdings, Ltd. (PSH), targeted for later this year, which will increase the amount of our capital that is permanent