TIDMPSH
Pershing Square Holdings, Ltd. (LN:PSH) (LN:PSHD) (NA:PSH) (the
"Company") today issued the PSH annual report and financial
statements for the year ended December 31, 2020, which are now
available on PSH's website,
https://www.pershingsquareholdings.com/company-reports/financial-statements/.
PSH also announced that its Annual General Meeting of
Shareholders ("AGM") will be held on Wednesday, April 28, 2021, at
12:00 PM BST. Pursuant to mandatory measures announced by the
States of Guernsey to reduce the transmission of COVID-19, any
persons arriving into the Bailiwick of Guernsey are required to
self-isolate for a period of up to 14 days upon arrival and may be
required to submit pre-travel forms.
The board of directors of PSH (the "Board") fully supports these
measures to protect public health and safety and, in light of the
travel restrictions, requests that shareholders not attend the AGM
in person and instead submit proxy votes in electronic form.
Arrangements will be made by the Company to ensure that the minimum
number of shareholders required to form a quorum will attend the
AGM so that it may proceed. The results of the voting will be
announced as soon as practicable after the conclusion of the
AGM.
At the AGM, shareholders will consider the receipt of the annual
report and the financial statements, the renewal of PSH's share
buy-back authority, the re-appointment of PSH's auditor, the
approval to disapply pre-emption rights for any share issuance of
10% or less, and the re-election of PSH's current directors with
the exception of Richard Battey, who has served as a director for
the Company for nine years and has determined not to offer himself
for re-election, and Richard Wohanka who is not offering himself up
for re-election due to his other commitments.
Following a thorough search process for prospective Board
candidates, the Nomination Committee (which is comprised of only
the independent directors) recommended that the Board submit Tope
Lawani, Rupert Morley and Tracy Palandjian for election as
non-executive directors to the Board at the upcoming AGM. The
election of Mr. Lawani, Mr. Morley and Ms. Palandjian would expand
the board to seven members, six of whom are independent.
"The Board is pleased to recommend that shareholders elect Tope,
Rupert and Tracy to the PSH Board," said PSH Chairman Anne Farlow.
"Tope's deep global investing experience, Rupert's extensive
operational, entrepreneurial and investing roles and Tracy's
background in social impact investing and alternative investment
management will provide valuable perspectives to the Board and will
complement the Board's existing expertise."
The specific resolutions can be found in the Notice of Annual
General Meeting available on PSH's website,
https://www.pershingsquareholdings.com/company-reports/notices-shareholders/.
Tope Lawani
Mr. Lawani, a Nigerian national, is a co-founder and managing
partner of Helios Investment Partners and co-CEO and a director of
Helios Fairfax Partners Corp (TSX:HFPC). Prior to forming Helios,
he was a principal in the San Francisco and London offices of TPG
Capital. He began his career as a mergers & acquisitions and
corporate development analyst at the Walt Disney Company.
Mr. Lawani serves as a non-executive director of Helios Towers
plc (LSE:HTWS.L), Vivo Energy plc (LSE:VVO.L), LinkCommerce Ltd,
Thunes, Axxela Ltd, ZOLA Electric and OVH Energy BV. Mr. Lawani is
a member of the MIT Corporation (Massachusetts Institute of
Technology's board of trustees), the MIT School of Engineering
dean's advisory council, the Harvard Law School dean's advisory
board and the international board of The Fund. He previously served
as a non-executive director of Equity Group Holdings Plc
(NSE-NAIROBI:EQTY.NR), Emerging Markets Private Equity Association
(EMPEA), First City Monument Bank Plc (NSE:FCMB), Bayport
Management and Millicom International Cellular (NASDAQ:TIGO). Mr.
Lawani also previously served as a board observer of the board of
directors of J. Crew, Inc. and Burger King Corp, and on the
overseers' visiting committee of the Harvard Business School.
Mr. Lawani received a B.S. in chemical engineering with a minor
in economics from the Massachusetts Institute of Technology, a
juris doctorate from Harvard Law School and an MBA from Harvard
Business School. He is fluent in Yoruba, a widely spoken West
African language.
Rupert Morley
Mr. Morley is a trustee of Comic Relief and chair of its
investment advisory group. He has served as chairman and CEO of
Rococo Chocolates, one of Britain's leading makers of high-quality
chocolates, since 2017. He purchased the business out of
administration in 2019, prior to which he was a minority
shareholder. Mr. Morley previously served as CEO of Sterling
Relocation, Hamptons estate agency and Propertyfinder.co.uk and
managing director of Swan Hellenic Cruises. He also previously
served as operations director of Brierley Investments Limited, a
non-executive director of Thistle Hotels, English Welsh &
Scottish Railways and Graham-Field Health Products and president of
the Fédération Internationale des Déménageurs Internationaux
(FIDI).
He has a degree in economics from Cambridge University and an
MBA from Harvard Business School where he was a Kennedy
Scholar.
Tracy Palandjian
Ms. Palandjian is co-founder and CEO of Social Finance, Inc., a
non-profit organization focused on developing and managing
investments that generate social impact and financial return. Prior
to Social Finance, Ms. Palandjian was a managing director for
eleven years at The Parthenon Group, a global strategy consulting
firm, where she established and led the Nonprofit Practice. She
also worked at Wellington Management Co. and McKinsey & Co.
Ms. Palandjian is co-author of "Investing for Impact: Case
Studies Across Asset Classes," and serves as vice chair of the U.S.
Impact Investing Alliance and vice chair of the Global Steering
Group on Impact Investing. She is an independent director of
Affiliated Managers Group (NYSE:AMG) where she is on the
compensation and nominating & governance committees, a trustee
at the Surdna Foundation where she chairs the investment committee,
and a director at the Boston Foundation. Previously, Ms. Palandjian
served as vice chair of the Harvard Board of Overseers, board chair
of Facing History and Ourselves, co-chair of Robert F. Kennedy
Human Rights, and trustee of Milton Academy. Ms. Palandjian is a
2019 recipient of the HBS Alumni Achievement Award, the school's
highest honor.
A native of Hong Kong, Ms. Palandjian is fluent in Cantonese and
Mandarin. She graduated from Harvard College with a B.A. magna cum
laude in economics and holds an M.B.A. with high distinction from
Harvard Business School, where she was a Baker Scholar.
About Pershing Square Holdings, Ltd.
Pershing Square Holdings, Ltd. (LN:PSH) (LN:PSHD) (NA:PSH) is an
investment holding company structured as a closed-ended fund that
makes concentrated investments principally in North American
domiciled companies.
Category: (PSH:FinancialReporting)
This is a disclosure according to Article 17 of the EU Market
Abuse Regulation (Regulation 596/2014/EU).
The document will shortly be available for inspection on the
National Storage Mechanism website:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Pershing Square Holdings, Ltd.
2020 Annual Report
Pershing Square Holdings, Ltd.
2020 Annual Report
Table of Contents
Company Overview 1
Company Performance 2
Chairman's Statement 3
Investment Manager's Report 8
Principal Risks and Uncertainties 22
Directors 27
Report of the Directors 30
Directors' Remuneration Report 39
Corporate Governance Report 41
Report of the Audit Committee 48
Report of Independent Auditor 53
Statement of Financial Position 61
Statement of Comprehensive Income 63
Statement of Changes in Net Assets Attributable to Management
Shareholders 64
Statement of Changes in Equity 65
Statement of Cash Flows 66
Notes to Financial Statements 67
Supplemental U.S. GAAP Disclosures
Condensed Schedule of Investments 103
Financial Highlights 105
Disclosures
Certain Regulatory Disclosures 106
Affirmation of the Commodity Pool Operator 108
Endnotes and Disclaimers 109
Company Overview
The Company
Pershing Square Holdings, Ltd. ("PSH", or the "Company")
(LN:PSH) (LN:PSHD) (NA:PSH) is an investment holding company
structured as a closed-ended fund that makes concentrated
investments in publicly traded, principally North
American-domiciled, companies. PSH's objective is to maximize its
long-term compound annual rate of growth in intrinsic value per
share.
PSH has appointed Pershing Square Capital Management, L.P.
("PSCM," the "Investment Manager" or "Pershing Square"), as its
investment manager. The Investment Manager has responsibility,
subject to the overall supervision of the Board of Directors, for
the investment of PSH's assets and liabilities in accordance with
the investment policy of PSH set forth on pages 30-31 of this
Annual Report (the "Investment Policy").
PSCM, a Delaware limited partnership, was founded by William A.
Ackman on January 1, 2004. PSH was incorporated with limited
liability under the laws of the Bailiwick of Guernsey on February
2, 2012. It commenced operations on December 31, 2012 as a
registered open-ended investment scheme, and on October 2, 2014
converted into a registered closed-ended investment scheme. Public
Shares of PSH commenced trading on Euronext Amsterdam N.V. on
October 13, 2014. On May 2, 2017, PSH's Public Shares were admitted
to the Official List of the UK Listing Authority and commenced
trading on the Premium Segment of the Main Market of the London
Stock Exchange ("LSE").
Company Performance
Pershing Square Holdings, Ltd. and Pershing Square, L.P.
("PSLP") NAV Performance vs. the S&P 500
PSLP Net
PSLP/PSH Net Return(*) Return(1,2) S&P 500(3)
2004 42.6 % 42.6 % 10.9 %
2005 39.9 % 39.9 % 4.9 %
2006 22.5 % 22.5 % 15.8 %
2007 22.0 % 22.0 % 5.5 %
Pershing
Square,
2008 (13.0)% L.P. (13.0)% (37.0)%
2009 40.6 % 40.6 % 26.5 %
2010 29.7 % 29.7 % 15.1 %
2011 (1.1)% (1.1)% 2.1 %
2012 13.3 % 13.3 % 16.0 %
2013 9.6 % 9.7 % 32.4 %
2014 40.4 % 36.9 % 13.7 %
2015 (20.5)% (16.2)% 1.4 %
2016 (13.5)% (9.6)% 11.9 %
Pershing
2017 (4.0)% Square (1.6)% 21.8 %
Holdings,
2018 (0.7)% Ltd. (1.2)% (4.4)%
2019 58.1 % 44.1 % 31.5 %
2020 70.2 % 56.6 % 18.4 %
Year-to-date through
March 23, 2021 5.9 % 4.9 % 4.5 %
January 1, 2004--March
23, 2021(1,4)
Cumulative (Since
Inception) 1,412.8 % 1,288.4 % 399.2 %
Compound Annual Return 17.1 % 16.5 % 9.8 %
December 31,
2012--March 23,
2021(1,4)
Cumulative (Since PSH
Inception) 185.4 % 161.9 % 223.5 %
Compound Annual Return 13.6 % 12.4 % 15.3 %
* NAV return an investor would have earned if it invested in PSLP at its
January 1, 2004 inception and converted to PSH at its launch on December 31,
2012. Also see endnote 1 on page 110. Past performance is not a guarantee of
future results. All investments involve risk, including the loss of principal.
Please see accompanying endnotes and important disclaimers on pages 110-112.
Chairman's Statement
INTRODUCTION
When I wrote to you last year, we were mere months into what
became a year that none of us will ever forget. COVID-19 has
infected more than 100 million people around the world and millions
have died. Our thoughts continue to be with all those who have lost
family members and friends to the virus, or have suffered great
hardship due to the impact it has had on their daily lives. It may
take years for certain aspects of our lives to return to the way
they were before COVID-19, and many things we took for granted have
been irrevocably changed.
In 2020, both our portfolio companies and our Investment Manager
faced rapidly changing conditions and challenges. They were forced
to adapt and pivot in record time to protect their employees and
preserve their businesses. You will read more about the actions of
our portfolio companies in the Investment Manager's Report. Our
Investment Manager's employees have been working remotely for over
a year now. Fortunately, they have adapted exceptionally well to
the change in circumstances, and the investment team has continued
to work efficiently and effectively with great support from the
operational team. Amid such a challenging period of time, I am
pleased to report that not only did the Investment Manager protect
your investment in PSH last year, but it delivered exceptional
returns, making 2020 the best year of performance since the
inception of the Investment Manager's strategy in 2004.
In addition to successfully navigating the volatile financial
markets and tumultuous business conditions, the Investment Manager
and the PSH Board were active on a number of fronts throughout the
year. To highlight several: PSH issued two tranches of debt
totaling $700 million, repurchased $286 million of PSH's
outstanding Public Shares, continued PSH's dividend program,
welcomed a new Board member, and gained entry to the FTSE 100 in
December 2020. The Investment Manager, with oversight from the PSH
Board, committed to a new investment by forming Pershing Square
Tontine Holdings, Ltd. ("PSTH"). PSTH is a special purpose
acquisition company, (or "SPAC") and it listed on the New York
Stock Exchange on July 22, 2020. PSTH is expected to combine with a
private business in an initial business combination (or de-SPAC
transaction) which will result in PSH owning a minority
shareholding in a newly listed public company.
I discuss these initiatives, among others, in detail below.
INVESTMENT PERFORMANCE
During the year ended December 31, 2020, PSH's total Net Asset
Value ("NAV") return including dividends was 70.2%, ending the year
at $45.46 per share.(i) PSH generated a total shareholder return of
84.8% as a result of the narrowing of the discount to NAV at which
PSH shares trade.(ii) Over the same period, the S&P 500
increased 18.4%.(iii)
PSH's outperformance was driven by its purchase of index credit
default swaps in February 2020, and the subsequent unwinding of
those hedges. When we published our 2019 Annual Report in April
2020, I stated that the PSH Board appreciated the Investment
Manager's foresight in using the hedges to protect the portfolio
from severe declines in the stock market in Q1 2020. Now that we
can re ect on the events of the full year of 2020, we also commend
the Investment Manager's actions in successfully identifying the
optimal moment to reinvest the proceeds from the hedges as the
markets recovered.
The Investment Manager continues to engage with PSH's portfolio
companies through direct board representation in some situations,
and less formal, private engagement in others. PSH's portfolio
companies have responded well to the challenges of the pandemic,
and the Investment Manager believes that they will continue to
recover and thrive over the long term, allowing for signi cant
further share price appreciation. The outlook for PSH's portfolio
companies is described further in the Investment Manager's
Report.
INVESTMENT MANAGER
The Board has delegated the task of managing the Company's
assets to the Investment Manager as set out in the Investment
Management Agreement (the "IMA") entered into by PSH and Pershing
Square Capital Management, L.P. at the inception of PSH. Although
the Board does not make individual investment decisions, the Board
is ultimately accountable for oversight of the Investment Manager.
In 2020, the Board adopted terms of reference describing its
principal responsibilities, which are available on the PSH
website.
The Investment Manager is a fundamental value investor that
utilizes a range of activist strategies to unlock long-term value
for shareholders, and seeks to invest in excellent businesses with
opportunities for improvement. These businesses tend to be large-
cap companies that generate relatively predictable and growing
free-cash- ows, with formidable barriers to entry and a compelling
value proposition.
PORTFOLIO CHANGES
As mentioned above, PSH invested in index credit default swaps
in February 2020 and unwound the positions in March. When faced
with the challenge of re-investing the considerable proceeds from
the hedges, the Investment Manager prudently chose to primarily
invest in existing portfolio companies it knew well, including
Agilent ("A"), Hilton ("HLT"), Lowe's ("LOW"), and Restaurant
Brands ("QSR"), and to re-establish a core investment in Starbucks
("SBUX").
In the summer of 2020, the Investment Manager initiated a new
portfolio investment for PSH by launching a SPAC, PSTH. On July 22,
2020, PSTH raised $4 billion in its IPO on the New York Stock
Exchange. The Company, Pershing Square, L.P. and Pershing Square
International, Ltd. (collectively, the "Pershing Square Funds")
entered into a Forward Purchase Agreement where they committed to
contributing an additional $1 billion, with the option to increase
their investment up to $3 billion (including capital from Pershing
Square co-investment funds) such that in total, PSTH has $5 billion
to $7 billion of equity capital for use in its initial business
combination.
In addition, the Pershing Square Funds purchased a Sponsor
Warrant exercisable at $24 per share to purchase 5.95% of the fully
diluted business combination. In typical SPAC transactions, the
sponsor is owned by the investment manager. However, the SPAC
sponsor for PSTH is 100% owned by the Pershing Square Funds,
ensuring that the Investment Manager's incentives are fully aligned
with the performance of the funds, and that there is no con ict of
interest between the Investment Manager and PSH. The creation of
PSTH did not require PSH Board approval, but the Investment Manager
kept the Board informed of its actions and processes as they were
considered and executed.
In 2020, the Investment Manager also increased PSH's ownership
of HHC and exited its investment in Berkshire Hathaway. During the
period of heightened volatility last spring, a number of non-core
investments were also initiated and sold. Later in the year,
smaller notional amounts of CDS were purchased as spreads narrowed.
The Investment Manager will provide a more detailed portfolio
update in the following pages.
CORPORATE ACTIONS
The PSH Board took several corporate actions in 2020 that we
believe will contribute to the long-term success of the
Company.
-- Bond Issuances In 2020, PSH completed two new bond issuances, raising a
total of $700 million of additional capital at highly attractive interest
rates: $500 million of 3.250% 10-year unsecured Bonds due November 2030
(the "2030 Bonds") and $200 million of 3.000% 12-year unsecured Bonds due
July 2032 (the "2032 Bonds"). The Company currently has $2.1 billion of
debt in four tranches. The 2030 Bonds and 2032 Bonds rank equally in
right of payment with PSH's existing $1 billion of 5.500% Bonds due July
2022 (the "2022 Bonds"), and PSH's $400 million of 4.950% Bonds due July
2039 (the "2039 Bonds"). The Company's total debt to capital ratio was
18.8% as of December 31, 2020, and 18.0% as of March 23, 2021.iv PSH
maintains conservative leverage levels and investment grade ratings on
its debt. PSH's long-term debt management strategy focuses on managing
leverage over time by increasing NAV through strong performance and
laddering its maturities through new issuances. The Board believes that
it is appropriate for PSH to use a prudent amount of debt to enhance our
returns to shareholders, and that our laddered maturities from 2022 to
2039 are well matched to our long-term investment horizon.
-- Dividend Since February 2019, PSH has paid a quarterly dividend of $0.10
per Public Share, a 1.1% yield at the current PSH share price.v The
dividend represents a return of capital at NAV which can currently be
reinvested in PSH shares at a discount to NAV. In 2020, PSH returned $81
million of capital to shareholders via the dividend. The Board has
continued the quarterly dividend as it believes that the payment expands
PSH's potential investor base to include shareholders who prefer or are
required to invest in dividend-paying equities. As PSH's current dividend
yield is similar to that of the S&P 500, we believe this further
emphasizes that PSH is an attractive alternative to an S&P500
portfolio.vi
-- Share Buyback Programs As we have discussed in previous letters, when
considering potential share repurchase programs, the Board consults with
the Investment Manager and considers a number of factors including: the
available free cash and the likelihood that such cash would be deployed
into an attractive new investment in a given market environment; the
level at which our current portfolio holdings trade relative to their
intrinsic values; our leverage levels; the discount to NAV at which the
shares would be repurchased; and the impact further reductions would have
on the free oat of PSH shares. In 2020, PSH repurchased a total of $286
million of PSH Public shares, representing 13.7 million PSH Public Shares
at an average price of $20.81 per share and an average discount of 32%.
Since May 2, 2017, when PSH initiated its rst share repurchase program,
through March 23, 2021, the Company has repurchased 50.8 million PSH
Public Shares at a total cost of $837 million at an average price of
$16.46 per share and an average discount of 26.5%. PSH buybacks and
purchases by PSCM affiliates reduced the free oat by 9.9% in 2020 and by
37% since PSH's IPO.vii Today, as a result of purchases by PSCM
affiliates and the buyback programs, PSCM affiliates now own
approximately 25% of PSH on a fully diluted basis.viii
FTSE 100 INCLUSION
The FTSE 100 Index represents the 100 largest companies by
market capitalization on the London Stock Exchange. I am pleased to
report that in December 2020, PSH gained entry to the FTSE 100.
This achievement is both symbolic, as it is an honor to be a part
of this prestigious group, but also it has materially positive
practical implications. Inclusion in the FTSE 100 has led to
increased demand for PSH shares by funds who track the index and
are required to purchase the shares. The inclusion also provides
added global visibility and an opportunity to share our investment
story with a wider audience. Over time, we hope investors will
realise that PSH is undervalued relative to the other FTSE 100
constituents as PSH's market capitalisation is at a signi cant
discount to its underlying NAV.
DISCOUNT TO NET ASSET VALUE
The Board pays close attention to the discount to NAV at which
PSH's Public Shares currently trade. The Board was pleased to see
PSH's discount narrowed by 5.9%, from 28.9% in the beginning of
2020 to 23.0% as of December 31, 2020, although it has widened
slightly to 24.7% as of March 23, 2021.(ix)
The Board continues to hold the view that PSH shares are
undervalued at current levels. The Board believes that the recent
narrowing of the discount occurred largely as a result of continued
positive NAV performance, increased awareness of PSH, and
additional buying demand for PSH shares following our inclusion in
the FTSE 100 in December 2020. It is however an anomaly that PSH,
which owns almost 91% of the PSTH Sponsor Warrant, trades at a
discount to NAV, while PSTH, which does not share in the potential
upside of the Sponsor Warrant, trades at a 33.1% premium to its IPO
price.(x) We expect that continued strong performance and
appreciation of the fact that PSH is undervalued will lead to a
further narrowing of the discount over time.
CORPORATE GOVERNANCE / BOARD
The Board continues to work effectively and diligently on behalf
of all shareholders. Despite the challenges of 2020, the Investment
Manager and the PSH Board have been able to maintain open and
productive channels of communication in what has been a very busy
year. I would like to thank my fellow directors for all of their
contributions and time commitment throughout the year.
Richard Battey and Richard Wohanka will not be offering
themselves for re-election to the PSH Board at our Annual General
Meeting ("AGM") in April 2021. We will miss their thoughtful
insight at our Board meetings and thank them for their many
contributions. In September 2020, we welcomed a new independent
director, Andrew Henton, to the Board. Andrew will assume the role
of Chairman of the Audit Committee upon Richard Battey's
departure.
Following a thorough search process for prospective PSH Board
candidates, the Nomination Committee (which is comprised of only
the independent directors) recommended that the Board submit Tope
Lawani, Rupert Morley and Tracy Palandjian for election as
non-executive directors at the upcoming AGM. Tope's deep global
investing experience, Rupert's extensive
operational, entrepreneurial and investing roles, and Tracy's
background in social impact investing and alternative investment
management will provide valuable perspectives, and will complement
the Board's existing expertise. The election of Tope, Rupert and
Tracy would expand the board to seven members, six of whom are
independent.
EVENTS / SHAREHOLDER ENGAGEMENT
I enjoyed meeting many of our shareholders at the PSH investor
meetings in New York and London in February 2020. Since then,
COVID-19 has made it much more difficult to meet investors in
person, but the widespread adoption of Zoom has allowed me to
interact virtually with shareholders around the world. I look
forward to returning to in-person meetings at the appropriate time
while maintaining the option to meet virtually when that is more
convenient.
The Investment Manager operates a robust investor relations
program that acts as a resource for existing shareholders, and
actively seeks to engage with potential future shareholders. The
Board coordinates closely with the Investment Manager to ensure
that we remain apprised of shareholder feedback, and the Board
regularly reviews the communications we receive from
shareholders.
We held a virtual PSH investor meeting on February 18, 2021, and
we welcomed more shareholders to that event than to any other
previous PSH meeting. The Investment Manager presented a portfolio
update. Slides from the presentation are available on PSH's
website: www.pershingsquareholdings.com. PSH's 2021 AGM will be
held on April 28, 2021. To protect the health of our shareholders
and in accordance with public safety measures enacted by the States
of Guernsey to reduce the transmission of COVID-19, the Board
requests that shareholders not attend the AGM in person, but
instead submit proxy votes in electronic form.
Arrangements will be made by the Company to ensure that the
minimum number of Shareholders required to form a quorum will
attend the AGM so that it may proceed. The results of the voting
will be announced as soon as practicable after the conclusion of
the AGM.
I will report to you on the rst half of 2021 in August 2021, and
the Investment Manager will keep you informed of any signi cant
developments in the portfolio before then, when appropriate.
/s/ Anne Farlow
Anne Farlow
Chairman of the Board
March 29, 2021
Investment Manager's Report
LETTER TO SHAREHOLDERS
To the Shareholders of Pershing Square Holdings, Ltd.:
2020 was the best year in the 17-year history of Pershing
Square. We generated NAV performance of 70.2% and a total
shareholder return (TSR) including dividends of 84.8% due to the
reduction in the discount to NAV at which PSH's shares trade.(5)
Our NAV performance and TSR exceeded our benchmark's performance,
the S&P 500, by 5,180 and 6,640 basis points
respectively.(6)
Investors who invested in Pershing Square, L.P. at its inception
on January 1, 2004, and transferred their investment to PSH at its
inception on December 31, 2012 have grown their equity investment
at a 17.1% compounded annual return as of March 23, 2021, compared
with a 9.8% return had one invested in the S&P 500 over the
same period. With the magic of compounding, our 17.1% compound
annual NAV return translates into a cumulative total NAV return
since inception of 1,413% versus 399% for the S&P 500 over the
same period.(7) In other words, investors in Pershing Square since
inception have multiplied their equity investment by 15 times,
versus the 5 times multiple they would have achieved had they
invested in a zero-cost S&P 500 index fund.
Our returns to investors using the market value of our common
stock rather than NAV are somewhat lower, as PSH currently trades
at a 25% discount to NAV. Using PSH's stock market value rather
than NAV, investors in Pershing Square since inception have earned
a 15.2% compounded return, or an 11.5 times multiple of their
original investment.(8) With continued strong performance, we
expect that our discount to NAV will narrow and our NAV and market
value returns will be comparable.
2020 was also an excellent year for our portfolio companies,
which we discuss in greater detail later in this letter. The well-
capitalized, high-quality, durable growth companies that represent
nearly all of our holdings comfortably weathered the COVID-19
storm. Each has executed initiatives that have and will likely lead
to greater market share, improved long-term pro tability, and the
acceleration of shareholder value creation.
The majority of our NAV performance last year was driven by our
large hedging gain (45% of our net investment gain) and the
reinvestment of those proceeds in our portfolio companies from
March through the beginning of April of last year (25% of our net
investment gains).9 As a result of the hedge and reinvestment, 70%
of our net investment gains were unrelated to our companies'
underlying performance. Therefore, despite the large increase in
NAV in 2020, our portfolio composition and the inherent investment
opportunities in our holdings remain about the same as one year
ago, as our companies' share price increases were generally in line
with improvements in their underlying intrinsic value.
We also generated a substantial mark-to-market gain on our
Forward Purchase Agreement ("FPA") and Sponsor Warrants in Pershing
Square Tontine Holdings, Ltd. (NYSE:PSTH) due to the requirement
under IFRS for PSH to mark to market these instruments with the
bene t of a third-party valuation service. PSTH is trading at a
premium to its $20 per share cash in trust, driven, we believe, by
PSTH's highly favorable and differentiated shareholder/merger
friendly structure, and our investors' expectation that PSTH will
create substantial shareholder value from its initial business
combination.
Eight months since PSTH's launch, we remain convinced that an
investment in PSTH will generate highly attractive long- term
returns, even from PSTH's current stock price. While we previously
believed that we would be able to announce a potential transaction
by the end of this quarter, we will not be in a position to do so.
We do not intend to make any announcements about PSTH's transaction
progress until we enter into a de nitive agreement.
If we are successful in completing such a transaction, we expect
that PSTH will be an important contributor to our shorter- term and
long-term performance. This is due to our investment expectations
from the transaction, the large size of this investment due to the
Pershing Square funds' minimum FPA commitment of $1 billion, and
the large notional investment underlying the Sponsor Warrants, 91%
of which are held by PSH.
We are likely to launch a second SPAC, PSTH2 after PSTH
completes a business combination transaction. If we do so, we
believe it is appropriate for the right to invest in PSTH2 to be
owned by our current PSTH shareholders, including PSH and the
Pershing Square private funds.
We like the idea of providing investors who backed us in PSTH
with the opportunity to invest in PSTH2 without paying a premium to
its cash-in-trust value. We have always believed in giving existing
investors the right to participate in new Pershing Square
opportunities, and we intend to continue this tradition with
PSTH.(a)
Conglomerates
In this year's Berkshire Hathaway annual letter, Warren Buffett
writes about the "terrible reputation" that has been "earned" by
conglomerates. He explains that this bad reputation is due to the
fact that conglomerates: (1) are generally required, for
regulatory, tax and other reasons, to own controlling interests in
businesses, (2) must pay large premiums for these controlling
interests, and (3) nd it difficult to buy control of great
businesses, as they are rarely available for sale. Berkshire has
managed these issues with a more open mandate than a typical
conglomerate due to its large insurance company investment
portfolios, which have enabled Berkshire to invest a large portion
of its assets in non-controlling interests in publicly traded
companies.
In last year's letter, I wrote:
PSH is legally a closed-ended fund, [but] in our view it is best
thought of as a tax-efficient investment holding company that owns
minority interests in public companies which are of a quality and
scale where legal control is often difficult if not impossible to
achieve. Our strategy is to acquire smaller pieces of superb
businesses over which we have substantial in uence, rather than
controlling interests in lower quality businesses...
The formal de nition of a subsidiary is a corporation controlled
by a holding company, where control is typically represented by a
50% or greater ownership interest. In the case of PSH's
"subsidiaries," however, we have generally owned less than 20% of
shares outstanding, and usually less than 10% of shares
outstanding. Even so, we are typically one of the largest
shareholders of our investees, and we are an in uential and
supportive owner whether or not we have board seats, regardless of
what percentage of the company we own.
If one were to think of PSH as a conglomerate, one should
consider PSH's important distinguishing attributes. Since PSH is
structured as a closed-ended fund, there are no securities law, tax
or other issues that require any of our assets to be invested in
companies we legally control. As a result, there is no limitation
on the nature of our ownership stakes; they can be controlling or
non-controlling. We did, however, intentionally include an
ownership restriction in the investment management agreement which
limits PSH's investment universe to publicly traded companies.
While it is extremely rare for a controlling interest in a truly
outstanding business to be available without the payment of a large
control premium, this is not the case for minority interests in the
best publicly traded businesses. Just one year ago, we saw all of
our holdings, which represent among the best businesses in the
world, become available at massive discounts to their intrinsic
values, and we took advantage of this, albeit short-term,
opportunity.
We have always believed that the common stocks of even the best
businesses can trade at almost any price for brief periods. And it
is this volatility -- often driven by a disappointing short-term
event, missed expectations, macro factors, political events,
shareholder frustration with management and/or governance, that has
enabled us to acquire large minority stakes in great businesses at
bargain prices.
In light of the nature of our strategy, and our long-term track
record for effectuating corporate change, we have often been able
to obtain in uence over our portfolio holdings that is similar to
that of a control shareholder, but without the need to pay a
control premium. This aspect of our strategy has given us the best
of both worlds, that is, the ability to own great businesses as an
important and in uential shareholder, and the occasional
opportunity to purchase them at bargain prices in the stock
market.
Furthermore, unlike most conglomerates, including Berkshire
Hathaway, which are structured as tax-paying C corporations, PSH is
a Guernsey closed-ended fund which generally does not pay any
corporate taxes.(b) As a result, PSH does not have the same
"switching costs" as a tax-paying conglomerate, which must pay
corporate taxes if it sells an investment at a price in excess of
its tax basis.
Unlike the typical conglomerate which: (1) has an extremely
limited universe of opportunities to buy controlling interests in
great businesses at sensible prices, (2) must pay corporate taxes
when it sells an existing holding, and (3) is limited in the amount
of its assets it can invest in non-controlling interests, PSH
suffers from none of these constraints.
PSH has another important bene t because of its closed-ended
fund structure and the highly liquid nature of our portfolio, which
is almost entirely comprised of publicly traded, large
capitalization, investment-grade U.S. equities. We have been able
to access low-cost, long-term, non-margin debt in the form of
publicly traded bonds to nance our investments and reduce our cost
of capital, which should enhance our ability to generate high,
long-term rates of return. While in recent years, we have been able
to issue bonds at attractive long-term rates, we still believe that
PSH remains an underappreciated and underrated credit. Our credit
remains misunderstood likely because we are a one-of-a-kind
company, and it will therefore take time for xed income investors
and analysts to fully appreciate our story.
Discount and Valuation
PSH has traded at a persistently wide discount to NAV in recent
years. As a result, the Board and we have taken a number of steps
to address the discount including obtaining a premium listing on
the London Stock Exchange, repurchasing 21% of our shares
outstanding, and initiating a quarterly dividend. In addition, I
and other affiliates of the Investment Manager have increased our
stake in PSH from 4% to 25% via open market purchases over the last
three years. Employees and affiliates of PSCM now have an
investment of approximately $2.4 billion in PSH equity, which is
one of the largest insider investments of any FTSE 100 or FTSE 250
company.
Despite the above actions, PSH's discount to NAV remains wide.
The discount was as high as 35% in September prior to PSH's recent
FTSE 100 inclusion, which we believe has contributed to the
discount narrowing to 25% today.
We believe that PSH's discount to NAV or book value is
anomalously large, particularly when PSH is compared with our peers
in the FTSE 100. In general, companies which earn higher, long-term
returns on equity should trade at greater multiples of book value
or NAV than companies that earn lower returns on equity.
When our long-term track record's 17% ROE is compared with that
of other FTSE 100 companies over the same 17-year period, there is
no other company that has earned similar or greater long-term
returns on equity that trades at a meaningful discount to NAV or
book value.
When compared over the short term, the last three years for
example, the disparately low valuation of PSH becomes that much
more stark. PSH's ROE of 39% over the last three years compares
favorably to the FTSE 100's weighted average, three-year ROE of
approximately 8%. Despite earning an ROE nearly ve times greater
than the FTSE 100 index, PSH trades at only 0.7 times book value,
while the FTSE 100 index, weighted by market cap, currently trades
at approximately 1.8 times book value.
PSH Replication
Some investors have suggested that PSH should trade at a
discount to book value because our portfolio is publicly traded,
and copycat investors (let's call them PSH Replicators) can simply
purchase our companies in the same proportions as we own them,
thereby replicating our portfolio without paying investment
management fees.
The problem with this approach is that investors can only
replicate changes in our portfolio when we disclose them. By the
date on which we are required or choose to disclose a new position,
its trading price is typically well above PSH's average cost of
acquisition. As a result, investors who attempt to track and
replicate the portfolio will likely have a substantially higher
cost basis in our investments, and therefore will earn lower
returns.
More signi cantly, there are limited disclosure requirements for
the various hedging transactions we have historically executed. For
example, had PSH Replicators simply purchased and held PSH's
portfolio as of the beginning of last year until the end of the
year and paid no fees, they would have realized a 15.4% return.(10)
Had they purchased PSH shares instead, they would have earned a
70.2% NAV total return and an 84.8% TSR as the opportunity to
realize returns from the credit hedge and reinvest the proceeds in
our existing holdings would not have been in the PSH Replicator's
portfolio.
As of this writing, in addition to investment grade credit
hedges, PSH owns very large notional hedges in the form of interest
rate swaptions that we purchased beginning in December through
early February. Like our credit hedge, our interest rate swaption
position is highly asymmetric; it has a potential payoff that is
many multiples of our capital at risk. While this hedge started as
a small percentage of the portfolio -- at a cost of $157 million it
represented 1.4% of assets at that time -- it has more than tripled
in value, and now represents 4.2% of the portfolio with a market
value of $493 million.(11)
There is no requirement that we make timely disclosures of our
hedging transactions, and the timing of their purchase and sale. As
a result, a PSH Replicator has no ability to participate in these
investments, which have historically generated large pro ts and
important hedging bene ts for PSH.
Net of all fees, long-term PSH investors have earned
substantially superior returns to that of the theoretical PSH
Replicator. For the above reasons, we believe that PSH is an
attractive acquisition at its NAV, and an even better investment
when it is trading at a discount to NAV.
ESG
Earlier in my career, I thought business was about making money,
and philanthropy was about doing good. To that end, the Pershing
Square Foundation has given away hundreds of millions of dollars in
an attempt to address U.S. and global problems in income
inequality, education, healthcare, social and criminal justice, and
other areas. As a result of a successful venture investment I made
more than a decade ago, the Foundation and an affiliated donor
advised fund now have more than a billion dollars of additional
philanthropic resources.
Despite these growing resources and the excellent works of many
important organizations the Foundation has supported, over time it
has become increasingly clear to us that philanthropy alone cannot
save the world. Unfortunately, we cannot rely on governments
either.
With the bene t of substantial philanthropic and investing
experience, I have come to believe that capitalism is likely the
most powerful potential force for good in addressing society's
long-term problems. A successful business operating ethically and
sustainably can create many thousands of high-paying jobs, deliver
high long-term returns for pensioners, long-term savers and other
investors, and provide goods and services that materially increase
its customers' quality of life, broadly de ned. That said,
capitalism is far from perfect.
Poorly designed compensation structures can lead management to
pursue short-term pro ts at the expense of long- term
sustainability, with negative externalities that are borne by
others. On the other hand, with well-aligned incentive structures,
supportive corporate values, and strong leadership, a successful
business can generate both strong returns for its shareholders, and
positively impact the society and environment in which it
operates.
Environmental, social and governance ("ESG") issues have emerged
into the Zeitgeist, with considerable study and discussion in board
rooms, and among investors around the world. Companies are
evaluating how they interact with their stakeholders and what role
they play in society. This self-examination will lead managements
and boards to elevate the importance of ESG in how they govern and
manage their companies, and implement their long-term
strategies.
We believe that good ESG practices are fundamentally aligned
with running a successful business. As consumers and other
corporate customers have become increasingly educated on matters of
ESG, they have begun to avoid companies that contribute to climate
change or do not treat their employees well, while rewarding
companies with their business that have sustainable and responsible
policies. Similarly, a growing number of investors have become
increasingly concerned about the risks of companies which do not
take ESG issues seriously. These investors avoid investing in
companies which do not meet high ESG standards, reducing the
valuations and investment returns of these businesses, negatively
impacting their cost of capital.
As capital is reallocated away from companies that rate poorly
on ESG issues, boards' and managements' likely response will be to
pivot their company's business models to ones that are better for
the environment and society. As a long-term, concentrated and
engaged owner of publicly traded companies, we can help accelerate
this process in a manner that is closely aligned with our strategy,
which seeks to generate high long-term rates of returns for our
shareholders.
The emergence of ESG has provided an additional lens with which
to evaluate how companies perform. We therefore thought it would be
helpful to share how we think about ESG at Pershing Square, and its
role in our investment process.
ESG As Part of Our Investment Process
We believe that good corporate governance, including the
management of sustainability risks, creates long-term value for
shareholders. We consider ESG issues in our investment selection
process, and as part of our ongoing stewardship once we have made
an investment.
We do not view ESG as a way to market our funds to investors or
to raise additional capital. As you likely are aware, we decided
several years ago that we would no longer market our private funds
to new investors, and PSH has returned substantial capital through
large share buybacks and dividends. Our interest in ESG issues
therefore entirely relates to their impact on our investments, and
our long-term track record.
The most important criterion in our investment selection process
is our assessment of the long-term quality of a business, which is
informed by, among other considerations, our assessment of the
long-term impact of the company on all of its stakeholders and
society at large. As a result, assessing the sustainability risks
of a potential investment is a critical component of our investment
selection process.
Our focus on business quality has largely enabled us to avoid
investments in businesses which make products or deliver services
which we do not believe to be desirable, which treat their
employees poorly, and/or which have long-term nancial and legal
risks that are a consequence of their negative externalities. We
believe that this approach has helped us to avoid losses and
generate pro ts by identifying great businesses that have
contributed to our long-term investment returns, and by avoiding
others which would likely have generated losses in the portfolio.
We have still made mistakes (you know them well) when in certain
cases, we failed to fully consider certain ESG shortcomings in a
company's approach to business.
The relevant ESG issues we consider as part of our due diligence
process can vary depending on a given company and the sector in
which it operates. We therefore do not utilize a uniform set of
sustainability factors to evaluate companies that we are
considering for potential investment.
In many instances, we have chosen to invest in companies which
already have excellent ESG practices, including good governance,
robust environmental stewardship programs, and diversity and
inclusion initiatives. The majority of the companies in our
portfolio today exhibited those characteristics at the time of our
initial investment, and all, to varying degrees, do so today.
A few examples from our portfolio:
For the third year in a row, Agilent ranked in the top three of
Barron's Most Sustainable Companies in America as it continues to
invest in infrastructure improvements to further reduce its
environmental impact.
Starbucks has made signi cant investments in eco-friendly
operations, regenerative agricultural practices, and an
environmentally friendly menu, and has committed to cut its carbon,
water, and waste footprints by half by 2030.
Lowe's is enhancing the sustainability of its products and
promoting consumers' ability to reduce their own environmental
footprints through the sale of eco-conscious products. During the
pandemic, Lowe's invested more than $1 billion in employee support,
community donations, and enhanced store safety.
The Howard Hughes Corporation (HHC) has set 10-year goals for
energy, water, waste, and carbon emissions, and established an ESG
Committee that reports directly to the CEO to guide its
sustainability program. HHC has regularly received awards for
owning and managing communities and small cities that are
considered among the best places to live in the United States.
In some instances, we have used our in uence and engagement with
boards and management to improve ESG practices that pose
sustainability risks to a business in order to catalyze long-term
value creation.
For example, Chipotle is a business for which sustainability has
been a core value since its founding. For years, the company has
earned accolades for sustainably sourcing its food, and for
reducing its environmental impact over time. Consumers understand
that the company's commitment is genuine and reward it with their
business. When we rst invested in the company, we recognized that
the opportunity to work with the company to improve its governance
could create signi cant shareholder and stakeholder value, while
allowing the company to continue to grow rapidly and stay true to
its core values.
Following our investment, the Board and management were
refreshed, and have since done a remarkable job of turning around
and accelerating the growth and pro tability of the company. As
evidence of the company's continued commitment to good ESG
practices, in March 2021, Chipotle announced that 10% of its
officers' annual incentive bonus will be tied to the company's
progress toward achieving ESG objectives in three categories: Food
& Animals, People, and the Environment.
Each of our companies' ESG initiatives generates a materially
positive bene t to society, and fosters customer and stakeholder
loyalty, which contribute to the creation of shareholder value. The
above examples represent a small sample of our portfolio companies'
approach to ESG issues. Each of our portfolio companies produces
robust sustainability reports which track the initiatives that are
most relevant to their businesses. You can learn more about these
programs from their respective websites.
Our ability to consider ESG issues in our investment selection
is greatly enhanced by the long duration of our capital base. As a
public company where the investment manager is the largest
shareholder with a more than 25% stake, we do not need to think or
act short-term. With a long-term mindset, we can be highly
supportive of investments that reduce short-term earnings, but
increase a company's long-term net present value.(12) Compared with
the entire universe of global investment entities, PSH is extremely
advantaged due to our long-term structure and large insider
ownership.
We are grateful to you for supporting PSH's long-term approach
to investing, and we are very pleased to have delivered the third
consecutive year of returns well in excess of our S&P 500
benchmark. We do not believe it is coincidental that our
performance over the last three years coincides with the increased
stability of our capital base that resulted from management's
larger investment in the company several years ago, our decision to
no longer market the private funds for investment, and our
refocusing the rm on our core investment strategy.
2020 will go down in history as one of the world's most
challenging years primarily due to the pandemic, but also because
of the political divisiveness that plagues the U.S. and many
countries around the world. During this difficult time for all, we
are fortunate to have been able to generate strong returns for our
shareholders, which include many healthcare, educational, and other
institutions that have been at the frontlines dealing with this
crisis, and to whom we are very grateful.
Unlike other alternative investment rms, we are pleased that our
publicly traded corporate form allows us to have a highly diversi
ed investor base which includes thousands of smaller investors who
can invest in PSH at a very low entry price, the less than forty
dollars it costs to purchase one share. We take our responsibility
for managing our highly disparate investors' savings extremely
seriously, and remain focused on delivering outstanding long-term
results for all of you.
Lastly, I would like to thank the entire Pershing Square team.
This was without question our most productive year. The entire
organization transitioned seamlessly to working from home, and
executed extraordinarily well under highly challenging
circumstances. We are looking forward to the day when we will
return to the office, which is hopefully only a few more months
from now.
Please contact us if you have questions about any of the
above.
Sincerely,
William A. Ackman
2020 PORTFOLIO UPDATE
Performance Attribution
Below are the contributors and detractors to gross performance
of the portfolio of the Company for 2020 and year-to-date 2021(13)
.
January 1, 2020 -- December January 1, 2021 -- March 23,
31, 2020 2021
Index CDS 36.6 % Interest Rate Swaptions 3.8 %
Pershing Square Tontine
Holdings, Ltd. 13.1 % Lowe's Companies Inc. 2.4 %
Lowe's Companies Inc. 10.7 % The Howard Hughes Corporation 1.5 %
Hilton Worldwide Holdings
Chipotle Mexican Grill, Inc. 10.2 % Inc. 1.0 %
Restaurant Brands
Starbucks Corporation 7.6 % International Inc. 1.0 %
Agilent Technologies Inc. 7.2 % Chipotle Mexican Grill, Inc. 0.7 %
Restaurant Brands
International Inc. 3.0 % Bond Interest Expense (0.3)%
Hilton Worldwide Holdings Federal National Mortgage
Inc. 2.7 % Association (0.7)%
Federal Home Loan Mortgage
Share Buyback Accretion 2.4 % Corporation (0.7)%
Federal Home Loan Mortgage Pershing Square Tontine
Corporation (0.9)% Holdings, Ltd. (1.8)%
All Other Positions and Other
Bond Interest Expense (1.5)% Income and Expense 0.4 %
Federal National Mortgage
Association (1.6)%
Berkshire Hathaway Inc. (3.1)%
All Other Positions and Other
Income and Expense (0.6)%
Net Contributors and Net Contributors and
Detractors 85.8 % Detractors 7.3 %
Contributors or detractors to performance of 50 basis points or more are
listed above separately, while contributors or detractors to performance of
less than 50 basis points are aggregated, except for share buyback accretion
and bond interest expense. Past performance is not a guarantee of future
results. All investments involve risk, including the loss of principal. Please
see accompanying endnotes and important disclaimers on pages 110-112.
Lowe's ("LOW")
Lowe's is a high-quality business with signi cant long-term
earnings growth potential. We initiated our investment in the
company in April 2018 largely because we believed that the hiring
of a new high-caliber management team could dramatically improve
the business and close the performance gap to its closest
competitor, Home Depot. Marvin Ellison became CEO in July 2018, and
immediately began working on a multi-year transformation plan to
bolster Lowe's retail fundamentals, reduce structural costs, expand
distribution capabilities, and modernize systems and the company's
online capabilities.
In 2020, Lowe's experienced unprecedented demand driven by
consumers nesting at home, higher home asset utilization and a
reallocation of discretionary spend. Lowe's earlier decision to
modernize the company's online offering allowed it to meet
consumers' surging demand. Further, its commitment to improve the
company's retail fundamentals allowed Lowe's to showcase its
enhanced merchandising, greater in-stock-levels, and excellent
customer service. In the fourth quarter, the company completed 95%
of its store layout resets which include a more intuitive shopping
experience complete with a more Pro-centric layout (by "Pro" we
refer to the professional tradesmen that perform repair and
maintenance, remodeling and construction services). The company is
also rolling out a new Pro CRM tool, which should improve Lowe's
Pro market share.
Lowe's experienced comparable sales growth of more than 26% in
2020, while generating signi cant margin expansion and robust
earnings growth. The company shared its success with its employees
and the community by investing more than $1.2 billion in special
associate support, community donations and enhanced store
safety.
Management remains focused on a myriad of operational
initiatives designed to improve the customer shopping experience
and the company's long-term earnings power. In the
near-to-medium-term, these initiatives include improving Lowe's
omnichannel capabilities including simplifying search and checkout
features, launching three additional ecommerce ful llment centers,
enabling faster mobile order ful llment, standing up dedicated
store ful llment teams, rolling out touchless
Buy-Online-Pick-Up-In-Store lockers to all U.S. stores by April
2021, and reimagining scheduling and modes of delivery for certain
large-format order deliveries (notably, appliances). These
initiatives are examples of Lowe's "Perpetual Productivity
Improvement" program which is designed to improve market share and
pro t margins.
Lowe's is making important strategic investments to position the
business to continue to thrive. The company's long-term outlook
implies signi cant opportunity for continued earnings appreciation
and margin expansion as it executes its multi- year business
transformation.
Chipotle ("CMG")
Chipotle's superb 2020 performance amid a challenging backdrop
was due to the successful business transformation led by CEO Brian
Niccol and his team. Improved digital access, which has been a
pillar of management's transformation strategy and a growing sales
driver in recent years, enabled the company to serve customers with
digital pickup and delivery as the pandemic began. Only three
months after the onset of COVID-19 in the U.S., Chipotle returned
to growth, achieving same-store sales growth of 6% in Q4, or 20%
over two years.
The pandemic accelerated a shift in the company's digital sales
mix from just under 20% of sales at the end of 2019 to 70% in
April, before settling to about 50% in July, a level which has been
maintained through the start of 2021. Management believes that the
majority of these digital sales are incremental, noting that in the
60% of stores with dining rooms open, 80% to 85% of digital sales
gains are being retained while 50% to 60% of in-store sales have
been recovered.
Management remains con dent that the company will emerge even
stronger from the COVID-19 pandemic as it continues to execute on a
number of long-term strategic initiatives. Chipotle plans to open
200 new restaurants in 2021, a 24% increase from 2020 opening
levels, with more than 70% of these new locations featuring a
Chipotlane, the company's high-return, digital drive-thru
format.
Chipotle has already launched two new menu innovations in 2021,
including cauli ower rice, which was introduced in January and has
garnered very favorable early feedback, and the much-anticipated
quesadilla, which was launched as a digital-only menu item on March
11(th) . Chipotle Rewards, a highly effective marketing tool for
the company, continues to see enrollment growth with over 19.5
million members as of year-end, compared to 8.5 million members at
the end of 2019.
Chipotle is extremely well positioned to execute on the
company's long-term strategy, which should drive substantial
shareholder value in the future.
Agilent ("A")
Amid a challenging backdrop, Agilent's highly resilient
performance throughout 2020 demonstrated the durable and high-
quality nature of its business model. Despite the impact of the
COVID crisis, the company generated positive revenue growth and
improved pro tability, with 1% organic growth and 20 basis points
of operating pro t margin expansion in scal year 2020.
The company was able to achieve these results without
furloughing a single employee. The resulting organizational
stability allowed the Agilent team to remain focused on
customer-centric initiatives and new product innovation to drive
market share gains. For example, the company launched several new
instrument lines designed to improve throughput for high volume
testing in the pharmaceutical end market. Likewise, in its CrossLab
services segment, the company is capitalizing on the trend of labs
increasingly outsourcing multiple services to a single vendor, and
has recently won several large, lab-wide, enterprise service
contracts.
The pandemic provided the company with a timely opportunity to
accelerate its digital transformation. Agilent quickly adopted
online engagement channels and digital tools to remotely respond to
customer service requests and sales inquiries in a timely and
reliable manner. This online service approach yielded record high
customer satisfaction scores. As the business emerges from the
pandemic, we expect Agilent to remain committed to its digital
transformation as it not only supports a higher standard of
customer engagement, but also allows for more efficient internal
operations and cost savings.
In December, Agilent held an Analyst Day to highlight the
acceleration in the company's long-term revenue growth outlook and
margin expansion opportunity. Management signi cantly raised its
guidance from its Analyst Day, and the company is now targeting
long-term organic growth of 5% to 7%, and margin expansion of up to
100 basis points per annum. Agilent's strong business momentum was
clearly re ected in its most recent quarter, where the company
delivered 11% organic growth and an impressive 260 basis points of
margin expansion.
We believe that Agilent will be a more pro table and competitive
company post COVID-19.
Hilton ("HLT")
Hilton is a high-quality, asset light, high-margin business with
signi cant long-term growth potential, led by a superb management
team. The hotel industry was one of the most negatively impacted as
a result of the COVID-19 pandemic. As the pandemic set in, Hilton's
management team deftly navigated a challenging situation and took
decisive actions to right size Hilton's cost structure for the
current economic environment, and fortify its balance sheet. As a
result, Hilton managed through the pandemic and positioned the
company to generate enhanced margins, improved cash ows and
returns, once the business recovers to pre-COVID-19 demand
levels.
Hilton's systemwide occupancy bottomed at 13% in April 2020, but
rebounded to approximately 40% during Q3 and Q4 as COVID-19 became
better understood and travel restrictions lifted. Positive demand
momentum experienced in the summer and early fall were disrupted in
November and December due to rising COVID-19 cases and tightening
travel restrictions.
Hilton management expects a more pronounced and sustained
recovery to commence in the second half of 2021, particularly as
the COVID-19 vaccine is rolled out more broadly, driven by
increased leisure demand and a rebound in business travel.
Management's conviction is driven by a number of factors which
include: (1) pent-up leisure travel demand, (2) large amounts of
unspent consumer savings, (3) large corporations indicating a
desire to resume business travel, (4) improving business transient
booking trends, (5) proprietary survey work in which 80% of
respondents express a desire to travel, and a substantially better
second half of 2021 group booking calendar.
Despite signi cant headwinds, Hilton continued to execute on its
long-term strategy, and opened 47,400 net new rooms in 2020 (+5%).
Hilton's pipeline expanded 3% year-over-year to 397,000 rooms, or
39% of the existing room footprint, 51% of which are currently
under construction. We believe Hilton will continue to grow its
market share over time given independent hotels' increased interest
in seeking an affiliation with global brands, particularly in the
wake of the pandemic.
Hilton is well positioned to thrive as the recovery sets in due
to its best-in-class management team, portfolio of great brands,
dominant market position, capital-light economic model, deep
development pipeline and strong balance sheet. Hilton is in the
early stages of a multi-year recovery, which we believe will
deliver long-term earnings that are meaningfully greater than
pre-2020 levels.
Restaurant Brands International ("QSR")
QSR's franchised business model is a high-quality,
capital-light, growing annuity that generates high-margin brand
royalty fees from three leading brands: Burger King, Tim Hortons
and Popeyes. The company nimbly navigated difficult market
conditions in 2020 by assisting franchisees, while maintaining its
long-term growth potential.
As the COVID-19 pandemic began, management undertook a series of
steps to secure and strengthen the business. The company quickly
bolstered safety procedures and shifted marketing spend to
highlight the off-premise options available to customers, while
supporting its franchisees with fee/cap ex deferrals and liquidity
programs. Throughout the year, the company accelerated its digital
investments by expanding its delivery footprint, modernizing its
drive-thru experience, increasing mobile ordering adoption, and
improving its loyalty programs.
While the company's sales were negatively impacted by the
pandemic, comparable sales have already recovered or are well on
their way to recovery. Burger King U.S. returned to growth in
January; Tim Hortons improved to a high-single-digit decline in
Canada during the fourth quarter, and Popeyes U.S. grew 16% in
2020. To accelerate the recovery at Tim Hortons in Canada, the
company has committed additional funds to bolster its advertising,
and support continued enhancements to its Tim's Rewards
program.
We continue to believe each of Restaurant Brands' concepts will
emerge stronger from this crisis as their business models are
competitively advantaged in a socially distant and more
budget-conscious consumption environment, and as the company
continues to invest in drive-thru, delivery, and digital. We
believe QSR's long-term unit growth opportunity is still intact,
and we expect unit growth to return to its mid-single-digit growth
rate this year. As investors begin to see the results of these
efforts, and underlying sales trends at each of its brands continue
to improve, QSR's share price should more accurately re ect our
view of its business fundamentals.
The Howard Hughes Corporation ("HHC")
In 2019, HHC's Board of Directors announced a strategic
transformation plan to streamline the company's organizational
structure, sell $2 billion of non-core assets, and accelerate
growth in its core master planned community ("MPC") business. In
2020, David O'Reilly, formerly HHC's CFO and President, became the
company's new CEO, and Jay Cross, formerly President of Hudson
Yards, became the new President. This transformation into a leaner
and more focused organization allowed the company to successfully
navigate the impact of COVID-19.
When the pandemic began, it was clear that it would have a
draconian effect on the company's assets. Management acted quickly
and decisively to stabilize the business by raising $600 million of
equity in March 2020 to strengthen the company's balance sheet. The
Pershing Square funds invested $500 million in that offering.
Additionally, HHC's transition to a decentralized operating model
signi cantly reduced overhead expenses and enabled each MPC to more
nimbly react to challenging local market conditions.
Since the second quarter of 2020, the company has experienced a
robust recovery across all of its assets, which we expect will
continue into 2021. Despite the impact of the pandemic, new home
sales across HHC's MPCs grew an impressive 10% in 2020. Demand for
residential land in HHC's MPCs continues to accelerate, bene ting
from out-of-state migration from higher cost-of-living and higher
tax states. New homebuyers are drawn to HHC's walkable communities,
expansive open spaces, and amenity-rich urban cores in Summerlin,
Bridgeland and the Woodlands Hills, the three MPCs which own the
substantial majority of HHC's remaining unsold land.
Within HHC's portfolio of income-producing commercial
properties, office and multi-family assets have remained highly
resilient. The company has collected 97% of office and 98% of
multi-family rents from the beginning of Q2 2020 to year-end.
Retail and hospitality fundamentals are steadily improving with
phased re-openings and a gradual rebound in foot traffic.
Highlighting management's conviction in the recovery, in February
2021, the company announced the acceleration of plans for
approximately two million square feet of commercial development
across the company's MPCs.
In Ward Village, the company experienced strong condo sales
activity with the help of an innovative digital sales platform
which provides homebuyers with a completely online experience,
including virtual 3D condo tours and live chat capabilities. The
company's latest luxury condo project, Victoria Place, is already
77% pre-sold after launching sales in December 2019. At the
Seaport, which has begun to reopen after being impacted by New York
City's stay-at-home orders, the company has found creative ways to
activate the property with innovative new offerings like "The
Greens," a rooftop dining venue.
We believe that the impact of the COVID-19 pandemic is largely
transitory, and expect Howard Hughes's uniquely well positioned
MPCs and portfolio of high-quality operating assets to deliver
substantial growth for years to come.
Fannie Mae ("FNMA" or "Fannie") and Freddie Mac ("FMCC or
"Freddie") (together "the GSEs")
Fannie and Freddie continue to move towards the ending of their
conservatorships. While the progress made during the Trump
administration fell short of its articulated goals, there were a
number of positive developments in 2020.
The Preferred Stock Purchase Agreement ("PSPA") modi cation
announced in January 2021 suspended the net worth sweep, allowing
the GSEs to increase their maximum capital retention from $45
billion to over $300 billion. The amended PSPA, however, did not
provide recognition that Treasury's Senior Preferred investment has
been repaid and the balance due to Treasury continues to increase
for every dollar of capital retained. We were not surprised that
the Treasury's Senior Preferred remains unresolved in light of
existing shareholder litigation.
In July, the U.S. Supreme Court agreed to hear appeals by both
the plaintiff and the Federal Government from the Fifth Circuit
Court of Appeals' decision in the Collins case. The Fifth Circuit,
sitting en banc, ruled in favor of the plaintiff shareholders. On
appeal to the Supreme Court, the parties argued about the legality
of FHFA's structure, and the lawfulness of the net worth sweep, and
the scope of various provisions under the HERA statute under which
the Fannie and Freddie conservatorships were created.
We expect a decision by the Court by June 2021, which if a
ruling is issued in shareholders' favor, would be a game-changing
event. Regardless of the decision by the Court, we continue to
believe that our investment in the GSEs is a valuable perpetual
option on their eventual exit from conservatorship due to their
widely acknowledged irreplaceable role in the U.S. housing nance
system.
Starbucks ("SBUX")
We exited our initial investment in Starbucks in January 2020,
and opportunistically repurchased a stake in the company at a
highly attractive valuation during the March market downturn.
Management has handled the COVID-19 crisis incredibly well, which
we believe will enable the company to emerge even stronger
following the pandemic. At the company's current valuation, about
twice the price we paid one year ago, our expected returns from
owning Starbucks are below our long-term targets. As a result, we
recently sold our stake. Below we summarize our thoughts on the
company. Despite the sale, we expect that Starbucks will continue
to be a good, long-term investment.
Starbucks was well-prepared for the arrival of COVID-19 in the
U.S. given the company's large presence in China. As a result, the
company quickly shifted to a drive-thru and delivery-only model at
the beginning of the pandemic. As management reopened locations and
in-store ordering, Starbucks began to experience a robust sales
recovery.
Today, the company is already nearing a full sales recovery, and
should be a major bene ciary of a reopened global economy in 2021.
By January 2021, same-store sales in the U.S. only declined by 2%.
By the second quarter of 2021, Starbucks expects same-store sales
in the U.S. to grow by 5% to 10% year over year, implying
cumulative two-year comps of 2% to 7% with average-unit volumes
above pre-COVID-19 levels.
Starbucks is continuing to experience robust growth in China,
following the demise of its closest competitor in the region,
Luckin Coffee, and plans to open 600 stores in China in 2021.
We expect Starbucks to bene t from a number of post-COVID-19
tailwinds including pent-up consumer demand for the "third place"
experience as many consumers who prefer to enjoy their beverages in
store with friends and colleagues have not been able to do so for
the past year. Starbucks has historically generated 50% of its
sales from breakfast, a daypart geared towards work and school
commuting, which should bene t from a return of consumers to their
pre-COVID-19 routines.
In addition to managing the COVID-19 crisis, management
continues to invest in important growth initiatives including
digital, new store formats, and menu innovation. In December 2020,
Starbucks' management underscored their con dence in the company's
future and increased its long-term outlook for revenue growth,
margins, and earnings growth.
Other Positions
As discussed in detail in the 2020 Interim Financial Statements,
we invested in index credit default swaps in February 2020 and
unwound the positions in March. In the summer of 2020, we initiated
a new portfolio investment by launching a SPAC, PSTH. On July 22,
2020, PSTH raised $4 billion in its IPO on the New York Stock
Exchange. The SPAC sponsor for PSTH is 100% owned by the Pershing
Square Funds.
Other Exited Investments
As previously disclosed in our Interim Financial Statements, we
exited our investment in Berkshire Hathaway ("BRK.B") in 2020.
Principal Risks and Uncertainties
The Board has ultimate responsibility for the Company's risk
management. The Board believes that identifying the inherent risks
related to the business and operations of the Company and
developing an effective strategy to manage and mitigate these risks
is crucial to the ongoing viability and success of the Company.
In order to identify these risks, the Board reviews the
management of investment risk and the operations of the Investment
Manager at each quarterly Board meeting. In addition, the Board has
established a Risk Committee, which has carried out a robust
assessment of the existing and emerging risks facing the Company,
including those that could threaten its business model, future
performance, solvency or liquidity.
The Risk Committee's assessment identi ed 43 existing risks
relevant to the Company's business in 2020, including risks arising
from the Company's investment activities, structure and operations
as well as risks relating to shareholder engagement and regulatory
compliance. The Risk Committee has considered the cause of each
risk, the likelihood of a risk occurring, and the severity of the
impact on the Company if the risk occurs, both before and after
taking into account the controls in place to mitigate them. Based
on this assessment, the Risk Committee has identi ed the subset of
risks set out below as the principal risks faced by the
Company.
The Risk Committee identi ed the effect of the Covid-19 pandemic
on the Company and the Investment Manager, and risks relating to
remote operations, such as cybersecurity and service provider
concerns, as 2020 emerging risks. The effect of these emerging
risks is discussed as part of each applicable principal risk
below.
Risk Description Mitigating Factors
Investment Risk The Company's investments The Investment Manager is
are exposed to the risk of an experienced investor and
the loss of capital. There makes investment decisions
is no assurance that the in accordance with its
Company's portfolio investment principles as
investments will increase described in the Company's
in value and shareholders Investment Policy.
may lose all, or
substantially all, of their
investment in the Company.
Failure to appropriately The most important
integrate risks into criterion in the Investment
investment decisions or to Manager's investment
manage risks to which the selection process is its
Company's investments are view of the long-term
exposed, including ESG quality of a business,
risks, may have a material which is informed by, among
negative impact on the other things, the
Company's performance. Investment Manager's
assessment of the long-term
impact of the company on
all of its stakeholders and
society at large, and how
its management and board
manage ESG risks. The
Investment Manager assesses
risks to the long-term
success of the Company's
investments by performing
extensive research prior to
making an investment
decision and ongoing
monitoring to deeply
understand each business
and the industry in which
it operates.
As discussed in the
Chairman's Statement and
the Investment Manager's
Report, the Investment
Manager's early
implementation of a hedging
program in response to the
Covid-19 pandemic
successfully mitigated the
impact of Covid-19 on the
Company's investments.
The Board receives
quarterly updates on the
performance of the
Company's portfolio
positions.
The interests of the
Investment Manager are
aligned with the Company's
shareholders as a result of
the substantial investment
made by Investment
Manager's personnel in the
Company.
Investment The Investment Manager has The Board receives a report
Manager's Authority broad investment authority from the Investment Manager
in executing the Company's at each quarterly Board
strategy and may use meeting, or as necessary,
whatever investment on developments and risks
techniques it believes are relating to portfolio
suitable for the Company, positions, activist
including novel or untested engagements, nancial
approaches. instruments used in the
portfolio and the portfolio
composition as a whole.
In addition, the Company's The Board receives a daily
strategy depends on the summary of media reports
ability of the Investment regarding the activities of
Manager to successfully the Investment Manager and
identify attractive the Company's underlying
investment opportunities. portfolio positions.
The interests of the
Investment Manager are
aligned with the Company's
shareholders as a result of
the substantial investment
made by Investment
Manager's personnel in the
Company.
Portfolio The Investment Manager may The Investment Manager
Concentration invest a signi cant performs extensive research
proportion of the Company's prior to making new
capital in a limited number investments, along with
of investments, subject to ongoing monitoring of
the Company's Investment positions held in the
Policy. Because the Company's portfolio. The
Company's portfolio is Investment Manager is
highly concentrated and mindful of sector and
primarily invested in industry exposures and
public equities (or other correlations between
derivatives referencing businesses in which the
public equities), it is Company invests.
sensitive to uctuations in
equity prices and
investment results over
time may be volatile. A
concentrated portfolio also
exacerbates the risk that a
loss in any one position
could have a material
adverse impact on the
Company's assets.
The Board reviews portfolio
concentration and receives
a detailed overview of the
portfolio positions no less
than quarterly, but more
frequently as necessary.
The Investment Policy
prohibits investments by
the Company in, or giving
exposure to, the securities
of any one issuer
representing more than 25%
of the Company's gross
assets (assets on the
statement of nancial
position prior to deduction
of liabilities) measured at
the time of making the
investment.
Activist Strategies The Investment Manager may The Investment Manager has
pursue anactivist role with signi cant experience
respect to an investment, conducting activist
which may involve campaigns.
substantial use of time,
resources and capital and
litigation by or opposition
of the target company's
management, board or
shareholders.
The Board reviews the
Investment Manager's
activist engagements at
each Board meeting, or more
frequently as necessary.
Portfolio Liquidity The Company may be The Investment Manager
Risk restricted from trading in actively monitors positions
certain securities in its with trading restrictions
portfolio for which the to identify future selling
Investment Manager has opportunities. The
board representation or for Investment Manager may sell
contractual, regulatory or securities subject to
other reasons. restrictions through block
sales, during open trading
windows or pursuant to
automatic trading plans.
Stressful market conditions The Company invests
may prevent the Company primarily in
from having sufficient large-capitalization
liquidity to meet its securities which are highly
liabilities when due. liquid under normal market
conditions. The Investment
Manager actively manages
the Company's cash and cash
equivalents to ensure, as
much as possible, that the
Company will have
sufficient liquidity under
both normal and stressful
market conditions.
NAV Discount The Public Shares of the For a summary of actions
Company have in the past, the Company has taken to
currently and may in the address the discount,
future trade at a signi please see "Discount to
cant discount to NAV. NAV" in the Report of the
Directors.
The Board monitors the
trading activity of the
shares on a regular basis
and reviews the discount to
NAV at its quarterly
meetings. The Company has
also retained advisers to
engage with existing and
potential shareholders and
to consider other potential
measures to reduce the
discount of share price to
NAV.
Regulatory Risk Regulatory risk can Prior to initiating an
negatively impact the investment, the Investment
Company in a number of Manager considers the
ways. For example, changes possible legal and
in laws or regulations regulatory issues that
could have a detrimental could impact its ability to
impact on the Company's achieve its objective with
ability to freely acquire respect to such position.
and dispose of certain The Investment Manager's
securities or deploy legal and compliance team
certain investment monitors regulatory changes
techniques. In addition, on an ongoing basis and
failure to comply with laws informs the Board of
or regulations can subject emerging risks.
the Company to reputational
damage and prosecutions.
The Board and the
Investment Manager maintain
policies and procedures
designed to prevent
violations of applicable
laws and regulations. The
Board is provided with the
Investment Manager's
compliance manual and any
updates thereto.
The Board is apprised of
any regulatory inquiries or
material regulatory
developments and receives
quarterly updates from the
Investment Manager's Chief
Legal and Compliance
Officer.
Key Man The Investment Manager is The investment team and
dependent on William Ackman other senior personnel of
to provide its investment the Investment Manager are
advisory services to the experienced, longstanding
Company as he has ultimate employees.
discretion with respect to
all investment decisions.
The Investment Manager
maintains a contingency
plan to facilitate an
orderly transition in the
management of the Company's
affairs upon the occurrence
of a key man event.
Until October 2021, if a
key man event occurs,
provisions in place in the
Company's Articles of
Incorporation will trigger
a continuation vote.
Tax Risk The Company may conduct its The Company aims to avoid
affairs in a way that adverse tax consequences
places its tax status at and engages experienced tax
risk. Changes to the tax advisors as appropriate.
laws of, or practice in a
tax jurisdiction affecting
the Company could adversely
affect the value of the
Company's investments and
decrease the post-tax
returns to shareholders.
Investments in the Company
may not be tax efficient
for certain shareholders.
Although the investment
decisions of the Investment
Manager are based primarily
on economic considerations,
the Investment Manager may
make an investment decision
which is tax efficient for
some shareholders but which
may result in adverse tax
or economic consequences
for other shareholders.
Market Risk Adverse changes affecting The Investment Manager
the global nancial markets monitors emerging risks to
and economy as a whole may global markets that may
have a material negative impact the Company's
impact on the performance portfolio. In order to
of the Company's mitigate market- related
investments or may cause downside risk, the Company
the prices of nancial and may acquire put options,
derivative instruments in short market indices or
which the Company invests baskets of securities
to be highly volatile. and/or purchase index or
single- name credit default
swaps or engage in other
hedging strategies, but the
Company is not committed to
maintaining market hedges
at any time.
The Investment Manager
identi ed Covid-19 as an
emerging market risk in
early 2020 and entered into
a series of large hedging
transactions in the credit
default swap market that
offset the stock price
declines of the Company's
investment holdings due to
Covid-19.
Business Continuity An incident signi cantly The Investment Manager
disrupts the business maintains and regularly
operations of the tests a business continuity
Investment Manager or plan that emphasizes
another key service incident preparedness and
provider to the Company. anticipates responses to a
variety of potential
disruptions, including
natural disasters,
pandemics and equipment
failures. The Investment
Manager has invested in
systems that allow its
personnel to work remotely
for an inde nite period of
time.
The Investment Manager
reviews the business
continuity planning of
service providers whose
disruption in service would
impact the Investment
Manager's operations and
has con rmed that the
Company's prime brokers,
the Administrator, and
trading systems have well-
documented plans that are
tested on a regular basis.
The Investment Manager has
identi ed alternate means
of conducting critical
functions provided by
service providers and can
perform many critical
functions internally.
The Board receives
quarterly operational
updates from the Investment
Manager regarding upgrades
to systems and any
operational issues.
The Investment Manager and
other service providers
activated business
continuity plans and
transitioned to remote
operations in response to
the threat of the Covid-19
pandemic. The Company did
not experience any service
disruptions as a result of
the transition and all key
service providers continue
to perform well.
Cybersecurity An information security The Company's sensitive
breach results in the information is maintained
disclosure of the Company's by the Investment Manager,
sensitive information. which has implemented
robust information security
controls and monitoring of
cybersecurity threats. The
Investment Manager reviews
the information security
controls of service
providers with access to
sensitive Company
information to ensure
appropriate protections are
in place.
The Cybersecurity Committee
of the Investment Manager
meets quarterly or more
frequently as needed to
evaluate cybersecurity
risks and to review the
effectiveness of Investment
Manager's cybersecurity
controls.
The Board receives
quarterly updates on
cybersecurity and an annual
overview of the Investment
Manager's cybersecurity
program.
The Investment Manager has
adopted additional
precautions to mitigate the
additional cybersecurity
risks presented by its
transition to remote
operations, including
additional monitoring of
network traffic and user
activity as well as
employee training to
prevent successful
phishing/ ransomware
attacks.
Service Providers Key service providers The Investment Manager has
perform inadequately or adopted a vendor
expose Company to risk. supervision policy and
performs due diligence on
service providers in
accordance with its
assessment of their risk to
the Company.
The Investment Manager
monitors key service
providers through frequent
contact and reports to the
Board as needed.
Insurance The Company is liable for The Company and the
claims due to the failure Investment Manager maintain
of an insurance underwriter insurance policies with
or inadequate insurance reputable insurance
coverage. underwriters.
Insurance arrangements and
limits are reviewed
annually by the Board to
ensure they remain
appropriate.
Directors
ANNE FARLOW
Independent Director
Chairman of the Board
Chairman of the Nomination Committee
Ms Farlow, a Hong Kong resident, has been an independent
Director of the Company since 2014 and is an experienced private
equity investment professional and non-executive director. She is a
non-executive director of BlueRiver Acquisition Corp., listed on
the New York Stock Exchange, and since 2005 she has been an active
investor in and non-executive director of various unlisted
companies.
From 2000 to 2005, she was a director of Providence Equity
Partners in London, and was one of the partners responsible for
investing a $2.8 billion fund in telecom and media companies in
Europe.
From 1992 to 2000, she was a director of Electra Partners, and
was based in London from 1992 to 1996 and Hong Kong from 1996 to
2000. Prior to working in private equity, Ms Farlow worked as a
banker for Morgan Stanley in New York, and as a management
consultant for Bain and Company in London, Sydney and Jakarta.
Ms Farlow graduated from Cambridge University with a MA in
engineering in 1986 and a MEng in chemical engineering in 1987. She
obtained an MBA from Harvard Business School in 1991.
RICHARD BATTEY
Independent Director
Chairman of the Audit Committee
Mr Battey, a Guernsey resident, has been an independent Director
of the Company since 2012 and also serves as a non-executive
director of a number of investment companies and funds. He is
Chairman of the Board of Princess Private Equity Holding Limited,
which is listed on the London Stock Exchange.
From 2005 to 2006, Mr Battey was Chief Financial Officer of
CanArgo Energy Corporation. Mr Battey also worked for the Schroder
Group from 1977 to 2005, rst in London with J. Henry Schroder Wagg
& Co. Limited and Schroder Investment Management, then in
Guernsey as nance director and chief operating officer of Schroders
(C.I.) Limited, and retired as a director of his last Schroder
Group Guernsey company in 2008.
Mr Battey received his Bachelor of Economics from Trent
Polytechnic Nottingham in 1973 and is a chartered accountant having
quali ed with Baker Sutton & Co. in 1977.
NICHOLAS BOTTA
Chairman of the Risk Committee
Mr Botta, a U.S. resident, has been a Director of the Company
since 2012. He is also a director of Pershing Square International,
Ltd. Until March 1, 2017, when Mr Botta became President of the
Investment Manager, he was the Investment Manager's Chief Financial
Officer.
He also worked as controller and then as Chief Financial Officer
of Gotham Partners from 2000 to 2003. From 1997 to 2000, Mr Botta
was a senior auditor at Deloitte & Touche in its securities
group. He was also a senior accountant from 1995 to 1997 for
Richard A. Eisner & Co., LLP.
Mr Botta received his Bachelor of Accounting from Bernard Baruch
College in 1996. Mr Botta is a certi ed public accountant.
BRONWYN CURTIS, OBE
Senior Independent Director
Chairman of the Management Engagement Committee
Ms Curtis, a U.K. resident, has been an independent Director of
the Company since April 2018. Ms Curtis is a global nancial
economist who has held senior executive positions in both the
nancial and media sectors. She currently serves as a non-executive
director of a number of institutions including the U.K. Office of
Budget Responsibility, JP Morgan Asia Growth and Income, BH Macro,
Mercator Media, Australia-United Kingdom Chamber of Commerce, and
Scottish American Investment Co.
She has also been a Governor at the London School of Economics.
Ms Curtis held several senior positions at HSBC from 2008 to 2012
where she managed the global research operations and portfolio
including the economic, xed income, foreign exchange and equity
products. From 1999 to 2006, Ms. Curtis was the Head of European
Broadcast at Bloomberg LP, where she was responsible for production
and editorial for its 24-hour business and nancial news
coverage.
Prior to joining Bloomberg, she held positions at Nomura
International and Deutsche Bank. Ms Curtis graduated from the
London School of Economics with a Masters in Economics in 1974.
ANDREW HENTON
Independent Director
Mr Henton, a Guernsey resident, has been an independent director
of the Company since September 2020. Mr Henton has wide board
experience of both regulated and non-regulated businesses
(including listed funds) in both executive and non-executive
capacities. He currently serves as the Chair of the Board of
Boussard & Gavaudan Holding Limited, a listed closed-ended
investment company. Mr Henton also currently serves on the Boards
of several private entities. He is Chair of the Board of Butter eld
Bank Jersey Limited and SW7 Holdings Limited, and serves as a
member of the Board of Butter eld Bank Guernsey Limited, Longview
Partners (Guernsey) Limited and Close Brothers Asset Management
(Guernsey) Limited.
Between 2002 and 2011, Mr Henton held various positions at Close
Brothers Group plc, latterly acting as Head of Offshore Businesses.
During this time, he led the creation of Close Private Bank, which
provided asset management, banking, and administration services to
high net worth and institutional clients. Mr Henton previously
spent four years working in HSBC's Corporate Finance division and
three years as a Fund Manager with Baring Private Equity
Partners.
He graduated from Oxford University in 1991 and subsequently
quali ed as a Chartered Accountant with PricewaterhouseCoopers in
London, specializing as a corporate tax consultant.
RICHARD WOHANKA, CBE
Independent Director
Chairman of the Remuneration Committee
Mr Wohanka, a U.K. resident, has been an independent Director of
the Company since April 2018. He currently chairs the Nuclear
Liabilities Fund and the Pension Super Fund. He is a trustee of the
James Neill pension fund.
He previously served as a non-executive director of BTG, the
Embark Group, Julius Baer International, Old Mutual Global
Investors and Union Bancaire Privée Japan. Mr Wohanka was the Chief
Executive Officer at Union Bancaire Privée Asset Management from
2009 to 2012. Prior to that, he was the Chief Executive of Fortis
Investments from 2001 to 2009 and Chief Executive of West LB Asset
Management from 1998 to 2001.
He joined Baring Asset Management in 1996 and became the Chief
Executive Officer of the Institutional and Mutual Fund Division in
1997.
He worked at Banque Paribas from 1983 to 1996, where he was the
Chief Executive of Paribas Asset Management and a Banque Paribas
Board Member from 1993 to 1996, and in the Asset Management
division from 1990 to 1993.
He held various positions in Investment Banking from 1983 to
1990. Mr Wohanka was also employed at European Banking Corporation
from 1975 to 1983. He graduated from Cambridge University with a BA
in History in 1974 and subsequently studied modern economic history
at Harvard University as a Kennedy scholar.
Report of the Directors
We present the Annual Report and Financial Statements of the
Company for the year ended December 31, 2020.
PRINCIPAL ACTIVITY
The Company was incorporated in Guernsey, Channel Islands on
February 2, 2012. It became a registered open- ended investment
scheme under the Protection of Investors (Bailiwick of Guernsey)
Law, 1987 and the Registered Collective Investment Scheme Rules
2008 (issued by the Guernsey Financial Services Commission
("GFSC")) on June 27, 2012, and commenced operations on December
31, 2012. On October 2, 2014, the GFSC approved the conversion of
the Company into a registered closed-ended investment scheme under
the Protection of Investors Law and the 2008 Rules.
Please refer to Note 11 for further information on the various
classes of shares (any reference to "Note" herein shall refer to
the Notes to the Financial Statements).
INVESTMENT POLICY
The Company's investment objective is to preserve capital and
seek maximum, long-term capital appreciation commensurate with
reasonable risk. For these purposes, risk is de ned as the
probability of permanent loss of capital, rather than price
volatility.
In its value approach to investing, the Company seeks to invest
in long (and occasionally short) investment opportunities that the
Investment Manager believes exhibit signi cant valuation
discrepancies between current trading prices and intrinsic business
(or net asset) value, often with a catalyst for value
recognition.
The Investment Manager may also seek short sale investments that
offer absolute return opportunities. In addition, the Investment
Manager may short individual securities to hedge or reduce our long
exposures.
The Company will not make an initial investment in the equity of
companies whose securities are not publicly traded (i.e., private
equity) but may invest in privately placed securities of public
issuers and publicly traded securities of private issuers.
Notwithstanding the foregoing, it is possible that, in limited
circumstances, public companies in which we have invested may later
be taken private, and we may make additional investments in the
equity or debt of such companies. We may make investments in the
debt securities of a private company, provided that there is an
observable market price for such debt securities.
The Company may invest in long and short positions in equity or
debt securities of U.S. and non-U.S. issuers (including securities
convertible into equity or debt securities); distressed securities,
rights, options and warrants; bonds, notes and equity and debt
indices; swaps (including equity, foreign exchange, interest rate,
commodity and credit default swaps), swaptions, and other
derivatives; instruments such as futures contracts, foreign
currency, forward contracts on stock indices and structured equity
or xed-income products (including without limitation, asset-backed
securities, mortgage-backed securities, mezzanine loans, commercial
loans, mortgages and bank debt); exchange traded funds and any
other nancial instruments the Investment Manager believes will
achieve the Company's investment objective. The Company may invest
in securities sold pursuant to initial public offerings.
Investments in options on nancial indices may be used to establish
or increase long or short positions or to hedge the Company's
investments. In order to mitigate market-related downside risk, the
Company may acquire put options, short market indices, baskets of
securities and/ or purchase credit default swaps but is not
committed to maintaining market hedges at any time.
A substantial majority of the Company's portfolio is typically
allocated to 8 to 12 core holdings usually comprised of liquid,
listed mid-to-large capitalization North American companies.
So long as the Company relies on certain exemptions from
investment company status under the U.S. Investment Company Act of
1940, as amended, the Company will not purchase more than 3% of the
outstanding voting securities of any SEC-registered investment
company. The Company will not invest more than 10%, in aggregate,
of its total assets in other UK-listed closed-ended investment
funds, unless such other closed-ended investment funds themselves
have published investment policies to invest no more than 15% of
their total assets in other UK-listed closed-ended investment
funds. In addition, investments by the Company in, or giving
exposure to, the securities of any one issuer may not, in the
aggregate, represent more than 25% of the Company's gross assets,
measured at the time the investment is made.
The Company generally implements substantially similar
investment objectives, policies and strategies as the other
investment funds managed by the Investment Manager and its
affiliates. Allocation of investment opportunities and rebalancing
or internal "cross" transactions are typically made on a pro-rata
basis. However, the Investment Manager may abstain from effecting a
cross transaction or only effect a partial cross transaction if it
determines, in its sole discretion, that a cross transaction, or a
portion thereof, is not in the best interests of a fund (for
example, because a security or nancial instrument is held by such
fund in the appropriate ratio relative to its adjusted net asset
value, or because a security or nancial instrument should be
divested, in whole or in part, by the other funds) or as a result
of tax, regulatory, risk or other considerations.
The Company may hold its assets in cash, cash equivalents and/or
U.S. Treasurys pending the identi cation of new investment
opportunities by the Investment Manager. There is no limit on the
amount of the Company's assets that may be held in cash or cash
equivalent investments at any time.
The Board has adopted a policy pursuant to which the borrowing
ratio of the Company, de ned for this purpose as the ratio of the
aggregate principal amount of all borrowed money (including margin
loans) to total assets (pursuant to the latest annual or
semi-annual Financial Statements of the Company), shall in no event
exceed 50% at the time of incurrence of any borrowing or its
drawdown (e.g. a borrowing under a line of credit). The Board may
amend the Company's borrowing policy from time to time, although
the Board may not increase or decrease the Company's maximum
borrowing ratio without the prior consent of the Investment
Manager. This borrowing policy does not apply to and does not limit
the leverage inherent in the use of derivative instruments.
The Company may use derivatives, including equity options, in
order to obtain security-speci c, non-recourse leverage in an
effort to reduce the capital commitment to a speci c investment,
while potentially enhancing the returns on the capital invested in
that investment.
The Company may also use derivatives, such as equity and credit
derivatives and put options, to achieve a synthetic short position
in a company without exposing the Company to some of the typical
risks of short selling, which include the possibility of unlimited
losses and the risks associated with maintaining a stock borrow.
The Company generally does not use total return swaps to obtain
leverage, but rather to manage regulatory, tax, legal or other
issues.
Any material change to this Investment Policy will require
approval by a special resolution of the holders of Public
Shares.
RESULTS AND NAV
The Company had a gain attributable to all shareholders for the
year ended December 31, 2020 of $3.70 billion (2019: gain of $2.15
billion). The net assets attributable to all shareholders at
December 31, 2020 were $9.05 billion (2019: $5.72 billion). For the
Company's performance returns, please see the Company Performance
and Financial Highlights sections on pages 2 and 105,
respectively.
The Company announces the weekly and monthly NAV and investment
performance of its Public Shares to the Euronext Amsterdam and LSE
markets and publishes this information on the Company's website
(www.pershingsquareholdings.com). In addition, transparency reports
created by the Administrator are published on the Company's
website.
The Company released semi-annual nancial statements on August
28, 2020 relating to the rst half of 2020. The Company intends to
release semi-annual nancial statements for the rst half of 2021 in
the third quarter.
DISCOUNT TO NAV
The Board notes that the discount to NAV at which the Company's
Public Shares trade narrowed to 23.0% as of December 31, 2020 from
28.9% as of December 31, 2019, although a wide discount persists
despite the Company's strong performance. The Board monitors the
discount closely and seeks opportunities to narrow it.
In addition to its Euronext Amsterdam listing, the Company has
added a listing on the Main Market of the LSE and a U.S.-Dollar
denominated LSE quotation, allowing investors access to the
Company's shares in multiple markets and currencies. On December
21, 2020, the Company was admitted into the FTSE 100 index,
comprising the 100 largest companies by market capitalization
listed on the LSE, which may have the effect of further narrowing
the discount by increasing demand for the Company's shares by index
funds, and by enhancing the Company's visibility to potential
investors.
In 2019, the Company announced that it had initiated a quarterly
dividend of $0.10 per Public Share, in order to expand the
Company's potential shareholder base to include those who prefer or
require dividend-paying equities.
The Board also evaluates whether the discount provides
opportunities for accretive share repurchases. The Company
repurchased 13,732,785 Public Shares in 2020 through share buyback
programs authorized by the Board for a total of $286 million at an
average discount to NAV at the time of purchase of 32.0%. Since
2017, the Company has repurchased 50,834,239 Public Shares (21.2%
of shares then-outstanding) for a total of $837 million at an
average discount of 26.5%. The Company intends to propose that
shareholders renew the Company's general share buyback authority at
the Company's 2021 Annual General Meeting to allow the Company to
engage in share buybacks up to a maximum of 14.99% of the Public
Shares outstanding. If approved by shareholders and depending on
market conditions, the Company's available capital and other
considerations, the Company may decide to utilize the share buyback
authority to make further acquisitions of Public Shares in the
market.
The Board continues to be satis ed that the interests of PSH
shareholders and the Investment Manager are closely aligned. Since
2018, members of the PSCM management team and their affiliates have
substantially increased their ownership of, or exposure to, the
Company. Assuming full exercise of option contracts, affiliates of
the Investment Manager bene cially owned approximately 25% of the
Company at December 31, 2020 on a fully diluted basis (December 31,
2019: 22%). The Board believes the continued investment in the
Company by the Investment Manager's team has increased alignment
and created an even stronger incentive for it to generate positive
investment performance, which the Board believes will increase the
Company's share price and reduce the discount to NAV over the long
term. In addition, all Management Shares were converted to Public
Shares as of December 31, 2020 and will therefore now be included
in the Company's public share capital by the FTSE Indices.
The Board is encouraged by the Company's progress over the
course of 2020, and believes that sustained positive performance
over the long-term will lead to further reduction in the
discount.
BONDS IN ISSUE
On June 26, 2015, the Company issued $1 billion of Senior Notes
maturing on July 15, 2022 (the "2022 Bonds"). The 2022 Bonds were
issued at par with a coupon rate of 5.50% per annum.
On July 25, 2019, the Company closed on a fully committed
private placement of $400 million Senior Notes with a coupon rate
of 4.95%, maturing on July 15, 2039 (the "2039 Bonds").
On August 26, 2020, the Company closed on a fully committed
private placement of $200 million of Senior Notes with a coupon
rate of 3.00%, maturing on July 15, 2032 (the "2032 Bonds").
On November 2, 2020, the Company issued $500 million of Senior
Notes maturing on November 15, 2030 (the "2030 Bonds" and together
with the 2022 Bonds, 2039 Bonds and 2032 Bonds, "the Bonds"). The
2030 Bonds were issued at par with a coupon rate of 3.25% per
annum.
The Bonds rank equally in right of payment and contain
substantially the same covenants. The Bonds' coupons are paid
semi-annually. The Bonds are listed on Euronext Dublin with a
symbol of PSHNA.
DIVID
On February 13, 2019, the Company announced that it had
initiated a quarterly interim dividend of $0.10 per Public Share. A
proportionate quarterly dividend will be paid to the Special Voting
Share, based on their respective net asset values per share.
Dividends will be paid in U.S. Dollars unless a shareholder elects
to be paid in GBP. Shareholders may also elect to reinvest cash
dividends into Public Shares through a dividend reinvestment
program administered by an affiliate of Link Market Services
Limited ("Link"), the Company's registrar. Further information
regarding the dividend, including the anticipated 2021 dividend
payment schedule and how to make these elections, is available at
www.pershingsquareholdings.com/psh-dividend-information.
Each dividend is subject to a determination that, after the
payment of the dividend, the Company will meet the solvency
requirements under Guernsey law, and that, in accordance with the
indentures governing the Bonds, the Company's total indebtedness
will be less than one third of the Company's total capital. The
Board may determine to modify or cease paying the dividend in the
future.
The Company's Investment Management Agreement (the "IMA") has
been amended to account for the effect of a dividend on fees paid
to the Investment Manager. Further details regarding this amendment
are included in Notes 15 and 16.
In the year ended December 31, 2020, the Company paid dividends
in the amount of $81,137,646, a lesser amount than in 2019
($87,746,208), due to the decrease in the number of Public Shares
outstanding.
DIRECTORS
The present members of the Board, all of whom are non- executive
Directors, are listed on pages 27-29. Further information regarding
the Board is provided in the Corporate Governance Report.
The Company maintains directors' and officers' liability
insurance in relation to the actions of the Directors on behalf of
the Company. Information regarding Directors' remuneration and
ownership in the Company is set out in the Directors' Remuneration
Report on pages 39-40.
MATERIAL CONTRACTS
The Company's material contracts are with:
-- PSCM, the Investment Manager to the Company. PSCM receives a quarterly
management fee and may receive a performance fee from the Company as
described more fully in Note 15.
-- Effective August 1, 2020, Northern Trust International Fund
Administration Services (Guernsey) Limited ("Northern Trust") replaced
Elysium Fund Management Limited ("Elysium"), the Company's former
Administrator, and Morgan Stanley Fund Services (Cayman) Ltd., the
Company's former Sub-Administrator ("Morgan Stanley"). The Administrator
provides the Company with administration services, including, among other
things, the computation of the Company's NAV and the maintenance of the
Company's accounting and statutory records.
-- Effective September 1, 2020, Northern Trust replaced Elysiumas the
Company's Secretary.
-- Link, the Company's registrar. The Company has also appointed an
affiliate of Link to administer the Company's dividend reinvestment
program.
-- Goldman Sachs & Co. LLC and UBS Securities LLC ("UBS"), the Company's
Prime Brokers and custodians. UBS also provided investor relations
consulting services to the Company until that service was terminated on
December 31, 2020.
-- Jefferies International Limited ("Jefferies"), a corporate broker for the
Company and the Company's buyback agent. Jefferies also served as the
adviser for the Company's tender offer and was the Company's sponsor in
connection with its LSE listing.
Although the Investment Manager is authorized to engage service
providers on behalf of the Company, the Board is advised of and
given the opportunity to review and execute material contracts.
The Board, and where appropriate the Investment Manager, monitor
the performance of these service providers throughout the year. In
addition, the Investment Manager, the material service providers
and certain other providers of professional services to the Company
were reviewed formally by the Management Engagement Committee
during 2020. For further details of the review conducted by the
Management Engagement Committee, please see "Management Engagement
Committee" in the Corporate Governance Report.
Although the Board had been pleased with the services of the
Company's previous Administrator and Sub-Administrator, the Board
believes that the engagement of Northern Trust to replace both
Elysium and Morgan Stanley as the Company's new Administrator and
Secretary will result in signi cant efficiencies and cost
savings.
The Board has reviewed the recommendations of the Management
Engagement Committee with respect to the engagement of the
Investment Manager and the Company's other material service
providers above, and agrees with the Committee's conclusions. In
the opinion of the Board, the continued appointment of the
Investment Manager and the other material service providers is in
the interests of the Company's shareholders as a whole. The Board
will continue to monitor the performance of the Company and the
Investment Manager closely and will take further action as
appropriate.
ENVIRONMENTAL, EMPLOYEE, SOCIAL AND COMMUNITY ISSUES
As an investment company without employees or physical
operations, the Company does not directly engage in activities that
impact the environment or the community. Although the Board has
delegated the responsibility for making individual investment
decisions to the Investment Manager, the Board is committed to
responsible investing practices and has encouraged the Investment
Manager to consider ESG best practices within its own organization,
and to actively engage with these issues with its portfolio
companies when appropriate.
The Company's investment objective is to generate long- term
capital appreciation commensurate with reasonable risk. It is a
crucial part of the risk assessment process for the Investment
Manager to evaluate the effect of ESG risks on our portfolio
companies.
The Investment Manager's approach to ESG issues is described in
the Investment Manager's Report. The Board is pleased to note that
nearly all of the Company's portfolio companies have integrated ESG
into their business practices, including by adopting environmental
stewardship programs, diversity & inclusion initiatives, and,
in some cases, aligning the remuneration of senior management to
ESG targets. In addition, the Investment Manager showed strong
commitment to diversity initiatives internally and in connection
with the PSTH offering. The longstanding participation of the
Investment Manager's CEO in charitable and community activities is
well documented at www.pershingsquarefoundation.org which supports
exceptional leaders and innovative organizations that tackle
important social issues and deliver scalable and sustainable
impact. The Board will continue to monitor the Investment Manager's
implementation of ESG initiatives over the course of 2021.
MODERN SLAVERY ACT 2015
Although the Company does not fall within the scope of the U.K.
Modern Slavery Act 2015, it has assessed its supply chains for
potential sources of modern slavery or human trafficking. The
Company has minimal contact with countries and sectors most likely
to have a risk of modern slavery or human trafficking. The
Company's major suppliers are providers of professional services,
including the Investment Manager, Administrator, auditor and other
legal and nancial advisors described in "Material Contracts". These
suppliers operate in the United States, United Kingdom, Western
Europe, and other countries that are generally regarded as low
risk. Prior to engaging a supplier with higher-risk attributes, the
Company will perform additional due diligence on the supplier's
employment practices to ensure that it is not engaged in modern
slavery or human trafficking.
SECTION 172(1) STATEMENT
The Directors have acted in the way they consider, in good
faith, would be most likely to promote the success of the Company
for the bene t of its members as a whole, having regard to its
stakeholders and matters set out in s172(1)(a-f) of the Companies
Act 2006, in the decisions taken during the year ended December 31,
2020 as described in this Report of the Directors.
The following are some examples of how the Directors have
discharged their section 172 duties during the year:
-- The Board has identi ed shareholders as key stakeholders and actively
sought to engage with them. As a closed-ended investment company, PSH has
no employees or operations, and its shareholders are both customers and
investors. The Board's approach to engagement with its stakeholders is
discussed further in "Relations with Shareholders".
-- The Board has maintained close relationships with its major suppliers of
services -- the Investment Manager, Administrator, auditor and its other
professional service providers. The Board carefully considered whether
the appointment of Northern Trust as Administrator was in the long-term
best interest of the Company and its stakeholders.
-- The Board has approved the issuance of the 2030 Bonds and the 2032 Bonds,
which allow the Company to responsibly manage and ladder the maturities
of its debt obligations at low interest rates, and which we believe, will
enhance the Company's returns over the long-term.
-- Additional share buyback programs authorized by the Board in April and
June 2020 have permitted the Company to repurchase a total of $159
million of PSH Public Shares at a discount to NAV of 32.5% for the bene t
of shareholders.
-- The appointment of Andrew Henton as a non-executive Director in September
2020 as part of the Board's long- term succession planning ensures a
smooth transition in connection with the anticipated departure of the
Chairman of the Audit Committee in 2021.
-- The Board instructed the Investment Manager to examine the role of the
Company's investment activities on the community and the environment. The
Manager's approach to ESG issues is discussed in the Investment Manager's
Report.
Further details regarding the processes by which the Board has
considered the requirements of 172(1) in its decision- making are
included in "The Board's Processes" in the Corporate Governance
Report.
SHAREHOLDER ENGAGEMENT
As the Company's shareholders are also its customers, the Board
recognizes the importance of soliciting shareholder feedback to
understand shareholders' issues and to address their concerns
regarding the Company. The Chairman has met regularly with
shareholders over the past several years, and the Chairman and
other Directors plan to continue this practice.
The Board regularly assesses the nature and quality of its and
the Investment Manager's engagement with shareholders. To ensure
the Board remains apprised of shareholder requests and feedback for
the Board, the Board and the Investment Manager have adopted
procedures governing interactions with shareholders. In addition,
Company announcements, other than routine or portfolio-related
announcements, are generally approved by the Chairman and the
Senior Independent Director prior to their release. The Board
receives quarterly updates from the Investment Manager regarding
investor contact during the quarter, which include, among other
items, a summary of common discussion topics, selected meeting
highlights, and metrics regarding the number, type, location and
investment timeframe of shareholders contacted.
To understand the views of the Company's key stakeholders, and
to assist the Board's consideration of shareholder interests, the
Investment Manager maintains regular contact with shareholders via
quarterly communications, including semi- annual investor calls and
letters to shareholders, the publication of weekly and monthly NAV
estimates, and on an ad-hoc basis when queries from shareholders
arise. In addition, a representative of the investor relations team
is present for the substantial majority of board discussions
regarding key decisions to be made by the Board.
The Board notes that during the course of 2020, the Investment
Manager was able to take advantage of the efficiency of connecting
with shareholders virtually and communicated with holders of a
majority of the Company's Public Shares representing a variety of
regions, types and investment strategies, including a number of the
Company's largest shareholders.
Jefferies acted as the corporate broker to the Company during
2020 to support communications with shareholders and advise the
Company on shareholder sentiment. Investor feedback from meetings
conducted by Jefferies is reported to the Board on a regular
basis.
In 2020, shareholders had the opportunity to meet the Directors
in person at the Company's investor meetings in London and New York
in February. A record number of shareholders, representing
approximately 47% of NAV (excluding affiliate ownership), attended
the Company's 2021 virtual investor event on February 18, 2021. On
a more formal basis, the Directors reported to shareholders
throughout the year with the publication of the annual and
semi-annual reports.
Shareholders may contact the Directors in writing at the
Company's registered office or by email at
PSHDirectors@ntrs.com.
GOING CONCERN
Risks associated with the Company's investment activities,
together with existing and emerging risks likely to affect its
future development, performance and position are set out in
Principal Risks and Uncertainties on pages 22-26 and in Note
13.
The Board has considered the nancial prospects of the Company
through April 30, 2022 and made an assessment of the Company's
ability to continue as a going concern. In assessing the going
concern status of the Company, the Directors have considered:
-- The Company's net assets attributable to all shareholders at December 31,
2020 of $9,052,536,502;
-- The liquidity of the Company's assets (at December 31, 2020, 85.8% of its
assets comprised of cash and cash equivalents and Level 1 assets); and
-- The Company's total indebtedness to total capital ratio of 18.8% at
December 31, 2020.
After making reasonable enquiries, and assessing all data
relating to the Company's liquidity, particularly its cash holdings
and Level 1 assets, the Directors and the Investment Manager
believe that the Company is well placed to manage its business
risks. Furthermore, the Directors con rm that they have a
reasonable expectation that the Company will continue to operate
and meet its liabilities as they fall due for the foreseeable
future and do not consider there to be any threat to the going
concern status of the Company. For these reasons, the Directors
have adopted the going concern basis in preparing the Financial
Statements.
VIABILITY STATEMENT
In accordance with Principle 33 of the Association of Investment
Companies ("AIC") Code, the Board has carefully considered the
existing and emerging risks set out in Principal Risks and
Uncertainties alongside the measures in place to mitigate those
risks -- both at the Investment Manager level and the Company level
-- and has determined that they are sufficient such that the risks
will not likely impair the long-term viability of the business. The
Board has made this assessment with respect to the upcoming
three-year period ending December 31, 2023.
The Board has also evaluated the sustainability of the Company's
business model, taking into account its investment objective,
sources of capital and strategy. The Board believes that the
Company's closed-ended structure and Investment Policy position it
to invest over the long-term, and provide the Company with the
exibility to meet its investment objectives in a variety of market
conditions. In particular, the Board notes the Investment Manager's
success at managing the effects of severe market disruptions due to
Covid-19 on the Company in the rst quarter of 2020, and the
Company's strong 2020 performance despite the Covid-19
pandemic.
The Board has also evaluated quantitative data as of December
31, 2020 including net assets attributable to shareholders, the
liquidity of the Company's assets, and the Company's total
liabilities, and has also considered projections of expected net
cash out ows for the next three years. The Board believes that a
three-year timeframe is appropriate given the general business
conditions affecting PSH's portfolio positions and the regulatory
environment in which PSH operates, which is undergoing constant
change. The Board is con dent that these projections can be relied
upon to form a conclusion as to the viability of the Company with a
reasonable degree of accuracy over the three-year timeframe.
On the basis of these projections and the considerations
described above, the Board has determined that the Company will
remain viable for the upcoming three-year period. This assessment
is conducted annually by the Board.
KEY INFORMATION DOCUMENT
The Company has prepared a standardized Key Information Document
("KID") conforming to the requirements of the EU Packaged Retail
and Insurance-Based Investment Products Regulation. The KID is
updated at least annually and is available at
www.pershingsquareholdings.com/company-documents.
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE
FINANCIAL STATEMENTS
The Directors are responsible for preparing the Report of the
Directors and the Financial Statements in accordance with
applicable laws and regulations. The Companies (Guernsey) Law, 2008
requires the Directors to prepare Financial Statements for each
nancial year, which give a true and fair view of the state of
affairs of the Company as at the end of the nancial year, and of
the pro t or loss of the Company for that year. In preparing those
Financial Statements, the Directors are required to:
-- Select suitable accounting policies and then apply them consistently;
-- Make judgements and estimates that are reasonable and prudent;
-- State whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the Financial
Statements; and
-- Prepare the Financial Statements on a going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
nancial position of the Company, and to enable them to ensure that
the Financial Statements comply with the Companies (Guernsey) Law,
2008, Protection of Investors (Bailiwick of Guernsey) Law, 1987,
the listing requirements of Euronext Amsterdam and the UK Listing
Authority, the Company's governing documents and applicable
regulations under English and Dutch law. They are also responsible
for safeguarding the assets of the Company and for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
Each of the Directors con rms to the best of her or his
knowledge and belief that:
-- the Financial Statements, prepared in accordance with the International
Financial Reporting Standards ("IFRS"), give a true and fair view of the
assets, liabilities, nancial position and pro t or loss of the Company;
and
-- the Annual Report includes a fair review of the development and
performance of the business and the position of the Company, together
with a description of the principal risks and uncertainties faced.
The Directors further con rm that they have complied with the
above requirements, and that this Annual Report and Financial
Statements, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Company's position and performance, business model and
strategy.
DISCLOSURE OF INFORMATION TO THE AUDITOR
So far as each of the Directors is aware, there is no
information relevant to the audit of which the Company's auditor is
unaware, and each has taken all steps he or she ought to have taken
as a Director to make himself or herself aware of any relevant
audit information and to establish that the Company's auditor is
aware of that information.
By order of the Board.
/s/ Anne Farlow /s/ Richard Battey
Anne Farlow Richard Battey
Chairman of the Board Chairman of the Audit Committee
March 29, 2021 March 29, 2021
Directors' Remuneration Report
The Board aims to compensate the Directors in a manner that
promotes the strategy and long-term success of the Company, and has
formed a Remuneration Committee to ensure that the Company
maintains fair and appropriate remuneration policies and controls.
The Remuneration Committee has been delegated responsibility for
determining the remuneration of the Chairman and recommending
remuneration for the non-executive Directors of the Company.
The Remuneration Committee consists of the independent Directors
of the Company who are not affiliated with the Investment Manager.
Mr Wohanka is the Chairman of the Remuneration Committee. The
Committee is encouraged to exercise independent judgment when
considering the remuneration of each Director.
The Directors, other than Mr Botta, are all independent
non-executive Directors. The Directors are the only officers of the
Company. Each Director has executed an appointment letter setting
forth his or her responsibilities. Copies of the Directors' letters
of appointment are available upon request from the Company
Secretary, and will be available for inspection at the Annual
General Meeting.
DIRECTOR REMUNERATION POLICY
The Directors shall be paid such remuneration for their services
as determined by the Board, save that, unless otherwise approved by
ordinary resolution, each Director's remuneration shall not exceed
GBP150,000 per annum, the limit set in the Company's Articles of
Incorporation. All of the Directors are entitled to be reimbursed
for all reasonable expenses properly incurred by them in attending
general meetings, board or committee meetings or otherwise in
connection with the performance of their duties. At the
recommendation of the Remuneration Committee, the Board has adopted
a travel and expense policy to ensure that business expenditures
are appropriate and are cost-effective.
The Committee, in making its recommendations, will take into
account the Company's and each Director's performance, the time
commitments and responsibilities of the Directors, the level of
skill and experience of each Director, overall market conditions,
remuneration paid by companies of similar size and complexity, and
any other factors the Committee determines are relevant. The
Committee may recommend that additional remuneration be paid, from
time to time, on a time spent basis to any one or more Directors in
the event such Director or Directors are requested by the Board to
perform extra or special services on behalf of the Company. The
Committee's review may not result in any changes to previous
recommendations to the Board.
Only Directors unaffiliated with the Investment Manager will
receive fees for their services. Directors are not eligible for
bonuses, share options, long-term incentive schemes or other
performance-related bene ts. No Director will be involved in
deciding their own remuneration.
The Company has undertaken, subject to certain limitations, to
indemnify each Director out of the assets and pro ts of the Company
against all actions, proceedings, costs, charges, expenses, losses,
damages or liabilities arising out of any claims made against them
in connection with the performance of their duties as a Director of
the Company.
All Directors are required to submit themselves to annual
re-election by shareholders at each annual general meeting in
accordance with the Articles of Incorporation of the Company. On
termination of the appointment, Directors shall only be entitled to
such fees as may have accrued to the date of termination, together
with reimbursement in the normal way of any expenses properly
incurred prior to that date. The Company does not pay any
remuneration to the Directors for loss of office.
ANNUAL REPORT ON REMUNERATION
Service Contracts Obligations and Payment on Loss of Office
No Director has a service contract with the Company and, as
such, no Director is entitled to compensation payments upon
termination of their appointment or loss of office.
Total Remuneration Paid to Each Director
The total remuneration of the Directors for the year ended
December 31, 2020 was:
2020 2019
Anne Farlow GBP75,000 GBP75,000
Richard Battey GBP55,000 GBP55,000
Nicholas Botta -- --
Bronwyn Curtis GBP50,000 GBP50,000
Andrew Henton(1) GBP13,587 --
William Scott(2) GBP15,797 GBP50,000
Richard Wohanka GBP50,000 GBP50,000
(1) Appointed September 23, 2020
(2) Retired on April 27, 2020
Ms Farlow and Mr Battey were paid higher fees to re ect the
additional responsibilities required of the Chairman of the Board
and of the Audit Committee. Mr Botta did not receive a fee for his
services as a Director.
All of the above remuneration relates to xed annual fees. There
are no pension arrangements in place for the Directors of the
Company. Accordingly, there were no other items in the nature of
remuneration, pension entitlements or incentive scheme arrangements
which were paid or accrued to the Directors during the year.
As the Directors' remuneration had remained unchanged since
2014, the Remuneration Committee collected and reviewed peer
remuneration data and consulted with a global leadership advisory
rm to develop a benchmark for the Directors' remuneration in 2021.
Its evaluation found that the Directors' remuneration should be
increased to re ect market comparatives and in consideration of the
Company's complex structure, unique regulatory requirements and
additional
Board meetings as compared to its peers. In addition, the
Committee recommended that the Chairman of the Board, the Senior
Independent Director and the Chairman of the Audit Committee be
paid a premium re ecting the increased workload of their respective
roles.
The Board has accepted the recommendation of the Remuneration
Committee and the Directors will receive the following remuneration
for 2021:
2021 Remuneration
Chairman of the Board GBP125,000
Chairman of the Audit Committee GBP75,000
Senior Independent Director GBP70,000
Non-Executive Directors GBP65,000
Following the Company's 2021 AGM, the Audit Committee's size
will be reduced to three members. Members of the Audit Committee
will receive additional remuneration of GBP5,000.
Directors' Shareholdings in the Company
Directors are not required under the Company's Articles of
Incorporation or letters of appointment to hold shares in the
Company. At December 31, 2020, the Directors' interests in the
Company were as follows:
Class of Shares Held Number of Shares
Anne Farlow Public Shares 15,139
Richard Battey Public Shares 4,000
Nicholas Botta Public Shares 2,065,822
Bronwyn Curtis Public Shares 7,400
Andrew Henton Public Shares 4,775
Richard Wohanka Public Shares 42,654
During the year ended December 31, 2020, Anne Farlow, Bronwyn
Curtis, Andrew Henton and Richard Wohanka purchased 5,000, 7,400,
4,775 and 26,350 Public Shares, respectively. Nicholas Botta
converted 1,726,083 Management Shares into 2,065,822 Public Shares
on December 31, 2020. There have been no changes in the interests
of the Directors between December 31, 2020 and the date of signing
of this report.
Corporate Governance Report
The Company is a member of the AIC and reports against the AIC
Code of Corporate Governance published in February 2019 (the "AIC
Code"). The AIC Code provides a framework of corporate governance
best practices for investment companies.
As an entity authorized and regulated by the Guernsey Financial
Services Commission (the "GFSC"), the Company is subject to the
GFSC's "Finance Sector Code of Corporate Governance" (the "Guernsey
Code"). By reason of the premium listing of the Public Shares on
the LSE, the Company is also required by the Listing Rules of the
Financial Conduct Authority to report on how it has applied the UK
Corporate Governance Code (the "UK Code"). The Company is deemed to
meet its reporting obligations under the Guernsey Code and the UK
Code by reporting against the AIC Code. The AIC Code addresses all
of the principles set out in the Guernsey Code and closely re ects
the UK Code. In addition, the AIC Code contains additional
principles and recommendations on issues that are of speci c
relevance to investment companies. Accordingly, the Board believes
that applying the AIC Code provides the appropriate corporate
governance framework for the Company and reporting for its
shareholders.
The AIC Code is available on the AIC's website,
www.theaic.co.uk. The UK Code is available on the UK Financial
Reporting Council's website, www.frc.org.uk.
The Company's compliance with the AIC Code is explained in this
Corporate Governance Report, the Report of the Directors, the
Directors' Remuneration Report and the Report of the Audit
Committee. Except as set forth in the Report of the Audit
Committee, the Company has complied with the principles and
recommendations of the AIC Code and the relevant provisions of the
UK Code.
The Board strongly believes that its focus on maintaining high
standards of corporate governance contributes to the Company's
success, as described throughout this report and the reports of its
committees. The Board is also pleased to report the following
enhancements to the Company's corporate governance:
-- The Board adopted terms of reference in February 2020 setting forth its
principal responsibilities, which are available on the Company's website.
-- The Board has established a Risk Committee and has appointed Mr Botta as
its Chairman. The Risk Committee had its rst meeting in July 2020.
-- The Board has adopted a travel and expense policy.
-- The Board has adopted procedures for the coordination of shareholder
interactions with the Investment Manager.
THE BOARD COMPOSITION AND DELEGATION OF FUNCTIONS AND
ACTIVITIES
The Board consists of six non-executive Directors, ve of whom
are independent. Mr Botta, as President of the Investment Manager,
is deemed not to be an independent Director of the Company. Ms
Farlow and Ms Curtis serve as Chairman and Senior Independent
Director of the Board, respectively. William Scott, who had served
as non-executive Director since 2012, retired on April 27, 2020.
Andrew Henton was appointed as a non-executive Director on
September 23, 2020.
The Company has no executive directors or employees, and has
engaged external parties to undertake the daily management,
operational and administrative activities of the Company. In
particular, the Directors have delegated the function of managing
the assets comprising the Company's portfolio to the Investment
Manager, which is not required to, and generally will not, submit
individual investment decisions for the approval of the Board. In
each case where the Board has delegated certain functions to an
external party, the delegation has been clearly documented in
contractual arrangements between the Company and the external
party. The Board retains accountability for the various functions
it delegates. Further information is provided in the Report of the
Audit Committee.
COMPANY CULTURE
While the Company does not have employees, the Board and the
Investment Manager believe that it is important to the Company's
success to promote a culture of high ethical and professional
values, engage in prudent risk management and utilize effective
control processes and systems. The Company has adopted an
investment policy, which describes the Company's investment
objective, the instruments in which the Company may invest and the
types of opportunities the Investment Manager seeks on the
Company's behalf. Risk management is integrated into the Investment
Manager's investment process and operations. The Investment Manager
creates strong operational systems by maintaining a robust
compliance function, continually seeking to enhance its
infrastructure and controls, and incentivizing personnel to
collaborate and act with professional integrity.
The Board periodically receives reports on the Investment
Manager's culture, and is exposed to the Investment Manager's
culture through its close contact with the Investment Manager's
management team and support personnel. The Board has been pleased
by the Investment Manager's focus on creating a culture that will
contribute to the success of the Company. The Board believes that
the Investment Manager's investments in operational infrastructure
and personnel has contributed to the Company's positive performance
during the Covid-19 pandemic.
DIVERSITY
The Board recognizes that Board diversity contributes to the
success of the Company by enhancing the Board's effectiveness
through good corporate governance. Furthermore, in accordance with
the AIC Code, the Board believes that Board diversity is an
important component of a Board that re ects the balance of skills,
experience, independence, opinions and knowledge appropriate for
the Company.
The Board is committed to appointing the best possible applicant
for any open Board positions, taking into account the composition
and needs of the Board at the time of the appointment. Subject to
the foregoing, it is the intention of the Board that Board members
include Directors of different backgrounds, races and genders with
different skills, knowledge and experience.
The Nomination Committee will be responsible for recommending
the appointment of new Directors to the Board. When evaluating
candidates, the Nomination Committee will give full consideration
to the skills, experience, knowledge, background, gender and race
of each candidate in the context of the composition of the current
Board (including the bene ts of gender and ethnic diversity), the
challenges and opportunities facing the Company and the balance of
skills, knowledge and experience needed for the Board to be
effective in the future. All candidates are considered on their
merits. Where appropriate, the Nomination Committee may retain
external search consultants to assist in securing a diverse pool of
candidates for open board positions.
The Board currently comprises two female and four male
Directors. The Board acknowledges the targets set by the
Hampton-Alexander and Parker Reviews for female and ethnic minority
board representation, respectively, and intends to maintain or
exceed such representation to the extent consistent with its aim
that the Board re ects the balance of skills, experience, length of
service and knowledge appropriate for the Company.
The Company and the Investment Manager have made progress in
increasing their diversity. The Board has recommended that
shareholders elect Tope Lawani and Tracy Palandjian as
non-executive Directors at the Company's upcoming Annual General
Meeting. The Investment Manager's last three analyst and last six
operational hires are from ethnic minority groups, and it has hired
a female analyst who will join its investment team later this year.
In addition, a majority of the co-managers for the 2030 Bonds were
female and minority-owned banks. The Investment Manager continues
to seek opportunities to do business with rms owned by
under-represented groups and to expand the diversity of candidates
it considers for future open positions. The Investment Manager has
formed a Diversity & Inclusion Committee to monitor its
progress in this area and provide further strategic direction as
appropriate.
BOARD TENURE AND SUCCESSION PLANNING
All Directors are required to submit themselves to annual
re-election by shareholders at each annual general meeting, and any
Director appointed in accordance with the Articles of Incorporation
will hold office only until the next following annual general
meeting, and will then stand for re-election. In accordance with
the AIC Code, if and when any Director, including the Chairman, has
been in office (or upon re- election would at the end of that term,
be in office) for more than nine years, the Board will consider
whether there is a risk that such Director might reasonably be
deemed to have lost independence through such long service. The
Board believes that this policy will provide for its regular
refreshment while allowing it the exibility to maintain the proper
balance of skills, experience and independence that will contribute
to the Company's success.
William Scott and Richard Battey joined the Company's Board at
inception in December 2012. As part of the Board's policy for its
regular refreshment, Mr Scott resigned as non-executive director on
April 27, 2020, and Mr Battey has decided not to offer himself for
re-election at the 2021 Annual General Meeting. Mr Wohanka, having
served as a non- executive director of the Company for three years,
has also decided not to offer himself for re-election at the 2021
Annual General Meeting due to other commitments.
Andrew Henton was appointed as a non-executive Director on
September 23, 2020. Mr Henton will replace Mr Battey as the
Chairman of the Audit Committee.
The Board has accepted the recommendation of the Nomination
Committee that it increase the size of the Board to seven
directors. Accordingly, following a thorough search process
conducted by the Nomination Committee, the Board has submitted Tope
Lawani, Rupert Morley, and Tracy Palandjian for shareholder
approval at the 2021 Annual General Meeting as independent
non-executive Directors of the Company.
Further details regarding the selection of Mr Henton and the
search process undertaken by the Nomination Committee are provided
under "Nomination Committee" on pages 45-46.
THE BOARD'S PROCESSES
The content and culture of board meetings are a critical means
by which the Board's governance contributes to the Company's
success. The Board meets regularly throughout the year, at least on
a quarterly basis. Board meetings prioritize open discussion and
debate. The Board's decision-making actively considers the likely
consequences of any decision in the long term, reputational risks
to the Company and the need to consider the interests of
shareholders' as a whole.
The Chairman maintains regular contact with the Investment
Manager to identify information that should be provided to the
Directors, and invites Director comments on meeting agendas. At the
beginning of every Board meeting, Directors disclose their
potential con icts, including ownership in the Company, interests
in the business to be transacted at the meeting, and potential
appointments to other public companies. The Chairman is actively
involved in all aspects of Board decision making, seeks input from
other Directors, and encourages their participation in matters
involving their expertise. Minutes of meetings re ect any
Director's concerns voiced at Board meetings.
At each quarterly Board meeting, the Board receives updates
regarding the Investment Manager's operations and investor
relations activities during the quarter. The Board also reviews the
Company's investments, share price performance, and the
premium/discount to NAV at which the Company's Public Shares are
trading, and receives an update on litigation and regulatory
matters. The Board conducts a comprehensive review of the Company's
expenses semi-annually.
In order to perform these reviews in an informed and effective
manner, the Board receives formal reports from the Investment
Manager at each quarterly Board meeting. The Board may also request
focused reports to review the Investment Manager's controls in
certain operational areas such as information security, regulatory
compliance or media relations, and may request enhanced operational
controls as appropriate. In between meetings, the Board maintains
regular contact with the Investment Manager, the Company Secretary
and the Administrator, and is informed in a timely manner of
investments and other matters relevant to the operation of the
Company that would be expected to be brought to the Board's
attention.
An induction program, including training and information about
the Company and the Investment Manager, is provided to Directors
upon their election or appointment to the Board. Each Director is
encouraged to consider their own training needs on an ongoing
basis, and the Chairman also assesses the individual training
requirements for each Director.
Directors, where necessary in the furtherance of their duties,
also have access to independent professional advice at the
Company's expense.
BOARD ATTANCE
All Board members are expected to attend each Board meeting and
to arrange their schedules accordingly, although non- attendance
may be unavoidable in certain circumstances. The following table
details the number of Board meetings attended by each Director in
the year ended December 31, 2020:
Scheduled Quarterly Ad-hoc Board and
Board Meetings Subcommittee Meetings
(attended/eligible) (attended/eligible)
Richard Battey 4/4 12/12
Nicholas Botta(1) 4/4 11/11
Bronwyn Curtis 4/4 11/11
Anne Farlow 4/4 12/12
Andrew Henton(2) 1/1 2/2
William Scott(3) 1/1 3/3
Richard Wohanka 4/4 11/11
(1) Mr Botta does not attend meetings as a Director where such attendance
may conflict with his interests as President and a partner in the
Investment Manager.
(2) Appointed September 23, 2020
(3) Retired on April 27, 2020
The Board meets formally four times a year. Ad-hoc Board
meetings may be convened at short notice to discuss time- sensitive
matters arising in between scheduled meetings and require a minimum
quorum of two Directors.
COMMITTEES OF THE BOARD
The Board has established an Audit Committee, a Remuneration
Committee, a Management Engagement Committee, a Nomination
Committee and a Risk Committee. Other than the Risk Committee, each
of the Committees is comprised of the independent Directors of the
Company who are not affiliated with the Investment Manager.
Audit Committee
Further details as to the composition and role of the Audit
Committee are provided in the Report of the Audit Committee.
Remuneration Committee
The Remuneration Committee reviews the remuneration of the
Company's Chairman and non-executive Directors and seeks to ensure
that the Company maintains fair and appropriate remuneration
policies and controls. Mr Wohanka is the Chairman of the
Remuneration Committee. Further details regarding the Directors'
remuneration are provided in the Directors' Remuneration
Report.
Renumeration Committee
Meetings (attended/eligible)
Richard Battey 2/2
Bronwyn Curtis 2/2
Anne Farlow 2/2
Andrew Henton(1) 1/1
Richard Wohanka 2/2
(1) Appointed September 23, 2020
The written terms of reference of the Remuneration Committee are
available on the Company's website or, on request, from the Company
Secretary.
Management Engagement Committee
The Management Engagement Committee reviews the performance of
the Investment Manager in the management of the Company's affairs
and the terms of engagement and performance of the Company's other
key service providers, and then reports and makes recommendations
to the full Board. Ms Curtis is the Chairman of the Management
Engagement Committee.
Management Engagement Committee
Meetings (attended/eligible)
Richard Battey 2/2
Bronwyn Curtis 2/2
Anne Farlow 2/2
Andrew Henton(1) 1/1
Richard Wohanka 2/2
1 Appointed September 23, 2020
The written terms of reference of the Management Engagement
Committee are available on the Company's website or, on request,
from the Company Secretary.
The Management Engagement Committee performed a formal review of
the Company's key service providers, including the Investment
Manager, in April 2020.
The Committee's review of the Investment Manager included a
discussion of, among other items, the Company's annual and
long-term investment performance, and shareholder feedback
regarding the Company's fee structure. The Committee noted the
Company's performance in 2019 and 2020 and the Investment Manager's
foresight in identifying Covid-19 as a material risk to the
portfolio in early 2020 and taking steps to mitigate potential
losses. Accordingly, the Committee recommended that the Board
continue to engage PSCM as the Investment Manager while monitoring
performance closely.
The Management Engagement Committee also reviewed the large
performance fee earned by the Investment Manager in 2020. The
Committee believes that competitive remuneration is critical to the
Investment Manager's ability to recruit and retain the personnel
who contribute to the long-term success of the Company. In addition
to fees paid by the Company, the Investment Manager has taken
separate steps, such as the implementation of a long-term equity
program, to retain key personnel.
The Committee noted that the performance fee was calculated in
accordance with the terms of the IMA which is further discussed in
"Signi cant Reporting Matters" in the Report of the Audit
Committee.
The Committee also reviewed the performance of and fees paid to
the Company's other key service providers and made recommendations
to the Board and the Investment Manager.
Nomination Committee
The Nomination Committee is responsible for reviewing the
structure, size and composition of the Board, succession planning
for Director departures and identifying and nominating suitable
candidates to ll vacancies, taking into account the challenges and
opportunities facing the Company and the skills, knowledge and
experience needed on the Board. The Nomination Committee, of which
Ms Farlow is the Chairman, reports its recommendations to the full
Board. In the event the Nomination Committee is considering the
matter of the succession to the chairmanship of the Board, another
member of the Committee will preside as Committee Chairman.
Nomination Committee Meetings
(attended/eligible)
Richard Battey 4/4
Bronwyn Curtis 4/4
Anne Farlow 4/4
Andrew Henton(1) 1/1
William Scott(2) 1/1
Richard Wohanka 3/3
(1) Appointed September 23, 2020
(2) Retired on April 27, 2020
The written terms of reference of the Nomination Committee are
available on the Company's website or, on request, from the Company
Secretary.
The Nomination Committee undertook a targeted search process to
identify Mr Henton as Mr Scott's replacement. The Nomination
Committee prioritized the need to prepare for Mr Battey's departure
and therefore determined that the new Director should be a
Guernsey-resident with the skills necessary to succeed Mr Battey as
Chairman of the Audit Committee. Given the speci c requirements for
the new director, the Committee concluded that the best candidates
could be identi ed by the Company's Guernsey-based service
providers, and therefore it was not necessary to engage an external
search consultant. Following a review of the recommended candidates
by a senior member of the Investment Manager, the Nomination
Committee reviewed a shortlist of candidates. After consideration
of the results of the interviews and the quali cations of these
candidates to chair the Audit Committee, Mr Henton was interviewed
by the remaining members of the Nomination Committee and Mr.
Ackman, and was appointed a non-executive Director by the Board on
September 23, 2020.
The Nomination Committee also reviewed the commitments of the
Directors to con rm that they continue to have sufficient time to
meet their responsibilities to the Company and that their other
commitments do not create any con icts of interest. While the
Committee believes that each Director has sufficient time to meet
their responsibilities to the Company, in light of the signi cant
increase in the number of ad-hoc/subcommittee meetings of the Board
and corporate actions in 2019 and 2020, the Committee recommended
that the Board increase its size to seven directors and reduce the
size of the Audit Committee to three members.
The Nomination Committee engaged Egon Zehnder, a global
leadership advisory rm with no other connection to the Company, to
identify a range of candidates to ll the Board vacancies . The
Committee also considered candidates proposed by members of the
Board and the Investment Manager. The Committee, noting the U.S.
focus of the Company's investments and the bene ts of expanding the
diversity of the Board, actively sought to identify candidates with
U.S. business experience and diverse ethnic backgrounds. Committee
members and representatives of the Investment Manager conducted
interviews with a number of highly quali ed candidates, of which
three were interviewed by the remaining members of the Committee.
Following this process, the Nomination Committee recommended that
the Board submit Tope Lawani, Rupert Morley, and Tracy Palandjian
for shareholder approval at the 2021 Annual General Meeting as
independent non-executive Directors of the Company.
To ensure that Directors continue to have sufficient time to be
effective contributors to the Company, Directors are limited in the
number and type of directorship appointments they may hold in
accordance with overboarding guidelines, and will seek the approval
of the Board prior to accepting new appointments. In considering
whether to grant approval, the Board will assess any impact the
appointment may have on the time the Director is able to devote to
the Company, any impact on the Director's independence, and
relevant guidelines on overboarding.
Risk Committee
A Risk Committee consisting of all the Directors of the Company
was established by the Board on February 11, 2020. Mr Botta is the
Chairman of the Risk Committee. The Risk Committee is responsible
for reviewing the Company's risk pro le, as described in the
Company's Investment Policy, borrowing policy and other risk
disclosures; identifying, evaluating and reporting to the Board any
emerging risks to the Company; ensuring that appropriate controls
and reporting are in place to allow for the identi cation,
monitoring and management of key risks to the Company's business;
conducting and submitting to the Board an annual assessment of the
material risks applicable to the Company's business; and making
recommendations to the Board regarding risk mitigation.
The written terms of reference of the Risk Committee are
available on the Company's website or, on request, from the Company
Secretary.
Risk Committee Meetings
(attended/eligible)
Richard Battey 2/2
Nicholas Botta 2/2
Bronwyn Curtis 2/2
Anne Farlow 2/2
Andrew Henton(1) 1/1
Richard Wohanka 2/2
(1) Appointed September 23, 2020
The Risk Committee conducted its annual business risk assessment
in November 2020 and identi ed 43 risks relevant to the Company's
business. These risks consist of risks arising from the Company's
investment activities, structure and operations as well as risks
relating to shareholder engagement and regulatory compliance.
The Risk Committee has considered the cause of each risk and has
assigned each risk a rating based on the likelihood of a risk
occurring and the severity of the impact on the Company if the risk
occurs before and after considering the controls in place to
mitigate them. Risks with the highest inherent risk or the highest
residual risk have been included in "Principal Risks and
Uncertainties".
The Risk Committee identi ed the effect of the Covid-19 pandemic
on the Company and risks relating to remote operations, such as
cybersecurity, service provider and culture concerns, as emerging
risks in 2020. It reviewed the controls of the Investment Manager
and the Administrator to address these risks and found them to be
appropriate.
COMMITTEES OF THE INVESTMENT MANAGER
The Investment Manager has a Con icts Committee, which meets no
less frequently than annually and on an as-needed basis; a Best
Execution and Cybersecurity Committees, which meet no less
frequently than quarterly and on an as-needed basis; and Valuation
and Disclosure Committees, which meet no less frequently than
semi-annually, and on an as-needed basis. The minutes from
Disclosure, Valuation and Con icts Committee meetings are presented
to the Board at the quarterly Board meetings, or sooner if
necessary.
BOARD PERFORMANCE
The performance of the Board and that of each individual
Director is evaluated annually.
The evaluation of the Board's performance in 2020 was performed
internally. Each Director completed a questionnaire assessment of
the effectiveness of the Board, its committees, the individual
directors and the policies and procedures observed by the Board and
its committees. The Chairman discussed matters related to
individual performance individually with each Director. The Senior
Independent Director conducted a full review of the Chairman's
performance with the other non- executive Directors.
The results were collated by the Company Secretary and were
presented to the Board by the Chairman. No material weaknesses in
performance were identi ed in the assessment, and the Board has
concluded that it operated effectively in 2020. The Board will use
the ndings of its assessment to further build on its existing
strengths in the coming year. The 2019 Board evaluation was
externally facilitated by SCT Consultants. The next external review
will be completed for 2022, or earlier as the Board deems
appropriate.
/s/ Anne Farlow
Anne Farlow
Chairman of the Board
March 29, 2021
Report of the Audit Committee
The Audit Committee consists of the independent Directors of the
Company. Mr Battey is the Chairman of the Audit Committee. As Ms
Farlow is an independent non-executive Director, the Directors
consider it appropriate for her to be a member of the Audit
Committee. In consideration of Mr Battey's and Mr Henton's
professional quali cations and service on the audit committees of
other investment companies, and the experience of the other Audit
Committee members in the nancial sector, the Board has determined
that the Audit Committee members have the relevant experience to
successfully perform the duties of the Committee.
From the date of the 2021 Annual General Meeting, Mr Henton will
become the Chairman of the Audit Committee, and the size of the
Committee will be reduced to three Directors.
All members of the Audit Committee are expected to attend each
Board and Audit Committee meeting and to arrange their schedules
accordingly, although non-attendance may be unavoidable in certain
circumstances. The following table details the number of formal
meetings attended by each Director in the year ended December 31,
2020:
Audit Committee Meetings
(attended/eligible)
Richard Battey 7/7
Bronwyn Curtis 7/7
Anne Farlow 7/7
Andrew Henton(1) 1/1
William Scott(2) 1/1
Richard Wohanka 7/7
(1) Appointed September 23, 2020
(2) Retired on April 27, 2020
The Audit Committee has written terms of reference with formally
delegated duties and responsibilities. The terms of reference of
the Audit Committee are available on the Company's website or, on
request, from the Company Secretary.
The Audit Committee considers the appointment, independence and
remuneration of the auditor and reviews the annual accounts and
semi-annual reports. Where non- audit services are to be provided
by the auditor, the Audit Committee reviews the scope and terms of
the engagement, and considers the nancial and other implications of
the engagement on the independence of the auditor.
The principal duties of the Audit Committee are to monitor the
integrity of the Financial Statements of the Company, including its
annual and semi-annual reports and formal announcements relating to
the Company's nancial performance, and reviewing and reporting to
the Board on signi cant nancial reporting issues and judgements
communicated to the Committee by the auditor. In particular, the
Audit Committee reviews and assesses, where necessary:
-- The consistency of, and any changes to, signi cant accounting policies
both on a year-on-year basis and across the Company;
-- The methods used to account for signi cant or unusual transactions where
different approaches are possible;
-- Whether the Company has followed appropriate accounting standards and
made appropriate estimates and judgements, taking into account the views
of the external auditor;
-- The clarity of disclosure in the Company's nancial reports and the
context in which statements are made;
-- All material information presented with the Financial Statements, such as
the Chairman's Statement, Investment Manager's Report, Principal Risks
and Uncertainties, Report of the Directors, Directors' Remuneration
Report and the Corporate Governance Report; and
-- The content of the Annual Report and Financial Statements, and advises
the Board on whether, taken as a whole, it is fair, balanced and
understandable and provides the information necessary for shareholders to
assess the Company's performance, business model and strategy.
PREPARATION OF FINANCIAL STATEMENTS
As part of the December 31, 2020 audit, prior to year-end, the
Audit Committee was involved in the planning and preparation for
the Annual Report, Financial Statements and the audit. The Audit
Committee's November 2020 meeting was devoted to discussing the
audit plan and timelines, including the extensive coordination
undertaken by the Investment Manager and the Company's new
Administrator to ensure an efficient audit process. In addition to
meetings of the Audit Committee during the audit, the Chairman of
the Board and the Chairman of the Audit Committee were in regular
contact with the Investment Manager, Administrator and auditor
throughout the audit process. From this contact, the Audit
Committee was able to consider the processes of the Investment
Manager and the Administrator in relation to the production of the
Financial Statements and determine that their processes were
appropriate.
The Audit Committee used its own experience with the Company and
the Investment Manager's, Administrator's and auditor's knowledge
to determine the overall fairness, balance and understandability of
the Annual Report and Financial Statements, and carefully reviewed
their content prior to nal approval by the Board. This allowed the
Audit Committee and the Board to be satis ed that the Annual Report
and Financial Statements taken as a whole is fair, balanced and
understandable.
SIGNIFICANT REPORTING MATTERS
As part of the year-end audit, the Audit Committee reviewed and
discussed the most relevant issues for the Company. In discharging
its responsibilities, the Audit Committee made the following
assessments during the year:
Given the large performance fee owed by the Company for 2020,
the Audit Committee reviewed the auditors' process for con rming
the Investment Manager's calculation of the performance fee and the
disclosure of the performance fee in Note 15. The Audit Committee
also noted that the performance fee is independently calculated by
the Company's Administrator as part of its calculation of the
Company's NAV, and that 1% of the total performance fee is held
back by the Company to account for adjustments, if any, that arise
from the Company's audit. The Audit Committee is satis ed with the
controls in place for the calculation of the performance fee and
has determined that the disclosure is consistent with the relevant
accounting standards.
The Audit Committee has con rmed that where the Investment
Manager has fair valued Level 3 assets, such as the Company's
investment in Pershing Square TH Sponsor, LLC and the Committed
Forward Purchase Units and Additional Forward Purchase Units (as de
ned in Note 14), the Investment Manager has obtained pricing from
an independent third-party pricing service/valuation agent. The
independent third-party pricing service/valuation agent utilizes
proprietary models to determine fair value. The Audit Committee
also reviewed the auditor's assessment of the appropriateness of
the valuation process and methodology. The Audit Committee has
satis ed itself that the valuation techniques are reasonable and
appropriate for the Company's investments, and are consistent with
the requirements of IFRS.
The Audit Committee reviewed the completeness and accuracy of
the disclosures in the Annual Report and Financial Statements, in
particular the disclosures regarding the effect of Covid-19 and
other emerging risks on the Company, and satis ed itself that the
disclosures appropriately re ected the risks facing the Company and
its nancial results.
The Audit Committee reviewed the report of the Risk Committee
and the Board's procedures regarding the identi cation, management,
and monitoring of risks that could affect the Company. The Audit
Committee is satis ed that the Risk Committee and the Board are
engaged on an ongoing basis in the process of identifying,
evaluating and managing (where possible) the principal risks facing
the Company as described in Principal Risks and Uncertainties on
pages 22-26. The Audit Committee also has access to personnel of
the Investment Manager responsible for implementing and maintaining
controls to address these risks.
The Audit Committee continues to monitor the review by the Board
of the Company's compliance with applicable regulations, listing
requirements and corporate governance standards.
Members of the Audit Committee met with the auditor a number of
times during the audit process and, after considering the audit
process and various discussions with the auditor, Investment
Manager and Administrator, are satis ed that the audit was
undertaken in an effective manner and addressed the main risks.
INTERNAL CONTROLS
The Audit Committee has examined the effectiveness of the
Company's internal control systems at managing the risks to which
the Company is exposed and has not identi ed any material
weaknesses.
The Board is ultimately responsible for the Company's system of
internal controls, and for assessing its effectiveness at managing
the operational risks to which the Company is exposed. The internal
control systems are designed to manage, rather than eliminate, the
operational risk of failure to achieve business objectives, and by
their nature can only provide reasonable and not absolute assurance
against misstatement and loss. The Board con rms there is an
ongoing process for identifying, evaluating and managing the signi
cant operational risks faced by the Company, and that this process
has been in place for the year ended December 31, 2020, and up to
the date of the approval of the Annual Report and Financial
Statements. This is done in accordance with relevant best practices
detailed in the Financial Reporting Council's guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting.
The Risk Committee, at the direction of the Board, conducts an
annual risk assessment to identify the material risks applicable to
the Company's business, the likelihood of a risk occurring, and the
severity of the impact on the Company, and reviews the controls and
reporting in place to monitor and mitigate these risks. De ciencies
and recommendations are provided to the Board. The Investment
Manager's operational controls are reviewed by the Board as part of
an operational update provided by the Investment Manager at each
quarterly Board meeting.
Neither the Company nor the Investment Manager have an internal
audit department. All of the Company's management functions are
delegated to independent third parties, and the Board therefore
believes that an internal audit function for the Company is not
necessary or required. The Board, and where appropriate the
Investment Manager, has familiarized itself with the internal
control systems of its material service providers, which report
regularly to the Board. The Board is satis ed that the controls
employed by these service providers adequately manage the
operational risks to which the Company is exposed.
AUDITOR
It is the duty of the Audit Committee, among other things,
to:
-- Consider and make recommendations to the Board in respect of the
Company's external auditor that are to be approved by shareholders at the
Annual General Meeting;
-- Discuss and agree with the external auditor the nature and scope of the
audit;
-- Keep under review the scope, results and cost effectiveness of the audit
and the independence and objectivity of the auditor; and
-- Review the external auditor's letter of engagement, audit plan and
management letter.
Ernst & Young LLP has been appointed to provide audit
services to the Company, and has acted as the Company's auditor
since it was appointed to audit the Company's rst Financial
Statements, for the period ended December 31, 2012. A resolution to
re-appoint Ernst & Young LLP as auditor will be proposed at the
2021 Annual General Meeting. In recognition of the auditor's long
tenure, the Audit Committee intends to put the audit services
contract out to tender no later than for the period ending December
31, 2022.
The Audit Committee reviewed the scope of the audit and the fee
proposal set out by the auditor in its audit planning report and
discussed these with the auditor at the Audit Committee meeting
held on November 5, 2020. The Company regularly undertakes market
surveys of auditors' fees and has found its auditor's fees to be in
line with the market. The Audit Committee recommended to the Board
that it accept the auditor's proposed fee of $224,000 (2019 Actual:
$176,000) for the audit of the Annual Report and Financial
Statements. The Audit Committee notes that the increase in the 2020
fee is attributable to the additional audit work undertaken in
relation to the Company's investment in Pershing Square Tontine
Holdings, Ltd. During the year ended December 31, 2020, the Company
also paid $66,000 (2019: $55,000) for fees related to the
semi-annual review.
The table below summarizes the amounts expensed for other
non-audit services during the years ended December 31, 2020 and
December 31, 2019.
Year Ended 2020 Year Ended 2019
Tax Services $ 86,034 $ 57,563
Other Services(1) 192,749 --
Total Non-Audit Fees $ 278,783 $ 57,563
(1) Ernst & Young LLP was engaged to provide a comfort letter relating to
the nancial information of the Company in the offering memorandum for the
2030 Bonds.
The Audit Committee understands the importance of auditor
independence. Each year, the Audit Committee reviews the scope and
results of the audit, its cost effectiveness, and the independence
and objectivity of the external auditor. As part of this review,
the Audit Committee receives a report from the external auditor con
rming its independence and the controls it has in place to ensure
its independence is not compromised.
In addition, any engagement of the auditor to provide non- audit
services to the Company must receive the prior approval of the
Audit Committee. In considering whether to approve such engagement,
the Audit Committee assesses (i) the nature of the non-audit
service and whether the auditor is the most appropriate party to
provide such service; (ii) the proposed fee for the service and
whether it is reasonable; and (iii) whether the engagement will
constitute a threat to the objectivity and independence of the
conduct of the audit. The Audit Committee may take into account the
expertise of the auditor, the potential time and cost savings to
the Company, and any other factors it believes relevant to its
determination.
The auditor was engaged to provide non-audit services to the
Company in connection with the issuance of the 2030 Bonds,
including a comfort letter for 2017, 2018 and 2019 nancial
statements and the 2020 unaudited semi-annual nancial statements
included in the offering documentation. Prior to approving the
engagement, the Audit Committee con rmed that no rm other than the
auditor could provide the services in the expedited timetable
required for the bond issuance. Furthermore, because of the
auditor's prior audit of these nancial statements and expertise in
the matters for which it was engaged, the auditor was able to
perform the non- audit services more efficiently than another
accounting rm, resulting in substantial cost savings to the
Company. The Audit Committee has reviewed the fees paid for the
non-audit services. The Audit Committee does not consider the fees
to be excessive or a threat to the objectivity and independence of
the conduct of the audit and considers Ernst & Young LLP to be
independent of the Company.
To ful ll its responsibility regarding the independence of the
external auditor, the Audit Committee considers:
-- discussions with or reports from the external auditor describing its
arrangements to identify, report and manage any con icts of interest; and
-- the nature of non-audit services provided by the external auditor.
To assess the effectiveness of the external auditor, the Audit
Committee reviews:
-- the external auditor's ful llment of the agreed audit plan and variations
from it;
-- discussions or reports highlighting the major issues that arose during
the course of the audit; and
-- feedback from other service providers evaluating the performance of the
audit team.
The Audit Committee is satis ed with Ernst & Young LLP's
effectiveness and independence as external auditor having
considered the degree of diligence and professional skepticism
demonstrated by them, and has also considered the Financial
Reporting Council's Audit Quality Review of Ernst & Young LLP's
previous audit work.
Having carried out the review described above, and having satis
ed itself that the external auditor remains independent and
effective, the Audit Committee has recommended to the Board that
Ernst & Young LLP be reappointed as external auditor for the
year ending December 31, 2021.
Shareholders should note that the primary framework for the
Company's audit is International Standards on Auditing (UK); the
auditor's report thereunder is set out on pages 53-59. The Annual
Report also includes on page 60 a report from the auditor to the
Directors in accordance with U.S. Generally Accepted Auditing
Standards in order to satisfy various U.S. regulatory
requirements.
/s/ Richard Battey
Richard Battey
Chairman of the Audit Committee
March 29, 2021
Report of Independent Auditor
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF PERSHING SQUARE
HOLDINGS, LTD.
Opinion
We have audited the Financial Statements of Pershing Square
Holdings, Ltd. (the "Company") for the year ended 31 December 2020
which comprise the Statement of Financial Position, the Statement
of Comprehensive Income, the Statement of Changes in Net Assets
Attributable to Management Shareholders, the Statement of Changes
in Equity, the Statement of Cash Flows and the related notes 1 to
20, including a summary of signi cant accounting policies. The
nancial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting
Standards as adopted by the European Union ("IFRS").
In our opinion, the Financial Statements:
-- give a true and fair view of the state of the Company's affairs as at 31
December 2020 and of its pro t for the year then ended;
-- have been properly prepared in accordance with IFRS; and
-- have been properly prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
Basis for Opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor's responsibilities for the audit of the Financial
Statements section of our report below. We are independent of the
Company in accordance with the ethical requirements that are
relevant to our audit of the Financial Statements, including the UK
FRC's Ethical Standard as applied to listed entities, and we have
ful lled our other ethical responsibilities in accordance with
these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Conclusions Relating to Going Concern
In auditing the Financial Statements, we have concluded that the
Directors' use of the going concern basis of accounting in the
preparation of the Financial Statements is appropriate. Our
evaluation of the Directors' assessment of the Company's ability to
continue to adopt the going concern basis of accounting
included;
-- Con rming our understanding of the Investment Manager's going concern
assessment process by engaging with the Investment Manager early in the
audit process to ensure all key factors were considered in its
assessment;
-- Obtaining the Investment Manager's going concern assessment which
comprised a cash ow forecast and loan covenant reverse stress test,
acknowledging the liquidity of the investment portfolio, the signi cant
net asset position and cash balances which are signi cantly in excess of
current liabilities, and testing for arithmetical accuracy;
-- We challenged the appropriateness of Investment Manager's forecasts by
applying downside sensitivity analysis and applying further sensitivities
to understand the impact on the liquidity of the Company;
-- Holding discussions with the Investment Manager and the Board on whether
events or conditions exist that, individually or collectively, may cast
signi cant doubt on the Company's ability to continue as a going concern;
-- Assessing the assumptions used in the going concern assessment prepared
by the Investment Manager and considering whether the methods utilised
were appropriate for the Company;
-- Reading the going concern disclosures included in the Annual Report and
Financial Statements in order to assess that the disclosures were
appropriate and in conformity with the reporting standards.
Based on the work we have performed, we have not identi ed any
material uncertainties relating to events or conditions that,
individually or collectively, may cast signi cant doubt on the
Company's ability to continue as a going concern up to 31 December
2023.
-- In relation to the Company's reporting on how they have applied the UK
Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the Directors' statement in the Financial
Statements about whether the Directors considered it appropriate to adopt
the going concern basis of accounting;
-- Our responsibilities and the responsibilities of the Directors with
respect to going concern are described in the relevant sections of this
report. However, because not all future events or conditions can be
predicted, this statement is not a guarantee as to the Company's ability
to continue as a going concern.
Overview of Our Audit Approach
Key audit matters Misstatement of the valuation of the Company's
investments
Materiality Overall materiality of $90.5m which represents 1% of
Total Equity.
An Overview of the Scope of our Audit
Tailoring The Scope
Our assessment of audit risk, our evaluation of materiality and
our allocation of performance materiality determine our audit scope
for the Company. This enables us to form an opinion on the
Financial Statements. We take into account size, risk pro le, the
organisation of the Company and effectiveness of controls,
including controls and changes in the business environment when
assessing the level of work to be performed. All audit work was
performed directly by the audit engagement team.
Key Audit Matters
Key audit matters are those matters that, in our professional
judgement, were of most signi cance in our audit of the Financial
Statements of the current period and include the most signi cant
assessed risks of material misstatement (whether or not due to
fraud) that we identi ed. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters were addressed in the context of our
audit of the Financial Statements as a whole, and in our opinion
thereon, and we do not provide a separate opinion on these
matters.
Risk Our response to the risk Key observations
communicated to the Audit
Committee
Misstatement of the Updated our We con rmed that there
valuation of the understanding of the were no material
Company's investments investment valuation instances of use of
(2020 -- assets: $9,697.0 process, performed a inappropriate policies or
million and liabilities: walkthrough of the methodologies and that
$573.6 million; 2019 -- investment valuation the valuation of the
assets: $5,865.2 million class of transactions investments was not
and liabilities: $7.6 and evaluated the design materially misstated.
million) of controls in this
area.
Refer to the Audit In conjunction with our We also con rmed that
Committee Report (pages internal valuation there were no material
48-52); Accounting specialists we assessed matters arising from our
policies (pages 68-72); the reasonableness and audit work on the
and Note 7 of the appropriateness of the valuation of nancial
Financial Statements valuation model/method, instruments, in
(pages 76-80) comparing these to our accordance with IFRS,
understanding of market that we wanted to bring
practices, and to the attention of the
determined whether signi Audit Committee.
cant assumptions used to
estimate fair value are
appropriate and
supported.
The fair value of the For options, forwards
investment portfolio may and swaps, we instructed
be misstated due to the our internal valuation
application of specialists to assist
inappropriate the audit team by
methodologies or inputs independently valuing a
to the valuations. sample of positions. We
compared their values to
the Company's
valuations, assessing
differences with
reference to our
Reporting Threshold.
The valuation of the For level 3 investments
Company's investments is we obtained management's
a key driver of the models, as well as those
Company's net asset value of their independent
and total return. valuation agents, and
Investment valuation instructed our own
could have a signi cant internal specialists to
impact on the net asset assist the audit team in
value of the Company and challenging the
the total return methodologies and
generated for subjective estimates
shareholders. therein.
There has been no change Identi ed the key
in this risk from the unobservable inputs to
previous year. valuations and reviewed
and assessed the
reasonableness of the
sensitivity workings and
disclosures, comparing
against our range of
acceptable inputs.
Vouched valuation inputs
that do not require
specialist knowledge to
independent sources and
tested the arithmetical
accuracy of the
Company's calculations.
The audit team also
considered the
credentials and quali
cations of management's
independent valuation
agents.
Obtained values for all
remaining quoted
equities from
independent sources and
agreed these to the
client proposed values.
Assessed whether the
valuation determined is
in accordance with IFRS
by comparing the
valuation methodology to
the requirements of IFRS
13.
Our Application of Materiality
We apply the concept of materiality in planning and performing
the audit, in evaluating the effect of identi ed misstatements on
the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually
or in the aggregate, could reasonably be expected to in uence the
economic decisions of the users of the Financial Statements.
Materiality provides a basis for determining the nature and extent
of our audit procedures.
We determined materiality for the Company to be $90.5 million
(2019: $55.7 million), which is 1% (2019: 1%) of Total Equity. We
believe that Total Equity provides us with the best measure of
materiality as the Company's primary performance measures for
internal and external reporting are based on Total Equity.
During the course of our audit, we reassessed initial
materiality and updated its calculation to align with the year- end
Total Equity gure.
Performance Materiality
The application of materiality at the individual account or
balance level. It is set at an amount to reduce to an appropriately
low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our
assessment of the Company's overall control environment, our
judgement was that performance materiality was 75% (2019: 75%) of
our planning materiality, namely $67.9 million (2019: $41.8
million). We have set performance materiality at this percentage
due to our past experience of the audit that indicates a lower risk
of misstatements, both corrected and uncorrected. Our objective in
adopting this approach was to ensure that total uncorrected and
undetected audit differences in the Financial Statements did not
exceed our materiality level.
Reporting Threshold
An amount below which identi ed misstatements are considered as
being clearly trivial.
We agreed with the Audit Committee that we would report to them
all uncorrected audit differences in excess of $4.5 million (2019:
$2.8 million), which is set at 5% of planning materiality, as well
as differences below that threshold that, in our view, warranted
reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the
quantitative measures of materiality discussed above and in light
of other relevant qualitative considerations in forming our
opinion.
Other Information
The other information comprises the information included in the
Annual Report, other than the Financial Statements and our
auditor's report thereon. The Directors are responsible for the
other information.
Our opinion on the Financial Statements does not cover the other
information and, except to the extent otherwise explicitly stated
in this report, we do not express any form of assurance conclusion
thereon.
Our responsibility is to read the other information and, in
doing so, consider whether the other information is materially
inconsistent with the Financial Statements or our knowledge
obtained in the course of the audit or otherwise appears to be
materially misstated. If we identify such material inconsistencies
or apparent material misstatements, we are required to determine
whether there is a material misstatement in the Financial
Statements themselves. If, based on the work we have performed, we
conclude that there is a material misstatement of the other
information, we are required to report that fact.
We have nothing to report in this regard.
Matters on Which We Are Required to Report by Exception
We have nothing to report in respect of the following matters in
relation to which the Companies (Guernsey) Law, 2008 requires us to
report to you if, in our opinion:
-- proper accounting records have not been kept by the Company, or proper
returns adequate for our audit have not been received from branches not
visited by us; or
-- the Financial Statements are not in agreement with the Company's
accounting records and returns; or
-- we have not received all the information and explanations we require for
our audit.
Corporate Governance Statement
The Listing Rules require us to review the Directors' statement
in relation to going concern, longer-term viability and that part
of the Corporate Governance Statement relating to the Company's
compliance with the provisions of the UK Corporate Governance Code
speci ed for our review.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the Financial
Statements or our knowledge obtained during the audit:
-- Directors' statement with regards to the appropriateness of adopting the
going concern basis of accounting and any material uncertainties identi
ed, set out on page 36;
-- Directors' explanation as to its assessment of the Company's prospects,
the period this assessment covers and why the period is appropriate, set
out on pages 36-37;
-- Directors' statement on fair, balanced and understandable Financial
Statements, set out on page 37;
-- Board's con rmation that it has carried out a robust assessment of the
emerging and principal risks, set out on page 46;
-- The section of the Annual Report that describes the review of
effectiveness of risk management and internal control systems, set out on
page 50; and
-- The section describing the work of the audit committee, set out on pages
48-52.
Responsibilities of Directors
As explained more fully in the Directors' responsibilities
statement set out on page 37, the Directors are responsible for the
preparation of the Financial Statements, and for being satis ed
that they give a true and fair view, and for such internal controls
as the Directors determine is necessary to enable the preparation
of Financial Statements that are free from material misstatement,
whether due to fraud or error.
In preparing the Financial Statements, the Directors are
responsible for assessing the Company's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Company or to cease
operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the Audit of the Financial
Statements
Our objectives are to obtain reasonable assurance about whether
the Financial Statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to in uence the
economic decisions of users taken on the basis of these Financial
Statements.
Explanation as to what extent the audit was considered capable
of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-
compliance with laws and regulations. We design procedures in line
with our responsibilities, outlined above, to detect
irregularities, including fraud. The risk of not detecting a
material misstatement due to fraud is higher than the risk of not
detecting one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery or intentional
misrepresentations, or through collusion. The extent to which our
procedures are capable of detecting irregularities, including fraud
is detailed below.
However, the primary responsibility for the prevention and
detection of fraud rests with both those charged with governance of
the Company and the Investment Manager. Our approach was as
follows:
-- We obtained an understanding of the legal and regulatory frameworks that
are applicable to the Company and determined that the most signi cant are
the Companies (Guernsey) Law, 2008, the 2018 UK Corporate Governance Code
and the listing requirements of Euronext Amsterdam and the UK Listing
Authority.
-- We understood how the Company is complying with those frameworks by
making enquiries of the Investment Manager and those charged with
governance regarding:
-- their knowledge of any non-compliance or potential non- compliance
with laws and regulations that could affect the Financial
Statements;
-- the Company's methods of enforcing and monitoring non-compliance
with such policies;
-- management's process for identifying and responding to fraud risks,
including programs and controls the Company has established to
address risks identi ed by the entity, or that otherwise prevent,
deter and detect fraud; and
-- how management monitors those programs and controls.
-- Administration and maintenance of the Company's books and records is
performed by Northern Trust International Fund Administration Services
(Guernsey) Limited whom are a regulated rm, independent of the Investment
Manager. We corroborated our enquiries through our review of Board
minutes and any correspondence received from regulatory bodies. We also
obtained their SOC1 controls report and reviewed it for ndings relevant
to the Company. We noted no contradictory evidence during these
procedures. For the period up to 31 July 2020, the books and records were
maintained by Morgan Stanley Fund Services Inc ("MSFS"). The same
procedures, as described above were performed in connection with MSFS for
that period with no contradictory evidence noted.
-- We assessed the susceptibility of the Company's Financial Statements to
material misstatement, including how fraud might occur by:
-- obtaining an understanding of entity-level controls and
considering the in uence of the control environment;
-- obtaining management's assessment of fraud risks including an
understanding of the nature, extent and frequency of such
assessment documented in the Board's risk matrix;
-- making inquiries with those charged with governance as to how they
exercise oversight of management's processes for identifying and
responding to fraud risks and the controls established by
management to mitigate speci cally those risks the entity has
identi ed, or that otherwise help to prevent, deter and detect
fraud;
-- making inquiries with management and those charged with governance
regarding how they identify related parties including
circumstances related to the existence of a related party with
dominant in uence; and
-- making inquiries with management and those charged with governance
regarding their knowledge of any actual or suspected fraud or
allegations of fraudulent nancial reporting affecting the Company.
-- Based on this understanding, we designed our audit procedures to identify
non-compliance with such laws and regulations identi ed above. Our
procedures involved a review of Board minutes and inquiries of the
Investment Manager and those charged with governance including:
-- Through discussion, gaining an understanding of how those charged
with governance, the Investment Manager and Administrator identify
instances of non-compliance by the Company with relevant laws and
regulations;
-- Inspecting the relevant policies, processes and procedures to
further our understanding;
-- Reviewing Board minutes and internal compliance reporting;
-- Inspecting correspondence with regulators; and
-- Obtaining relevant written representations from the Board of
Directors.
A further description of our responsibilities for the audit of
the Financial Statements is located on the Financial Reporting
Council's website at www.frc.org.uk/auditorsresponsibilities. This
description forms part of our auditor's report.
Use of Report
This report is made solely to the Company's members, as a body,
in accordance with Section 262 of The Companies (Guernsey) Law,
2008. Our audit work has been undertaken so that we might state to
the Company's members those matters we are required to state to
them in an auditor's report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's
members as a body, for our audit work, for this report, or for the
opinions we have formed.
/s/ Christopher James Matthews
Christopher James Matthews, FCA
For and on behalf of Ernst & Young LLP Guernsey
March 29, 2021
(1) The maintenance and integrity of the Pershing Square Holdings, Ltd.
website is the responsibility of the Directors; the work carried out by the
auditors does not involve consideration of these matters and, accordingly, the
auditors accept no responsibility for any changes that may have occurred to
the Financial Statements since they were initially presented on the website.
(2) Legislation in Guernsey governing the preparation and dissemination of
Financial Statements may differ from legislation in other jurisdictions.
INDEPENT AUDITOR'S REPORT TO THE DIRECTORS OF PERSHING SQUARE
HOLDINGS, LTD.
We have audited the accompanying Financial Statements of the
Company, which comprise the Statement of Financial Position as of
December 31, 2020, and the related Statement of Comprehensive
Income, Statement of Changes in Net Assets Attributable to
Management Shareholders, Statement of Changes in Equity and
Statement of Cash Flows for the year then ended, and the related
notes to the Financial Statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair
presentation of these Financial Statements in conformity with
International Financial Reporting Standards. This includes the
design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of Financial
Statements that are free of material misstatement, whether due to
fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these Financial
Statements based on our audit. We conducted our audit in accordance
with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the Financial
Statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the Financial Statements. The
procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the Financial
Statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
Company's preparation and fair presentation of the Financial
Statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control.
Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of signi cant accounting estimates made by
management, as well as evaluating the overall presentation of the
Financial Statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the Financial Statements referred to above
present fairly, in all material respects, the nancial position of
Pershing Square Holdings, Ltd. at December 31, 2020, and the
results of its operations, changes in net assets attributable to
management shareholders and equity, and its cash ows for the year
then ended, in conformity with International Financial Reporting
Standards.
Supplementary Information
Our audit was conducted for the purpose of forming an opinion on
the Financial Statements as a whole. The accompanying Supplemental
U.S. GAAP Disclosures and Certain Regulatory Disclosures are
presented for the purposes of additional analysis and are not a
required part of the Financial Statements. Such information is the
responsibility of management and was derived from and relates
directly to the underlying accounting and other records used to
prepare the Financial Statements. The information has been
subjected to the auditing procedures applied in the audit of the
Financial Statements and certain additional procedures, including
comparing and reconciling such information directly to the
underlying accounting and other records used to prepare the
Financial Statements or to the Financial Statements themselves, and
other additional procedures in accordance with auditing standards
generally accepted in the United States of America. In our opinion,
the information is fairly stated, in all material respects, in
relation to the Financial Statements as a whole.
/s/ Ernst & Young LLP
Ernst & Young LLP
Guernsey
March 29, 2021
Audited Financial Statements
STATEMENT OF FINANCIAL POSITION
As of December 31, 2020
and December 31, 2019
(Stated in United States
Dollars) Notes 2020 2019
Assets Cash and cash
equivalents 10 $ 1,879,639,109 $ 1,222,846,586
Due from brokers 13 955,676,624 114,975,502
Trade and other
receivables 9 8,865,622 7,124,045
Financial assets at fair
value through pro t or
loss
Investments in securities 6 9,093,461,819 5,734,336,025
Derivative nancial
instruments 6, 8 603,563,999 130,860,803
Total Assets $ 12,541,207,173 $ 7,210,142,961
Liabilities
Due to brokers 13 $ 46,004,594 $ --
Trade and other payables 9 693,840,621 45,497,324
Deferred tax expense
payable 19 52,446,850 13,508,846
Financial liabilities at
fair value through pro t
or loss
Derivative nancial
instruments 6, 8 573,590,762 7,607,415
Bonds 18 2,122,787,844 1,422,883,554
Liabilities excluding net
assets attributable to
management shareholders 3,488,670,671 1,489,497,139
Net assets attributable
to management
shareholders(1) 11 -- 152,364,909
Total Liabilities $ 3,488,670,671 $ 1,641,862,048
Equity
Share capital 11 $ 5,722,349,692 $ 5,568,360,539
Treasury shares 11 (242,956,239) (80,153,606)
Retained earnings 3,573,143,049 80,073,980
Total Equity(2) 9,052,536,502 5,568,280,913
Total Liabilities and
Equity $ 12,541,207,173 $ 7,210,142,961
Net assets attributable
to Public Shares $ 9,052,247,442 $ 5,568,109,388
Public Shares outstanding 199,120,882 206,677,784
Net assets per Public
Share $ 45.46 $ 26.94
Net assets attributable
to Management Shares $ -- $ 152,364,909
Management Shares
outstanding -- 5,160,225
Net assets per Management
Share $ -- $ 29.53
Net assets attributable
to Special Voting Share $ 289,060 $ 171,525
Special Voting Share
outstanding 1 1
Net assets per Special
Voting Share $ 289,060.26 $ 171,524.95
(1) Net assets attributable to management shareholders are comprised of the
aggregate net asset values of all Management Shares as of December 31, 2019.
On December 31, 2020, all outstanding Management Shares were converted to
Public Shares. See Note 11 for further discussion. (2) Total equity of the
Company is comprised of the aggregate net asset values of all Public Shares
and the Special Voting Share as of December 31, 2020 and December 31, 2019.
The accompanying notes form an integral part of these Financial Statements.
These Financial Statements on pages 61-102 were approved by the
Board of Directors on March 29, 2021, and were signed on its behalf
by
/s/ Anne Farlow /s/ Richard Battey
Anne Farlow Richard Battey
Chairman of the Board Chairman of the Audit Committee
March 29, 2021 March 29, 2021
STATEMENT OF COMPREHENSIVE INCOME
For the years ended December
31, 2020 and December 31, 2019
(Stated in United States
Dollars)
Notes 2020 2019
Investment gains and losses
Net gain/(loss) on nancial
assets and liabilities at fair
value through pro t or loss $ 2,512,130,911 $ 2,274,474,001
Net realized gain/(loss) on
commodity interests (net of
brokerage commissions and
other related fees of (2020:
$1,305,482, 2019: $521,138)) 2,057,091,477 (1,732,785)
Net change in unrealized
gain/(loss) on commodity
interests (8,908,581) --
6 4,560,313,807 2,272,741,216
Income
Dividend income 84,418,343 84,148,405
Interest income 12 1,062,148 3,033,126
85,480,491 87,181,531
Expenses
Performance fees 15 (695,694,558) (38,979,640)
Management fees 15 (95,794,204) (64,422,781)
Interest expense 12 (83,482,818) (66,384,642)
Professional fees (9,186,732) (7,314,830)
Other expenses (2,028,302) (1,526,381)
(886,186,614) (178,628,274)
Pro t/(loss) before tax
attributable to equity and
management shareholders 3,759,607,684 2,181,294,473
Withholding tax (dividends) (21,794,811) (18,714,011)
Deferred tax expense 19 (38,938,005) (13,508,846)
Pro t/(loss) attributable to
equity and management
shareholders 3,698,874,868 2,149,071,616
Amounts attributable to
management shareholders 127,038,913 51,430,312
Pro t/(loss) attributable to
equity shareholders(1) $ 3,571,835,955 $ 2,097,641,304
Earnings per share (basic &
diluted)(2)
Public Shares 17 $ 18.12 $ 9.78
Special Voting Share 17 $ 115,896.15 $ 61,933.12
All the items in the above statement are derived from continuing operations.
There is no other comprehensive income for the years ended 2020 and 2019.
(1) Profit/(loss) attributable to equity shareholders is comprised of the net
profits earned and losses incurred by shareholders of Public Shares and the
Special Voting Share.
(2) EPS is calculated using the profit/(loss) for the year attributable to
equity shareholders divided by the weighted average shares outstanding over
the full years of 2020 and 2019 as required under IFRS. See Note 17 for
further details.
The accompanying notes form an integral part of these Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
ATTRIBUTABLE TO MANAGEMENT SHAREHOLDERS
For the years ended December 31, 2020 and December 31,
2019 (Stated in United States Dollars)
Net Assets
Attributable to
Management
Shareholders
As of December 31, 2019 $ 152,364,909
Total pro t/(loss) attributable to management shareholders 127,038,913
Dividend distribution to management shareholders (2,370,760)
Conversion from Management Shares to Public Shares(1) (280,762,795)
Accretion from share buybacks(2) 3,729,733
As of December 31, 2020 $ --
As of December 31, 2018 $ 86,046,388
Total pro t/(loss) attributable to management shareholders 51,430,312
Dividend distribution to management shareholders (2,043,108)
Conversion from Management Shares to Public Shares (4,725,042)
Conversion from Public Shares to Management Shares 20,026,591
Accretion from share buybacks(2) 1,629,768
As of December 31, 2019 $ 152,364,909
(1) The Company converted all outstanding Management Shares to Public Shares
on December 31, 2020. See Note 11 for further details.
(2) Since June 20, 2019, the Company has been engaged in an ongoing share
buyback program whereby its buyback agent has repurchased Public Shares
subject to certain limitations. Any repurchased Public Shares are subsequently
cancelled or held in Treasury. See Note 11 for further details. This amount
represents the accretion relating to the share buyback program that has been
allocated to the Management Shares.
The accompanying notes form an integral part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY
For the years ended December 31, 2020 and December 31, 2019
(Stated in United States Dollars)
Share Capital Treasury Shares Retained Earnings Total Equity
As of December
31, 2019(1) $ 5,568,360,539 $ (80,153,606) $ 80,073,980 $ 5,568,280,913
Total pro
t/(loss)
attributable
to equity
shareholders -- -- 3,571,835,955 3,571,835,955
Share
buybacks(2) -- (289,575,701) -- (289,575,701)
Dividend
distribution
to equity
shareholders -- -- (78,766,886) (78,766,886)
Conversion
from
Management
Shares to
Public
Shares(3) 153,989,153 126,773,068 -- 280,762,221
As of December
31, 2020(1) $ 5,722,349,692 $ (242,956,239) $ 3,573,143,049 $ 9,052,536,502
As of December
31, 2018(1) $ 5,678,775,664 $ -- $ (1,931,864,224) $ 3,746,911,440
Total pro
t/(loss)
attributable
to equity
shareholders -- -- 2,097,641,304 2,097,641,304
Share
buybacks(2) (95,113,359) (80,153,606) -- (175,266,965)
Dividend
distribution
to equity
shareholders -- -- (85,703,100) (85,703,100)
Conversion
from
Management
Shares to
Public
Shares 4,724,997 -- -- 4,724,997
Conversion
from Public
Shares to
Management
Shares (20,026,763) -- -- (20,026,763)
As of December
31, 2019(1) $ 5,568,360,539 $ (80,153,606) $ 80,073,980 $ 5,568,280,913
(1) Total equity of the Company is comprised of the aggregate net asset values
of Public Shares and the Special Voting Share. Under IFRS, Management Shares
are classified as financial liabilities rather than equity. See Note 2 on page
72 for further details.
(2) Since June 20, 2019, the Company has been engaged in an ongoing share
buyback program whereby its buyback agent has repurchased Public Shares
subject to certain limitations. Any repurchased Public Shares are subsequently
retired or held in Treasury. As of December 31, 2020 and December 31, 2019,
11,835,868 and 4,278,966 Public Shares were held in Treasury, respectively.
See Note 11 for further details. This amount includes the accretion relating
to the share buyback program that has been allocated to the Public Shares and
the Special Voting Share.
(3) The Company converted all outstanding Management Shares to Public Shares
on December 31, 2020 and issued Public Shares to these shareholders from
Treasury. See Note 11 for further details.
The accompanying notes form an integral part of these Financial Statements.
STATEMENT OF CASH FLOWS
For the years ended December 31, 2020 and December 31, 2019
(Stated in United States Dollars)
Notes 2020 2019
Cash ows from operating
activities
Pro t/(loss) for the year
attributable to equity and
management shareholders $ 3,698,874,868 $ 2,149,071,616
Adjustments to reconcile
changes in profit/(loss) for
the year to net cash flows:
Bond interest expense 18 82,079,517 65,765,676
Bond interest paid(1) 18 (74,250,000) (55,000,000)
(Increase)/decrease in
operating assets:
Due from brokers (840,701,122) 246,671,489
Trade and other receivables 9 (1,741,577) (353,782)
Investments in securities 6 (3,359,125,794) (1,259,295,954)
Derivative nancial instruments 6 (472,703,196) (68,946,858)
Increase/(decrease) in
operating liabilities:
Due to brokers 46,004,594 (67,510,000)
Due to Pershing Square, L.P. -- (24,783,576)
Due to Pershing Square
International, Ltd. -- (18,145,672)
Trade and other payables 9 653,217,441 38,905,255
Deferred tax expense payable 19 38,938,004 13,508,846
Derivative nancial instruments 6 565,983,347 (137,093,923)
Net cash from operating
activities 336,576,082 882,793,117
Cash ows from nancing
activities
Purchase of Public Shares(2) 11 (291,177,639) (168,305,743)
Dividend distributions 11 (81,137,646) (87,746,208)
Proceeds from issuance of the
Bonds(3) 18 700,000,000 400,000,000
Expenses relating to issuance
of the Bonds(4) 18 (7,468,274) (5,140,756)
Net cash from nancing
activities 320,216,441 138,807,293
Net change in cash and cash
equivalents 656,792,523 1,021,600,410
Cash and cash equivalents at
beginning of year 1,222,846,586 201,246,176
Cash and cash equivalents at
end of year 10 $ 1,879,639,109 $ 1,222,846,586
Supplemental disclosure of
cash ow information
Cash paid during the year for
interest $ 75,483,434 $ 55,770,197
Cash received during the year
for interest $ 1,232,136 $ 3,359,520
Cash received during the year
for dividends $ 81,637,693 $ 83,410,482
Cash deducted during the year
for withholding taxes $ 21,045,969 $ 18,271,732
(1) In accordance with the amendments to IAS 7, the Company's net debt
reconciliation related to the Company's Bonds is further detailed in Note 18.
(2) Includes cash paid for fractional shares related to conversions.
(3) Proceeds from issuance of the 2030 and 2032 Bonds are reflected in the
year ended 2020 and proceeds for the 2039 Bonds are reflected in the year
ended 2019.
(4) Expenses from issuance of the Bonds for the year ended 2020 pertain to the
2030, 2032 and 2039 Bonds. Expenses for the year ended 2019 pertain to the
2039 Bonds.
The accompanying notes form an integral part of these Financial Statements.
Notes to Financial Statements
1. CORPORATE INFORMATION
Organization
The Company was incorporated with limited liability under the
laws of the Bailiwick of Guernsey on February 2, 2012. It became a
registered open-ended investment scheme, under the Protection of
Investors (Bailiwick of Guernsey) Law, 1987 and the Registered
Collective Investment Scheme Rules 2008 (issued by the Guernsey
Financial Services Commission, the "GFSC"), on June 27, 2012, and
commenced operations on December 31, 2012.
On October 2, 2014, the GFSC approved the conversion of the
Company into a registered closed-ended investment scheme under the
Protection of Investors Law and the 2008 Rules.
The Company's registered office is at Trafalgar Court, Les
Banques, St. Peter Port, Guernsey GY1 3QL, Channel Islands.
The latest traded price of the Public Shares is available on
Reuters, Bloomberg, Euronext Amsterdam and the LSE.
A copy of the Prospectus of the Company is available from the
Company's registered office and on the Company's website
(www.pershingsquareholdings.com).
Investment Policy
Please refer to "Investment Policy" in the Report of the
Directors for the Investment Policy of the Company.
Bond Offering
On June 26, 2015, the Company closed on the offering of $1
billion Senior Notes that mature on July 15, 2022 (the "2022
Bonds"). The 2022 Bonds were issued at par with a coupon rate of
5.50% per annum.
On July 25, 2019, the Company closed on a fully committed
private placement of $400 million Senior Notes with a coupon rate
of 4.95%, maturing on July 15, 2039 (the "2039 Bonds").
On August 26, 2020, the Company closed on a fully committed
private placement of $200 million Senior Notes with a coupon rate
of 3.00%, maturing on July 15, 2032 (the "2032 Bonds").
On November 2, 2020, the Company closed on the offering of $500
million Senior Notes that mature on November 15, 2030 (the "2030
Bonds" and together with the 2022 Bonds, 2039 Bonds and 2032 Bonds,
"the Bonds"). The 2030 Bonds were issued at par with a coupon rate
of 3.25% per annum.
The Bonds' coupons are paid semi-annually. The Bonds are listed
on the Euronext Dublin with a trading symbol of PSHNA.
Investment Manager
The Company has appointed PSCM as its investment manager
pursuant to the IMA. The Investment Manager has responsibility,
subject to the overall supervision of the Board of Directors, for
the investment of the Company's assets in accordance with the
Investment Policy of the Company. The Company delegates certain
administrative functions relating to the management of the Company
to PSCM. William A. Ackman is the managing member of PS Management
GP, LLC, the general partner of PSCM.
Board of Directors
The Company's Board of Directors is comprised of Nicholas Botta,
President and a partner of the Investment Manager, Richard Battey,
Bronwyn Curtis, Anne Farlow, Andrew Henton and Richard Wohanka, all
of whom are non-executive Directors. All Directors other than Mr.
Botta are considered independent. Anne Farlow is the Chairman of
the Board.
Committees of the Board
The Board has established an Audit Committee, a Management
Engagement Committee, a Remuneration Committee, a Risk Committee
and a Nomination Committee. Other than the Risk Committee, all
Committee members are independent Directors of the Company who are
not affiliated with the Investment Manager. Further details as to
the composition and role of the Audit Committee are provided
in the Report of the Audit Committee; further details as to the
composition and role of the Management Engagement, Remuneration,
Risk and Nomination Committees are provided in the Corporate
Governance Report.
Prime Brokers
Pursuant to prime broker agreements, Goldman Sachs & Co. LLC
and UBS Securities LLC (the "Prime Brokers") both serve as
custodians and primary clearing brokers for the Company.
Administrator
Effective August 1, 2020, Northern Trust International Fund
Administration Services (Guernsey) Limited (the "Administrator")
replaced both Elysium Fund Management Limited, the Company's prior
administrator, and Morgan Stanley Fund Services (Cayman) Ltd., the
Company's prior sub-administrator. Effective September 1, 2020,
Northern Trust replaced Elysium as the Company Secretary.
The Administrator provides certain administrative and accounting
services, including the maintenance of the Company's accounting and
statutory records, and receives customary fees, plus out of pocket
expenses, based on the nature and extent of services provided.
Exchange Listings
The Company's Public Shares trade on the Premium Segment of the
Main Market of the LSE and on Euronext Amsterdam. Shares are quoted
and traded in USD in Amsterdam and in USD and Sterling in
London.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The Financial Statements of the Company have been prepared in
accordance with IFRS as issued by the International Accounting
Standards Board ("IASB"). The Financial Statements have been
prepared on a historical-cost basis, except for nancial assets and
nancial liabilities at fair value through pro t or loss that have
been measured at fair value.
The Company presents its statement of nancial position with
assets and liabilities listed in order of liquidity. An analysis
regarding settlement within 12 months after the reporting date
(current) and more than 12 months after the reporting date
(non-current) is presented in Note 13.
After making reasonable inquiries and assessing all data
relating to the Company's liquidity, particularly its holding of
cash and Level 1 assets, the Investment Manager and the Board of
Directors believe that the Company is well placed to manage its
business risks, has adequate resources to continue in operational
existence through April 30, 2022 and do not consider there to be
any threat to the going concern status of the Company. For these
reasons, they have adopted the going concern basis in preparing the
Financial Statements.
Financial Instruments
Financial Assets and Financial Liabilities at Fair Value Through
Profit or Loss and Commodity Interests
Classification
In accordance with IFRS 9, the Company classi es its nancial
assets and nancial liabilities at initial recognition into the
categories of nancial assets and nancial liabilities discussed
below.
In applying that classi cation, a nancial asset or nancial
liability is considered to be held for trading if: (a) it is
acquired or incurred principally for the purpose of selling or
repurchasing it in the near term or (b) on initial recognition, it
is part of a portfolio of identi ed nancial instruments that are
managed together and for which, there is evidence of a recent
actual pattern of short-term pro t-taking or (c) it is a derivative
(except for a derivative that is a nancial guarantee contract or a
designated and effective hedging instrument).
Financial Assets
The Company classi es its nancial assets as subsequently
measured at fair value through pro t or loss or measured at
amortized cost based on the Company's business model for managing
the nancial assets and the contractual cash ow characteristics of
the nancial asset.
Financial assets measured at fair value through profit or loss
("FVPL")
A nancial asset is measured at fair value through pro t or loss
if: (a) its contractual terms do not give rise to cash ows on speci
ed dates that are Solely Payments of Principal and Interest
("SPPI") on the principal amount outstanding or (b) it is not held
within a business model whose objective is either to collect
contractual cash ows, or to both collect contractual cash ows and
sell or (c) at initial recognition, it is irrevocably designated as
measured at FVPL when doing so eliminates or signi cantly reduces a
measurement or recognition inconsistency that would otherwise arise
from measuring assets or liabilities or recognizing the gains and
losses on them on different bases. The Company includes in this
category investments in securities and derivative nancial
instruments.
Financial assets measured at amortized cost
A debt instrument is measured at amortized cost if it is held
within a business model whose objective is to hold nancial assets
in order to collect contractual cash ows, and its contractual terms
give rise on speci ed dates to cash ows that are SPPI on the
principal amount outstanding. The Company includes in this category
short-term non- nancing receivables including cash collateral
posted on derivative contracts and other receivables.
Derecognition of financial assets
A nancial asset (or, where applicable, a part of a nancial asset
or a part of a group of similar nancial assets) is derecognized
when the rights to receive cash ows from the asset have
expired.
Financial Liabilities
Financial liabilities measured at fair value through profit or
loss
A nancial liability is measured at fair value through pro t or
loss if it meets the de nition of held for trading. This category
would include derivative contracts in a liability position and
equity instruments sold short since they are classi ed as held for
trading.
Financial liabilities measured at amortized cost
This category includes all nancial liabilities, other than those
measured at fair value through pro t or loss. The Company includes
in this category its Bonds and other short- term payables.
Derecognition of financial liabilities
The Company will derecognize a nancial liability when the
obligation under the liability is discharged, canceled or
expired.
Bonds at Amortized Cost
(i) Classification
The Company classi es its Bonds, as discussed in Note 1 and Note
18, at initial recognition at amortized cost.
(ii) Recognition
The Company recognizes its Bonds upon the date of issuance of
the Bonds.
(iii) Initial Measurement
Bonds are measured initially at their par values plus any
directly attributable incremental costs of acquisition or issue,
which is considered to approximate fair value.
(iv) Subsequent Measurement
After initial measurement, the Company measures the Bonds at
amortized cost using the effective interest method. Interest
expense relating to the Bonds is calculated using the effective
interest method and allocated over the relevant period and is
recognized in the statement of comprehensive income accordingly.
The interest expense relating to the Bonds includes coupon interest
accrued as well as amortization of the transaction costs from the
bond offerings.
(v) Derecognition
The Company will derecognize its liability associated with each
of the Bonds upon maturity or in the event that the Company
exercises its prepayment option for all or some of the Bonds, in
which case all or some of the liability would be derecognized at
the settlement date.
Fair Value Measurement
The Company measures its investments in nancial instruments,
such as equities, options and other derivatives, at fair value at
each reporting date. Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date.
The Company values equity securities listed on a securities
exchange at the official closing price reported by the exchange on
which the securities are primarily traded on the date of
determination. In the event that the date of determination is not a
day on which the relevant exchange is open for business, such
securities are valued at the official closing price reported by the
exchange on the most recent business day prior to the date of
determination. Exchange- traded options and securities listed on a
securities exchange for which the exchange does not report an
official closing price on the date of determination (other than
because the relevant exchange was closed on such date) are valued
at the average of the most recent "bid" and "ask" prices.
Securities that are not listed on an exchange (both equity and
debt) but for which external pricing sources (such as dealer quotes
or other independent pricing services) may be available are valued
by the Investment Manager after considering, among other factors,
such external pricing sources, recent trading activity or other
information that, in the opinion of the Investment Manager, may not
have been re ected in pricing obtained from external sources. When
dealer quotes are being used to assess the value of a holding, an
attempt is made to obtain several independent quotes. The practical
application of quoted market prices to portfolio positions is a
function of the quoted differential in bid/offer spreads. Long and
short positions generally are marked to mid-market (subject to the
Investment Manager's discretion to mark such positions differently
if and when deemed appropriate).
In order to value over-the-counter credit derivatives, the
Investment Manager uses a third-party pricing service that obtains
quotes from multiple dealers and/or values such instruments after
considering, among other factors, the mark-to-market price provided
by the dealer with which the Company established the position or
other dealers. Cleared credit derivatives (including index credit
default swaps) will generally be valued using prices obtained from
the clearing house that clears the majority of the volume of such
credit derivative and/or as necessary, the value of a third-party
pricing provider if a single clearing house does not clear the
majority of such credit derivative.
For investments where no external pricing sources are available
(i.e. Level 3 investments), they are fair valued using valuation
methodologies as determined by the Investment Manager.
Additionally, the Investment Manager may choose to employ an
independent third-party valuation rm to conduct valuations.
The valuation committee of the Investment Manager considers the
appropriateness of the valuation methods and inputs, including
information obtained after the close of markets, and may request
that alternative valuation methods be applied to support the
valuation arising from the methods discussed. Any material changes
in valuation methods are discussed and agreed with the Board of
Directors.
Offsetting of Financial Instruments
Financial assets and nancial liabilities are reported gross by
counterparty in the statement of nancial position. It is not the
Company's intention to settle nancial assets and nancial
liabilities net of the collateral pledged to or received from
counterparties.
See Note 8 for the offset of the Company's derivative assets and
liabilities, along with collateral pledged to or received from
counterparties.
Functional and Presentation Currency
The Company's functional currency is the United States Dollar
("USD"), which is the currency of the primary economic environment
in which it operates. The Company's performance is evaluated, and
its liquidity is managed, in USD. Therefore, USD is considered the
currency that most faithfully represents the economic effects of
the underlying transactions, events and conditions. The
presentation currency of the Company's Financial Statements is
USD.
Foreign Currency Translations
Assets and liabilities denominated in non-U.S. currencies are
translated into USD at the prevailing exchange rates at the
reporting date. Transactions in non-U.S. currencies are translated
into USD at the prevailing exchange rates at the time of the
transaction. The Company includes the portion of gains and losses
on investments due to changes in foreign exchange rates with the
portion due to changes in market prices of the investments based on
the classi cation of the underlying investment in the statement of
comprehensive income.
Amounts Due To and Due From Brokers
Due from brokers includes cash balances held at the Company's
prime brokers, cash held and collateral pledged at the futures
commission merchants, cash collateral pledged to counterparties
related to derivative contracts and amounts receivable for
securities transactions that have not settled at the reporting
date. Cash that is related to securities sold, not yet purchased,
is restricted until the securities are purchased. Due to brokers
consists of cash received from counterparties to collateralize the
Company's derivative contracts and amounts payable for securities
transactions that have not settled at the reporting date.
Cash and Cash Equivalents
The Company considers all highly liquid nancial instruments with
a maturity of three months or less at the time of purchase to be
cash equivalents. Cash and cash equivalents in the statement of
nancial position comprise cash held at banks and money market funds
which are invested in U.S. Treasurys and obligations of the U.S.
government.
Investment Income/Expense
Dividend income is recognized on the date on which the
investments are quoted ex-dividend and presented gross of
withholding taxes, which are disclosed separately in the statement
of comprehensive income. Dividend expense relating to securities
sold not yet purchased is recognized when the shareholders' right
to receive the payment is established. Interest income and expense
related to cash, collateral cash received/posted by the Company and
rebate expense and borrowing costs on securities sold not yet
purchased is recognized when earned/incurred.
Net Gain or Loss on Financial Assets and Financial Liabilities
at Fair Value Through Profit or Loss
The Company records its security transactions and the related
revenue and expenses on a trade date basis. Unrealized gains and
losses comprise changes in the fair value of nancial instruments
for the year and from reversal of prior years' unrealized gains and
losses for nancial instruments which were realized in the reporting
period.
Realized gains and losses on disposals of nancial instruments
classi ed at fair value through pro t or loss are calculated using
the highest cost relief method (speci c identi cation). These gains
or losses represent the differences between an instrument's
purchase amount and disposal amount, or cash payments due on, or
receipts from, derivative contracts.
Professional Fees
Professional fees include, but are not limited to, expenses
relating to accounting, investment valuation, administrative
services, auditing, tax preparation expenses, legal fees and
expenses, professional fees and expenses (including fees and
expenses of investment bankers, advisers, appraisers, public and
government relations rms and other consultants and experts) and
investment-related fees and expenses including research, but
excluding investment transaction costs.
Other Expenses
Other expenses include, but are not limited to, investment-
related expenses associated with activist campaigns including
expenses for: (i) proxy contests, solicitations and tender offers;
(ii) compensation, indemni cation and expenses of nominees proposed
by the Investment Manager as directors or executives of portfolio
companies; and (iii) printing and postage expenses, bank service
fees, insurance expenses, and expenses relating to regulatory lings
and registrations made in connection with the Company's business
and investment activities.
Taxes
The Company is not subject to any income or capital gains taxes
in Guernsey. The Company is subject to withholding taxes applicable
to certain investment income, such as dividends.
Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply in the year when the asset is
realized or the liability is settled, based on tax rates (and tax
laws) that have been enacted or substantively enacted at the
reporting date. See Note 19 for further details.
Management Fees and Performance Fees
The Company recognizes management fees and performance fees in
the period in which they are incurred in accordance with the terms
of the IMA, which is an executory contract under IAS 37 as
discussed in Note 3. Refer to Note 15 for detailed information
regarding the calculation of both fees.
Net Assets Attributable to Management Shareholders
In accordance with IAS 32, the Company classi es its Public
Shares and the Special Voting Share as equity, as shareholders do
not have any rights of redemption.
Management Shares can be converted into a variable number of
Public Shares based upon their net asset values as of the last day
of each calendar month and are therefore classi ed as nancial
liabilities in accordance with IFRS. At no time can Management
Shares be redeemed in cash at the option of the management
shareholders. Net assets attributable to Management Shares, if any,
are accounted for on an amortized cost basis at the net asset value
calculated in accordance with IFRS. The change in the net assets
attributable to Management Shares, other than that arising from
share issuances, share repurchases or conversions, is recognized in
the statement of comprehensive income.
3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND
ASSUMPTIONS
The preparation of the Company's Financial Statements requires
management to make judgements, estimates and assumptions that
affect the reported amounts recognized in the Financial Statements
and disclosure of contingent liabilities. Uncertainty about these
assumptions and estimates could result in outcomes that could
require a material adjustment to the carrying amount of the asset
or liability in future periods.
Judgements
In the process of applying the Company's accounting policies,
management has made the following judgements, which have a signi
cant effect on the amounts recognized in the Financial
Statements:
Assessment of Investment Management Agreement as an executory
contract
The Company classi es the IMA as an executory contract. Under
paragraph 3 of IAS 37, "executory contracts" are contracts under
which neither party has performed any of its obligations or both
parties have partially performed their obligations to an equal
extent. The objective of IAS 37 is to ensure, inter alia, that
appropriate recognition criteria and measurement bases are applied
to provisions, contingent liabilities and contingent assets. The
Board has determined that the IMA meets the de nition of an
executory contract in that: it is a contract for the performance of
services, it imposes continuing obligations on each party, and it
has been entered into for a renewable term.
Under the IMA, the services that the Company has contracted for
consist of investment management services to be delivered by the
Investment Manager. The Investment Manager has sole authority to
make investments on behalf of the Company throughout the term of
the IMA. In consideration for those services, the Company has
continuing obligations to pay management fees and performance fees
(if any). See Note 15 - Investment Management Agreement - Fees,
Performance Fees And Termination.
As explained in Note 15, the performance fee is made up of three
components including the Potential Offset Amount (as de ned in Note
15). In the Company's judgment these components constitute a single
unit of account because no component is payable without the others
being payable, the components are settled as a single amount and it
is not possible to segregate the different services provided by the
Company and attribute them to the different components of the
performance fee.
The IMA is automatically renewable each December 31 for one
year. The IMA is terminable (a) at December 31 of any year by each
party upon four months' prior notice (subject, in the case of
termination by the Company, to shareholder approval requiring a 66
2/3% majority by voting power of the outstanding shares and a 66
2/3% majority of the outstanding Public Shares, as prescribed by
the Company's Articles of Incorporation) or (b) at any time if the
other party liquidates, a receiver or liquidator or administrator
is appointed in respect of the other party's assets or the other
party commits a material breach that remains uncured for more than
30 days after notice thereof. The Company considers that its
termination rights are substantive. In the event that the IMA is
terminated, the Company is only liable for performance fees up to
the date of termination, and the Investment Manager cannot recover
any Potential Offset Amount (except to the extent that it is part
of the performance fee).
In its application of IAS 37, the Board has determined that
payment of performance fees is entirely dependent on performance of
services under the IMA and on the Company's NAV appreciation
generated by those services (subject to standard high water mark
arrangements). Accordingly, those fees (including the Potential
Offset Amount component of performance fees) arise and are
recognized as the services are performed by the Investment Manager,
and the Company's NAV appreciates. The Company accrues a provision
for performance fees over the applicable period based on its NAV
appreciation above the high water mark. The Board has assessed that
in this manner, the Company's NAV appreciation appropriately
matches the timing of recognizing the Company's obligation to pay
fees that may be triggered by the NAV appreciation.
The Company also assessed whether the Potential Offset Amount
gave rise to a nancial liability under the requirements to record
contingent settlement obligations in IAS 32 paragraph 25. The
Company concluded that no nancial liability arises until December
31 of each year, at which point the performance fee including the
offset amount crystallizes, because the arrangements only give rise
to a nancial asset for the Investment Manager at that date.
Assessment of Company investment as structured entity
IFRS 12 de nes a structured entity as an entity that has been
designed so that voting or other similar rights of the investors
are not the dominant factor in deciding who controls the
entity.
The Company, Pershing Square, L.P. ("PSLP") and Pershing Square
International, Ltd. ("PSINTL" and together with the Company and
PSLP, the "Pershing Square Funds") wholly own Pershing Square TH
Sponsor, LLC ("PSTH Sponsor"), a Delaware limited liability
company, as non-managing members. The business and affairs of PSTH
Sponsor are managed exclusively by its non-member manager, PSCM.
PSTH Sponsor is the sponsor entity for Pershing Square Tontine
Holdings, Ltd. ("PSTH"), a Delaware corporation, which is a newly
organized blank-check company formed for the purpose of effecting a
merger, capital stock exchange, asset acquisition, stock purchase,
reorganization or similar business combination with one or more
businesses. PSTH led its initial Form S-1 Registration Statement
(the "PSTH S-1") with the Securities and Exchange Commission
("SEC") on June 22, 2020 and subsequently had its Initial Public
Offering ("IPO") on July 22, 2020. As of December 31, 2020, the
Company held an investment in PSTH Sponsor. This investment is re
ected under nancial assets at fair value through pro t or loss in
the statement of nancial position.
The Company has assessed whether PSTH Sponsor should be classi
ed as a structured entity. The Company has considered the terms of
the limited liability company agreement of PSTH Sponsor and has
determined that the dominant factor of control is PSCM's role as
non-member manager. The Company, therefore, has concluded that PSTH
Sponsor is a structured entity. Pershing Square VI, L.P. ("PS VI
LP") and Pershing Square VI International, L.P. ("PS VI Intl"),
each feeder funds to Pershing Square VI Master, L.P. ("PS VI Master
Fund"), all of which operated collectively as a co-investment
vehicle invested primarily in securities of (or otherwise seeking
to be exposed to the value of securities issued by) Automatic Data
Processing, Inc. ("ADP"), were affiliated investment funds
(collectively "PS VI"). PS VI commenced operations on July 24, 2017
and ceased operations as of July 31, 2019 (the "PSVI Cessation
Date"). During its operation, the Company held investments in PS VI
LP and PS VI Intl. See Note 16 for further detail.
The Company has assessed whether the PS VI funds should be
classi ed as structured entities. The Company has considered the
terms of the investment management agreement between the PS VI
funds and the Investment Manager along with the voting and
redemption rights of the PS VI investors, including their rights to
remove the Investment Manager, and has determined that the dominant
factor of control of PS VI is the PS VI funds' contractual
agreement with the Investment Manager. The Company, therefore, has
concluded that the PS VI funds were structured entities.
All realized and unrealized gains and losses from the Company's
investments in PS VI and PSTH Sponsor are re ected in the statement
of comprehensive income for the years ended 2019 and 2020,
respectively. The Company has not provided any nancial or other
support to these unconsolidated structured entities. See Note 7 for
the discussion on the fair value measurement and Note 16 for
related party transactions regarding the Company's investments in
PS VI and PSTH Sponsor.
Estimates and Assumptions
The key assumptions concerning the future and other key sources
of estimation uncertainty at the reporting date that have a signi
cant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next nancial year are
discussed below. The Company based its assumptions and estimates on
parameters available when the Financial Statements were prepared.
Existing circumstances and assumptions about future developments
may change due to market changes or circumstances arising beyond
the control of the Company. Such changes are re ected in the
assumptions when they occur.
Fair Value of Financial Instruments
When the fair value of nancial assets and nancial liabilities
recorded in the statement of nancial position cannot be derived
from active markets, their fair value is determined by the
Investment Manager using prices obtained from counterparties or
independent third-party pricing services/ valuation agents. The
independent third-party pricing services/ valuation agents utilize
proprietary models to determine fair value. The valuation agents'
modeling may consider, but is not limited to, the following inputs:
amount and timing of cash ows, current and projected nancial
performance, volatility of the underlying securities' stock prices,
dividend yields and/or interest rates. Changes in assumptions about
these factors could affect the reported fair value of nancial
instruments in the statement of nancial position and the level
where the instruments are disclosed in the fair value hierarchy.
The models are calibrated regularly and tested for validity using
prices from observable current market transactions in the same
instrument (without modi cation or repackaging) or based on
available observable market data.
4. NEW STANDARDS, INTERPRETATIONS AND AMMENTS
The Company has assessed the impact of amendments made to IFRS
3, IFRS 7, IFRS 9, IFRS 16, IAS 39, IAS 1, IAS 8 and
the Conceptual Framework for Financial Reporting, and has
determined that they do not affect the Company's Financial
Statements. The Company has also assessed the impact of amendments
made to IFRS 1, IFRS 9, IFRS 17, IAS 41 IAS 1, IAS 3, IAS 16 and
IAS 37, which have been issued but are not yet effective, and has
determined that they are unlikely to affect the Company's Financial
Statements.
5. SEGMENT INFORMATION
In accordance with IFRS 8: Operating Segments, it is mandatory
for the Company to present and disclose segmental information based
on the internal reports that are regularly reviewed by the Board in
order to assess each segment's performance.
Management information for the Company as a whole is provided
internally to the Directors for decision-making purposes. The
Board's decisions are based on a single integrated strategy and the
Company's performance is evaluated on an overall basis. The Company
has a portfolio of long and occasionally short investments that the
Board and Investment Manager believe exhibit signi cant valuation
discrepancies between current trading prices and intrinsic business
value, often with a catalyst for value recognition.
Therefore, the Directors are of the opinion that the Company is
engaged in a single economic segment of business for all
decision-making purposes. The nancial results of this segment are
equivalent to the results of the Company as a whole.
6. FINANCIAL ASSETS AND FINANCIAL LIABILITIES AT FAIR VALUE
THROUGH PROFIT OR LOSS
Financial assets at fair value through pro t or loss:
As of December 31 2020 2019
Investments in securities $ 9,093,461,819 $ 5,734,336,025
Derivative nancial instruments 603,563,999 130,860,803
Financial assets at fair value through
pro t or loss $ 9,697,025,818 $ 5,865,196,828
Financial liabilities at fair value through pro t or loss:
As of December 31 2020 2019
Derivative nancial instruments $ 573,590,762 $ 7,607,415
Financial liabilities at fair value
through pro t or loss $ 573,590,762 $ 7,607,415
Net changes in fair value of nancial assets and nancial
liabilities through pro t or loss:
For the
years ended
December 31 2020 2019
Total Total
Realized Unrealized Gains/(Losses) Realized Unrealized Gains/(Losses)
Financial
assets at
fair value
through pro
t or loss $ 142,989,921 $ 2,056,431,944 $ 2,199,421,865 $ 260,672,692 $ 1,776,919,372 $ 2,037,592,064
Financial
liabilities
at fair
value
through pro
t or loss -- -- -- -- -- --
Derivative
nancial
instruments 1,829,627,106 531,264,836 2,360,891,942 (9,180,025) 244,329,177 235,149,152
Net changes
in fair
value $ 1,972,617,027 $ 2,587,696,780 $ 4,560,313,807 $ 251,492,667 $ 2,021,248,549 $ 2,272,741,216
7. FAIR VALUE OF ASSETS AND LIABILITIES
Fair Value Hierarchy
IFRS 13 requires disclosures relating to fair value measurements
using a three-level fair value hierarchy. The level within which
the fair value measurement is categorized is determined on the
basis of the lowest level input that is signi cant to the fair
value measurement. Assessing the signi cance of a particular input
requires judgment and considers factors speci c to the asset or
liability. Financial instruments are recognized at fair value and
categorized in the following table based on:
Level 1 -- Inputs are unadjusted quoted prices in active
markets. The assets and liabilities in this category will generally
include equities listed in active markets, Treasurys (on the run)
and listed options.
Level 2 -- Inputs (other than quoted prices included in Level 1)
are obtained directly or indirectly from observable market data at
the measurement date. The assets and liabilities in this category
will generally include xed income securities, OTC options, total
return swaps, credit default swaps, equity forward contracts,
foreign currency forward contracts and certain other
derivatives.
Level 3 -- Inputs, including signi cant unobservable inputs, re
ect the Company's best estimate of what market participants would
use in pricing the assets and liabilities at the measurement date.
The assets and liabilities in this category will generally include
warrants and certain other derivatives.
Recurring Fair Value Measurement of Assets and Liabilities
(in thousands)
As of December 31 2020 2019
Level
Level 1 Level 2 Level 3 Total Level 1 Level 2 3 Total
Financial Assets:
Equity Securities:
Common Stock:
Financial Services $ 346,991 $ -- $ -- $ 346,991 $ 399,340 $ -- $ -- $ 399,340
Hospitality 1,269,175 -- -- 1,269,175 945,704 -- -- 945,704
Insurance/Industrials -- -- -- -- 734,632 -- -- 734,632
Life Science
Tools/Industrials 1,238,920 -- -- 1,238,920 116,508 -- -- 116,508
Real Estate Development
and Operating 681,387 -- -- 681,387 221,782 -- -- 221,782
Restaurant 3,545,817 -- -- 3,545,817 2,392,970 -- -- 2,392,970
Retail 1,700,141 -- -- 1,700,141 833,161 -- -- 833,161
Preferred Stock:
Financial Services 94,265 -- -- 94,265 90,239 -- -- 90,239
Investment in
Affiliated Entity
Special Purpose
Acquisition Company -- -- 216,765(3) 216,765 -- -- -- --
Derivative Contracts
(Held for Trading):
Currency Call/Put
Options -- 243(1) -- 243 -- -- -- --
Equity Forwards:
Life Science
Tools/Industrials -- -- -- -- -- 58,972(2) -- 58,972
Real Estate Development
and Operating -- -- -- -- -- 43,028(2) -- 43,028
Foreign Currency
Forwards -- 223(1) -- 223 -- -- -- --
Forward Purchase
Units:
Special Purpose
Acquisition Company -- -- 536,441(4) 536,441 -- -- -- --
Interest Rate Swaptions -- 61,101(1) -- 61,101 -- -- -- --
Total Return Swaps:
Financial Services -- 5,557(2) -- 5,557 -- 28,861(2) -- 28,861
Total $ 8,876,696 $ 67,124 $ 753,206 $ 9,697,026 $ 5,734,336 $ 130,861 $ -- $ 5,865,197
Recurring Fair Value Measurement of Assets and Liabilities
(continued)
(in thousands)
As of December 31 2020 2019
Level Level Level Level
1 Level 2 3 Total 1 Level 2 3 Total
Financial
Liabilities:
Derivative Contracts
(Held for Trading):
Credit Default
Swaps:
Financial Services $ -- $ 1,261(2) $ -- $ 1,261 $ -- $ -- $ -- $ --
Equity Forwards:
Restaurant -- -- -- -- -- 2,180(2) -- 2,180
Equity Options
Written:
Real Estate
Development and
Operating -- 47,712(1) -- 47,712 -- -- -- --
Foreign Currency
Forwards -- -- -- -- -- 5,427(1) -- 5,427
Index Credit Default
Swaps -- 524,618(2) -- 524,618 -- -- -- --
Total $ -- $ 573,591 $ -- $ 573,591 $ -- $ 7,607 $ -- $ 7,607
(1) Level 2 financial instruments may include OTC currency call/put options,
equity options, interest rate swaptions and foreign currency forward contracts
that are fair valued by the Investment Manager. The fair values of these
financial instruments may reflect, but are not limited to, the following
inputs: current market and contractual prices from market makers or dealers,
volatilities of the underlying financial instruments, interest rates and/or
current foreign exchange forward and spot rates. The significant inputs are
market observable and are included within Level 2. Additionally, the
Investment Manager employs an independent third-party pricing service to
conduct valuations.
The independent third-party pricing service uses widely recognized valuation
models for determining fair values of OTC derivatives. The most frequently
applied valuation techniques include forward pricing and option models, using
present value calculations.
(2) Level 2 financial instruments may include total return swap contracts,
equity forward contracts, credit default swaps and index credit default swaps
that are fair valued by the Investment Manager using market observable inputs.
The fair values of these financial instruments may reflect, but are not
limited to, the following inputs: market price of the underlying security,
notional amount, expiration date, fixed and floating interest rates, credit
spreads, index factors, payment schedules and/or dividends declared.
(3) This figure relates to the Company's investment in PSTH Sponsor as of the
year ended 2020. Refer to Note 16 for further details. Substantially all of
the instruments underlying the Company's investment in PSTH Sponsor are Level
3.
(4) This figure includes the Company's investments in the Committed Forward
Purchase Units and the Additional Forward Purchase Units. Refer to Note 14 for
further details.
The Company's cash and cash equivalents and short-term
receivables and payables are recorded at carrying value which
approximates fair value. The Bonds are classi ed as Level 1 nancial
liabilities and the fair values of the Bonds are discussed further
in Note 18.
Some of the Company's investments in Level 1 securities
represent a signi cant proportion of the Company's portfolio. If
such investments were sold or covered in their entirety, it might
not be possible to sell them at the quoted market price which IFRS
requires to be used in determining fair value.
Many factors affect the price that could be realized for large
investments and the Investment Manager believes that it is
difficult to accurately estimate the potential discount or premium
to quoted market prices that the Company would receive or
realize.
Level 3 Transfers
Transfers between levels during the year are determined and
deemed to have occurred at each nancial statement reporting date.
There were no transfers into or out of Level 3 fair value
measurements since the last nancial statement reporting date.
Level 3 Reconciliation
Level 3 investments include the Company's investment in PSTH
Sponsor (as disclosed in Note 16) and the Committed Forward
Purchase Units and Additional Forward Purchase Units (as disclosed
in Note 14). As no external pricing sources are available for these
investments, each is fair valued using valuation methodologies as
determined by the Investment Manager. In applying its valuation
methods, the Investment Manager utilizes information including, but
not limited to
the following: amount and timing of cash ows, current and
projected nancial performance, probability assessments, volatility
of the underlying securities' stock price, dividend yields and/or
interest rates. In addition, the Investment
Manager employs an independent third-party valuation rm to
conduct valuations. The independent third-party valuation rm
provides the Investment Manager with a written report documenting
their recommended valuations as of the determination date. The
valuation committee of the Investment Manager considers the
appropriateness of the valuation methods and inputs, and may
request that alternative valuation methods be applied to support
the valuation arising from the method discussed. Any material
changes in valuation methods are discussed and agreed with the
Board of Directors. The following table summarizes the change in
the carrying amounts associated with Level 3 investments for the
year ended 2020. The Company did not hold Level 3 securities as of
December 31, 2019.
Forward Investment in
Purchase Units Affiliated Entity Total
Balance at December
31, 2019 $ -- $ -- $ --
Purchase of Sponsor
Warrants -- 58,967,000 58,967,000
Purchase of Class B
common stock -- 21,076 21,076
Funding of PSTH
Sponsor loan -- 957,355 957,355
Repayment of PSTH
Sponsor loan -- (957,525) (957,525)
Net gain/(loss) 536,440,242 157,777,526 694,217,768
Balance at December
31, 2020 $ 536,440,242 $ 216,765,432 $ 753,205,674
As disclosed in the table above, the Company had a net gain of
$694,217,768 from Level 3 securities held directly with/
referencing PSTH. The most signi cant input driving the valuation
of these investments is the appreciation of PSTH stock which closed
on December 31, 2020 at $27.72 as compared to its July 22, 2020 IPO
price of $20.00.
Quantitative Information of Significant Unobservable Inputs --
Level 3
The table below summarizes quantitative information about the
signi cant unobservable inputs used in the fair value measurement
and the valuation processes used by the Company for Level 3
securities:
Financial Year Valuation Unobservable
Asset Ended Fair Value Techniques Input Input
Forward Purchase
Units:
Discount for
Lack of
Marketability 3%
Committed
Forward Black-Scholes Discount for
Purchase pricing Lack of
Units 2020 $ 387,563,628 model Marketability 8%
Additional
Forward Black-Scholes Discount for
Purchase pricing Probability
Units 2020 $ 148,876,614 model of Exercise 79.8%
Investment in
Affiliated Entity: Volatility 25%
Illiquidity
Discount 17%
Black-Scholes Probability
Sponsor pricing of Warrant
Warrants 2020 $ 216,762,909 model Renegotiation 24.5%
The signi cant unobservable inputs listed above are re ective of
rights and obligations associated with each investment.
The Discount for Lack of Marketability ("DLOM") for the
Committed Forward Purchase Units relates to an embedded lock-up
(the "FPA Lock-Up"), whereby the securities underlying the
Committed Forward Purchase Units may not be sold for 180 days post
the completion of PSTH's Initial Business Combination ("IBC"). As a
result of the FPA Lock- Up, the DLOM was 3%.
The Additional Forward Purchase Units are subject to the same
FPA Lock-Up, and have embedded optionality such that they may be
exercised at any amount of the Additional Forward Purchase Units up
to $2 billion. This additional feature, combined with the FPA
Lock-Up, resulted in a DLOM of 8%. The Discount for Probability of
Exercise is a direct result of the embedded option component
previously stated. It is modelled to re ect the possible exercise
of values between nil and $2 billion, resulting in a discount of
79.8%.
The Sponsor Warrants have three signi cant unobservable inputs:
(i) Volatility, (ii) Illiquidity Discount and (iii) Probability of
Warrant Renegotiation. The volatility of 25% re ects the
anticipated implied volatility of the potential target company from
PSTH's IBC over the Sponsor Warrants' 10-year term. The Illiquidity
Discount of 17% relates to an embedded lock-up, whereby the
securities underlying the Sponsor Warrants may not be sold for
three years post the completion of PSTH's IBC. The Probability of
Warrant Renegotiation is a discount based on the probability that
the Sponsor Warrants will be restructured at the time of PSTH's
IBC. The discount of 24.5% was representative of the average of
sponsor incentive restructurings and founder stock forfeitures in
completed SPAC transactions.
Sensitivity Analysis to Significant Changes in Unobservable
Inputs with Level 3 Hierarchy
The signi cant unobservable inputs used in the fair value
measurement of Level 3 investments together with a quantitative
sensitivity analysis are shown as follows:
Financial Year Unobservable Sensitivity
Asset Ended Input Used Effect on Fair Value
Forward
Purchase
Units:
Committed Discount for
Forward Lack of
Purchase Marketabilit
Units 2020 y +2%/-2% $(7,983,360) / $7,983,360
Additional Discount for
Forward Lack of
Purchase Marketabilit
Units 2020 y +3%/-3% $(4,808,160) / $4,808,160
Additional
Forward Discount for
Purchase Probability
Units 2020 of Exercise +3%/-3% $(22,055,795) / $22,055,795
Investment
in
Affiliated
Entity:
Sponsor
Warrant 2020 Volatility +5%/-5% $31,752,000 / $(32,659,200)
Sponsor Illiquidity
Warrant 2020 Discount +5%/-5% $(12,700,800) / $12,700,800
Probability
of Warrant
Sponsor Renegotiatio
Warrant 2020 n +1%/-1% $(3,150,172) / $3,150,172
8. DERIVATIVE CONTRACTS
In the normal course of business, the Company enters into
derivative contracts primarily for investment purposes, and
periodically for hedging purposes. These instruments are subject to
various risks, similar to non-derivative instruments, including
market, credit and liquidity risk (see Note 13). The Company
manages these risks on an aggregate basis along with other risks
associated with its investing activities as part of its overall
risk management strategy.
The Company's derivative trading activities are primarily the
purchase and sale of OTC and listed equity options, equity forward
contracts, index and single-name credit default swaps, total return
swap contracts and foreign currency options and forward contracts.
All derivatives are reported at fair value (as described in Note 2)
in the statement of nancial position. Changes in fair value are re
ected in the statement of comprehensive income.
Total Return Swaps
Total return swap contracts represent agreements between two
parties to make payments based upon the performance of a certain
underlying nancial instrument. The Company is obligated to pay or
entitled to receive as the case may be, the net difference in the
value determined at the onset of the swap versus the value
determined at the termination or reset date of the swap. The
amounts required for the future satisfaction of the swaps may be
greater or less than the amounts recorded in the statement of
nancial position. The ultimate gain or loss depends upon the prices
of the underlying instrument(s) on settlement date. In addition, a
total return swap requires one party to pay the other party a
oating amount that re ects an interest carrying cost; the party
that receives the performance of the underlying nancial instrument
will pay the oating amount to the other party.
Credit Default Swaps
A credit default swap contract represents an agreement that one
party, the protection buyer, will pay a xed coupon in return for a
payment by the other party, the protection seller, contingent upon
a speci ed credit event relating to an underlying reference
obligation. While there is no credit event, the protection buyer
pays the protection seller a quarterly xed coupon. If a speci ed
credit event occurs, there is an exchange of cash ows and/or
securities designed so that the net payment to the protection buyer
re ects the loss incurred by holders of the referenced obligation
in the event of its default. In the case of OTC credit default
swaps, which are usually on single reference entities, the ISDA
agreement establishes the nature of the credit event, and such
events may include bankruptcy and failure to meet payment
obligations when due. For cleared credit default swaps, the terms
incorporate a uniform set of de nitions published by ISDA. At the
point in time when a credit default swap contract is entered into,
the parties thereto agree that the contract will be governed by
these de nitions and that the determinations of the Credit
Derivatives Determinations Committees will be binding on the
contract.
Equity Options
Options are contractual agreements that convey the right, but
not the obligation, for the purchaser either to buy or sell a speci
c amount of a nancial instrument at a xed price, either at a xed
future date or at any time within a speci ed period.
The Company purchases and sells put and call options through
regulated exchanges and OTC markets. Options purchased by the
Company provide the Company with the opportunity to purchase (call
options) or sell (put options) the underlying asset at an
agreed-upon value either on or before the expiration of the option.
The Company is exposed to credit risk on purchased options only to
the extent of their carrying amount, which is their fair value.
Options written by the Company provide the purchaser (the party
facing the Company) the opportunity to purchase from or sell to the
Company the underlying asset at an agreed-upon value either on or
before the expiration of the option. In writing an option, the
Company bears the market risk of an unfavorable change in the
nancial instrument underlying the written option. The exercise by
the purchaser of an option written by the Company could result in
the Company buying or selling a nancial instrument at a price
higher or lower than the current market value, respectively. The
maximum loss for written put options is limited to the number of
contracts written and the related strike prices, and the maximum
loss for written call options (which could be unlimited) is
contingent upon the market price of the underlying security at the
exercise date. At December 31, 2020, the Company had a maximum
potential loss of $564,492,880 relating to written equity put
options, assuming the underliers stock price of such options
decreased to nil. The fair value of these written put options as of
December 31, 2020 was ($47,711,572). At December 31, 2019, the
Company had no written options.
Interest Rate Swaptions
An interest rate swaption is an option to enter into an interest
rate swap. In exchange for premiums, the buyer gains the right but
not the obligation to enter into a speci ed swap agreement with the
issuer on a speci ed future date. A payer swaption is an option to
enter into a swap as a xed-rate payer, while a receiver swaption is
an option to enter into a swap as a xed-rate receiver.
Equity Forwards
An equity forward contract involves a commitment by the Company
to purchase or sell equity securities for a predetermined price,
with payment and delivery of the equity securities at a
predetermined future date. An equity forward embeds a cost of carry
(interest) charge payable by the Company (when the Company commits
to purchase) or receivable by the Company (when the Company commits
to sell) the underlying securities.
Currency Options
Currency options operate as described under Equity Options with
the underlying asset being a notional amount of a currency that
will be bought or sold in the future for a speci ed amount of
another currency (the strike price).
Currency Forwards
A foreign currency forward contract is a commitment to purchase
or sell a non-USD currency on a future date at a negotiated forward
exchange rate. Foreign currency forward contracts are used for
trading purposes and may hedge the Company's exposure to changes in
foreign currency exchange rates on its non-U.S. portfolio
holdings.
The following table shows the fair values of derivative nancial
instruments recorded as assets or liabilities as of December 31,
2020 and December 31, 2019, together with their average notional
amounts (or shares, when applicable) which is indicative of the
trading activity throughout the year. The notional amount, which is
recorded on a gross basis, is the amount of a derivative's
underlying asset, reference rate or index value, and is the basis
upon which changes in the value of derivatives are measured.
Fair Value of Derivative Financial Instruments
As of
December 31 2020 2019
Average Average
Fair Value Notional Fair Value Notional
Derivatives
primarily
held for
trading
purposes
Assets
Currency
Call/Put
Options $ 243,466 $ 265,360,922 $ -- $ --
Equity
Forwards -- 102,380,104 101,999,533 1,126,077,944
Forward
Purchase
Units 536,440,242 719,088,197 -- --
Interest Rate
Swaptions 61,101,294 304,845,333 -- --
Total Return
Swaps 5,556,245 69,711,494 28,861,270 96,605,710
Total Assets $ 603,341,247 $ 1,461,386,050 $ 130,860,803 $ 1,222,683,654
Liabilities
Equity
Forwards $ -- $ 119,308,042 $ 2,180,511 $ 60,442,290
Equity
Options 47,711,572 174,732,049 -- --
Total
Liabilities $ 47,711,572 $ 294,040,091 $ 2,180,511 $ 60,442,290
Derivatives
primarily
held for
risk
management
purposes
Assets
Foreign
Currency
Forwards
Liabilities $ 222,752 $ 299,142,964 $ -- $ --
Credit
Default
Swaps $ 1,260,780 $ 4,351,500 $ -- $ --
Foreign
Currency
Forwards -- -- 5,426,904 305,682,837
Index Credit
Default
Swaps 524,618,410 8,284,621,212 -- --
Total
Liabilities $ 525,879,190 $ 8,288,972,712 $ 5,426,904 $ 305,682,837
The table below summarizes gains or losses from the Company's
derivative trading activities for December 31, 2020 and December
31, 2019 that are included in investment gains and losses.
Derivatives for Year Ended 2020 Year Ended 2019
Trading Activities Net Gain/(Loss) Net Gain/(Loss)
Credit Default Swaps $ (43,081) $ --
Currency Call/Put Options (6,097,741) (1,732,784)
Equity Forwards (320,069,585) 99,819,022
Equity Options 121,246,522 25,440,446
Foreign Currency Forwards (1,560,028) (11,638,315)
Forward Purchase Units 536,440,242 --
Index Credit Default Swaps 2,057,013,956 --
Interest Rate Swaptions (2,733,319) --
Total Return Swaps (23,305,024) 123,260,783
Total Net Gain/(Loss) $ 2,360,891,942 $ 235,149,152
Offsetting of Derivative Assets and Liabilities
IFRS 7 requires an entity to disclose information about
offsetting rights and related arrangements. The disclosures provide
users with information to evaluate the effect of netting
arrangements on an entity's nancial position.
The disclosures are required for all recognized nancial
instruments that could be offset in accordance with IAS 32
Financial Instruments Presentation. The disclosures also apply to
recognized nancial instruments that are subject to an enforceable
master netting arrangement or similar agreement, irrespective of
whether they are offset in accordance with IAS 32.
The table below displays the amounts by which the fair values of
derivative assets and liabilities could be offset in the statement
of nancial position as a result of counterparty netting. Collateral
pledged/received represents amounts by which derivative assets and
liabilities could have been further offset for nancial presentation
purposes if the Company did not include collateral amounts in due
from/to brokers in the statement of nancial position.
Offsetting of Derivative Assets and Liabilities
Gross
Amounts
Offset in Net Amounts
the Offset in Offsetting
Statement the Permitted Cash
As of of Statement of Under ISDA Collateral
December 31, Gross Financial Financial Master Pledged/ Net
2020 Amounts(1) Position Position Agreements (Received)(2) Amount
Derivative
Assets $ 66,901,005 $ -- $ 66,901,005 $ (5,799,711) $ (61,101,294) $ --
Total $ 66,901,005 $ -- $ 66,901,005 $ (5,799,711) $ (61,101,294) $ --
Derivative
Liabilities $ (47,711,572) $ -- $ (47,711,572) $ 5,799,711 $ 41,911,861 $ --
Total $ (47,711,572) $ -- $ (47,711,572) $ 5,799,711 $ 41,911,861 $ --
Gross
Amounts
Offset in Net Amounts
the Offset in Offsetting
Statement the Permitted Cash
As of of Statement of Under ISDA Collateral
December 31, Gross Financial Financial Master Pledged/ Net
2019 Amounts(1) Position Position Agreements (Received)(3) Amount
Derivative
Assets $ 130,860,803 $ -- $ 130,860,803 $ (2,180,511) $ (122,334,209) $ 6,346,083
Total $ 130,860,803 $ -- $ 130,860,803 $ (2,180,511) $ (122,334,209) $ 6,346,083
Derivative
Liabilities $ (2,180,511) $ -- $ (2,180,511) $ 2,180,511 $ -- $ --
Total $ (2,180,511) $ -- $ (2,180,511) $ 2,180,511 $ -- $ --
(1) The gross amounts include derivative assets and liabilities which the
Company has entered into with an ISDA counterparty and are collateralized.
Derivative assets and liabilities not subject to ISDA Master Agreements
totaled $536,662,994 and $525,879,190, respectively.
(2) The Company has also received collateral of approximately $633,000 and
posted collateral of approximately $157.4 million to its ISDA counterparties.
Included within the collateral available for offset shown above are amounts
offset against balances due from/to brokers as disclosed in Note 13.
Additionally, the Company has posted collateral of approximately $271.4M to
its futures commission merchant where the Company's credit default swaps and
index credit default swaps are held. This amount is not expressed in the above
table and is not subject to an ISDA Master Agreements.
(3) The Company has also received collateral of approximately $34,000 and
posted collateral of approximately $230.1 million (net of pending settlements)
from/to its ISDA counterparties. Included within the collateral available for
offset shown above are amounts offset against balances due from/to brokers as
disclosed in Note 13.
9. TRADE AND OTHER RECEIVABLES/PAYABLES
The following is a breakdown of the Company's trade and other
receivables/payables as stated in the statement of nancial
position.
As of December 31 2020 2019
Trade and other receivables
Dividends receivable $ 8,436,729 $ 6,404,920
Prepaids and other receivables 414,478 184,403
Interest receivable 14,415 534,722
$ 8,865,622 $ 7,124,045
As of December 31 2020 2019
Trade and other payables
Performance fees payable $ 692,206,795 $ 38,707,174
Other payables 1,463,960 1,458,367
Interest payable 169,866 --
Settlement of share buybacks -- 5,331,783
$ 693,840,621 $ 45,497,324
10. CASH AND CASH EQUIVALENTS
The following is a breakdown of the Company's cash and cash
equivalents as stated in the statement of nancial position.
As of December 31 2020 2019
Cash and cash equivalents
Cash at banks $ -- $ 799
U.S. Treasury money market funds 1,879,639,109 1,222,845,787
$ 1,879,639,109 $ 1,222,846,586
As of December 31, 2020, money market fund investments in
Goldman Sachs Financial Square Treasury Instruments Fund and
BlackRock Liquidity Funds Treasury Trust Fund had fair values of
$1,135,121,890 (2019: $968,816,432) and $744,517,219 (2019:
$254,029,355), respectively.
11. SHARE CAPITAL
Authorized and Issued Capital
The Board of the Company is authorized to issue an unlimited
number of shares, classes of shares or series, as determined by the
Board. All of the Company's share classes participate pro-rata in
the pro ts and losses of the Company based upon the share class's
ownership of the Company at the time of such allocation.
The Company had 199,120,882 Public Shares (2019: 206,677,784)
and the Special Voting Share outstanding as of December 31, 2020.
All Management Shares converted to Public Shares on December 31,
2020 (2019: 5,160,225 Management Shares outstanding). In addition,
the Company holds 11,835,868 Public Shares in Treasury (2019:
4,278,966) for a total of 210,956,750 Public Shares in issue as of
December 31, 2020 (2019: 210,956,750).
The Company's Articles of Incorporation, in accordance with the
Listing Rules, incorporate pre-emption rights in favor of existing
Shareholders on the issue or sale from treasury of new equity
securities for cash (or to issue any rights to subscribe for or
convert equity securities into ordinary shares of the Company). At
the 2020 Annual General Meeting, the Company proposed and
shareholders passed a special resolution to approve the
disapplication of the pre-emption rights contained in the Articles
of Incorporation so that the Board has the authority to allot and
issue (or sell from treasury) up to 20,044,933 Public Shares and up
to 516,022 Management Shares (equal to 10% of the Public Shares and
10% of the Management Shares outstanding as at the latest
practicable date prior to the date of publication of the Notice of
the 2020 Annual General Meeting). Such disapplication for issuances
of 10% or less of outstanding equity is commonly requested by
issuers listed on the LSE. The Company intends to propose the same
special resolution with regards to Public Shares at the 2021 Annual
General Meeting.
In order to maintain the status of the Company as a foreign
private issuer under U.S. securities law and regulations, the
Company has issued a Special Voting Share to PS Holdings
Independent Voting Company Limited ("VoteCo"), a Guernsey limited
liability company. The Special Voting Share at all times carries
50.1% of the aggregate voting power in the Company (except for
certain matters set forth in the Listing Rules on which it may not
vote). VoteCo's organizational documents require it to vote in the
interest of the Company's shareholders as a whole. The Investment
Manager has no affiliation with VoteCo. The members of the VoteCo
board of directors are independent from the Investment Manager and
have no interest in the Company or the Investment Manager. VoteCo
is wholly owned by a trust established for the bene t of one or
more charitable organizations outside of the United States,
currently the Breast Cancer Society of Canada.
The Investment Manager waived the management fee and the
performance fee with respect to Management Shares, which were
issued to certain members, partners, officers, managers, employees
or affiliates of the Investment Manager and certain other
shareholders.
Lock-up
In connection with the Company's IPO, Mr. Ackman and other
members of the PSCM's investment and management teams have each
entered into a lock-up arrangement with the Company (the "Lock-Up
Deed") whereby their aggregate Management Shares held at the time
of the IPO are subject to a lock-up of ten years commencing from
October 1, 2014, other than sales of Management Shares (i) required
to pay taxes on income generated by the Company; (ii) required due
to regulatory constraints; or (iii) following separation of
employment from the Investment Manager. Management Shares subject
to the Lock-Up Deed may from time to time be transferred to
affiliates, provided that the transferee agrees to be subject to
the remaining lock-up period. On August 9, 2018, the Company
amended the Lock-Up Deed to clarify that parties to the Lock-Up
Deed may sell the speci c Management Shares they held at the time
of the IPO, so long as they continue to hold at least as many
Management Shares in the aggregate as they held at the time of the
IPO (or, if the Management Shares have been converted, so long as
they hold at least as many shares of the class such Management
Shares were converted into). As of December 31, 2020, 7,950,974
Public Shares were subject to the Lock-Up Deed (2019:
7,891,079).
Share Conversion
Subject to the terms of the lock-up agreements, holders of
Management Shares are entitled to convert into Public Shares at the
current NAV as of the last day of each calendar month upon such
days' prior written notice to the Company as the Board may
determine.
As a result of amendments to the Articles approved by
shareholders at the 2018 Annual General Meeting, Public Shares
acquired by persons who are otherwise eligible to hold Management
Shares can be converted into Management Shares, on a NAV for NAV
basis as at each month end. The Management Shares resulting from
these conversions are not subject to the lock-up described in
"Lock-up."
During the year ended December 31, 2020, holders of Management
Shares converted 5,160,225 Management Shares into 6,175,883 Public
Shares. During the year ended December 31, 2019, holders of
Management Shares converted 783,086 Public Shares into 719,357
Management Shares and converted 185,949 Management Shares into
200,343 Public Shares.
Voting Rights
The holders of Public Shares have the right to receive notice
of, attend and vote at general meetings of the Company. Public
Shares held in Treasury do not have voting rights.
Each Public Share and Management Share carries such voting power
so that the aggregate issued number of Public Shares and Management
Shares carries 49.9% of the total voting power of the aggregate
number of voting shares. Each Public Share carries one vote and
each Management Share carries such voting power so that the total
voting power of the Public Shares and Management Shares are
pro-rated in accordance with their respective net asset values. The
Special Voting Share carries 50.1% of the aggregate voting power in
the Company. The Special Voting Share and the Management Shares may
not vote on certain matters speci ed in the Listing Rules as
discussed below.
Specified Matters
In order to comply with the Listing Rules, the Company was
required to make certain revisions to its shareholder voting
structure. The Listing Rules permit only holders of the Public
Shares to vote on certain matters (the "Speci ed Matters").
Each of the Speci ed Matters is set forth in the Listing
Rules.
Distributions
The Board may at any time declare and pay dividends (or interim
dividends) based upon the nancial position of the Company. No
dividends shall be paid in excess of the amounts permitted by the
Companies (Guernsey) Law, 2008 and without the prior consent of the
Board and the Investment Manager.
On February 13, 2019, the Company initiated a quarterly interim
dividend of $0.10 per Public Share. Please see "Dividends" in the
Report of the Directors for further information regarding the
dividend. For the year ended December 31, 2020, the Company paid
dividends of $81,137,646 (2019: $87,746,208).
Capital Management
The Company's general objectives for managing capital are:
-- To continue as a going concern;
-- To maximize its total return primarily through the capital appreciation
of its investments; and
-- To minimize the risk of an overall permanent loss of capital.
To the extent the Investment Manager deems it advisable and
provided that there are no legal, tax or regulatory constraints,
the Company is authorized to manage its capital through various
methods, including, but not limited to: (i) repurchases of Public
Shares and (ii) further issuances of shares, provided that the
Board only intends to exercise its authority to issue new shares if
such shares are issued at a value not less than the estimated
prevailing NAV per share (or under certain other speci ed
circumstances).
At the 2020 Annual General Meeting, shareholders renewed the
Company's authority to engage in share buybacks up to a maximum of
14.99% of the Public Shares outstanding.
The Company announced share buyback programs in June, October
and December of 2019 and April and June of 2020, each of $100
million and each for up to 6 million of the Company's outstanding
Public Shares. Jefferies International Limited was appointed as the
buyback agent. The Company repurchased 13,732,785 (2019: 9,355,567)
Public Shares for a total of $286 million (2019: $174 million) at
an average discount of 32.0% (2019: 28.3%) for the year ended
December 31, 2020. Beginning on October 24, 2019, all Public Shares
repurchased were held in Treasury. Public Shares repurchased prior
to this date were cancelled. Since the Company's rst buyback
program in May 2017, including the Company's May 2018 tender offer,
the Company has repurchased a total of 50,834,239 Public Shares for
$837 million at an average discount of 26.5% as of December 31,
2020.
As presented in "Supplemental U.S. GAAP Disclosures - Financial
Highlights", the Company's 2020 share repurchases provided
accretion to the Public Shares of $0.66 per share for the year
ended December 31, 2020 (2019: $0.31). The Company intends to
propose that shareholders renew its general share buyback authority
at the 2021 Annual General Meeting to allow the Company to engage
in share buybacks for up to a maximum of 14.99% of the Public
Shares outstanding. If approved by shareholders and depending on
market conditions, the Company's available capital and other
considerations, the Company may decide to utilize the share buyback
authority to make further acquisitions of Public Shares in the
market.
As discussed on page 86 under "Lock-up", the Investment Manager
imposed a ten-year lock-up on certain holders of Management Shares
at the time of the IPO, subject to certain exceptions. This lock-up
does not affect capital resources available to the Company.
The Public Shares, Management Shares and Special Voting Share
transactions for the years ended December 31, 2020 and December 31,
2019 were as follows:
Special Voting
Management Shares Public Shares Share
Shares Outstanding
as of December 31,
2019 5,160,225 206,677,784 1
Share Buybacks* -- (13,732,785) --
Conversion Out (5,160,225) -- --
Conversion In -- 6,175,883 --
Shares Outstanding
as of December 31,
2020 -- 199,120,882 1
Special Voting
Management Shares Public Shares Share
Shares Outstanding
as of December 31,
2018 4,626,817 216,616,094 1
Share Buybacks* -- (9,355,567) --
Conversion Out (185,949) (783,086) --
Conversion In 719,357 200,343 --
Shares Outstanding
as of December 31,
2019 5,160,225 206,677,784 1
* Beginning on October 24, 2019, all Public Shares repurchased were held in
Treasury. Public Shares repurchased prior to this date were cancelled. The
Company holds 11,835,868 Public Shares in Treasury which are excluded from
Public Shares outstanding.
12. INTEREST INCOME AND EXPENSE
The following is a breakdown of the Company's interest income
and expense as stated in the statement of comprehensive income.
Year Ended Year Ended
Interest Income 2020 2019
Interest earned on collateral balances $ 1,030,739 $ 2,828,170
Cash 31,409 204,956
$ 1,062,148 $ 3,033,126
Year Ended Year Ended
Interest Expense 2020 2019
Bonds coupon expense $ 79,602,528 $ 63,592,033
Amortization of Bonds issue costs incurred as
nance costs 2,476,989 2,173,643
Interest expense on collateral balances 1,401,786 618,641
Cash 1,515 325
$ 83,482,818 $ 66,384,642
13. FINANCIAL RISK AND MANAGEMENT OBJECTIVES AND POLICIES
Risk Mitigation
The Investment Manager does not use formulaic approaches to risk
management. Instead, risk management is integrated into the
portfolio management process. The primary risk management tool is
extensive research completed by the Investment Manager prior to an
initial investment. The Investment Manager de nes investment risk
as the probability of a permanent loss of capital rather than price
volatility. Factors considered by the Investment Manager in
assessing long investment opportunities include, but are not
limited to:
-- The volatility/predictability of the business;
-- Its correlation with macroeconomic factors;
-- The company's nancial leverage;
-- The defensibility of the company's market position; and
-- Its discount to intrinsic value.
The Investment Manager believes that the acquisition of a
portfolio of investments, when acquired at a large discount to
intrinsic value, provides a margin of safety that can mitigate the
likelihood of an overall permanent loss of the Company's capital.
The primary risks in the Company's portfolio are company-speci c
risks which are managed through investment selection and due
diligence.
The Investment Manager does not have a formulaic approach in
evaluating correlations between investments, but is mindful of
sector and industry exposures and other fundamental correlations
between the businesses in which the Company invests.
The Investment Manager believes that an important distinguishing
factor about the Company's portfolio is that it does not generally
use margin leverage.
At times, the Investment Manager has made investments that have
materially different risk and reward characteristics. These
investments -- because of the circumstances surrounding the
companies at the time of the investment, the highly leveraged
nature of the businesses or assets, the relative illiquidity of the
investment, and/or the structure of the Company's investment --
have a materially greater likelihood of a potential permanent loss
of capital for the funds. In light of this greater risk, the
Investment Manager generally requires the potential for a
materially greater reward if successful, and sizes the investments
appropriately.
Refer to Principal Risks and Uncertainties (which are explicitly
incorporated by reference into these Notes to Financial Statements)
for further information regarding principal risks faced by the
Company.
Market Risk
Market risk is the risk that the fair value or future cash ows
of nancial instruments will uctuate due to changes in market
variables such as interest rates, foreign exchange rates and equity
prices.
Securities sold, not yet purchased, represent obligations of the
Company to deliver the speci ed securities and, thereby, create a
liability to purchase the security in the open market at prevailing
prices. Accordingly, these transactions may result in additional
risk as the amount needed to satisfy the Company's obligations may
exceed the amount recognized in the statement of nancial
position.
The Company's derivative trading activities are discussed in
detail in Note 8 and a portfolio of the derivatives held as of
December 31, 2020 is presented in the Condensed Schedule of
Investments on pages 103-104 (which is explicitly incorporated by
reference into these Notes to Financial Statements).
Interest Rate Risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash ows or the fair values of
nancial instruments. Generally, most nancial assets decline in
value when interest rates rise, and increase in value when interest
rates decline. While nearly every one of the Company's investments
is exposed to the economy to some degree, the Investment Manager
attempts to identify companies for which increases or decreases in
interest rates are not particularly material to the investment
thesis. The Company does not generally hedge its interest rate
exposure as the Investment Manager does not, generally, believe
that hedging interest rate risk is a prudent use of capital. The
Company did however, initiate a position in interest rate swaptions
in December 2020 as it believes the potential portfolio hedging
bene ts and asymmetric pro t opportunity provided an attractive
opportunity.
The following table shows the Company's exposure to U.S.
interest rates as of December 31, 2020 as a result of its
investment in an interest rate swaption. The analysis calculates
the effect of a reasonably possible percentage change to the rate
and its effect on the Company's pro t or loss with all other
variables are held constant. The Company did not hold interest rate
swaptions as of December 31, 2019.
Effect on
Net Assets
Attributable to
all Shareholders
Change in and on Profit/
Interest (Loss) for the
Interest Rate Exposure Rate Year
U.S. 10 Year Treasury $ 61,101,294 +26% $ 67,370,000
U.S. 10 Year Treasury $ 61,101,294 -26% $ (6,330,000)
The Company's investments in cash and cash equivalents have
limited exposure to interest rate risk because the duration of
these investments is less than 90 days. As of December 31, 2020 and
December 31, 2019 cash and cash equivalents equaled $1,879,639,109
and $1,222,846,586, respectively. The Bonds have no interest rate
risk as the interest rate is xed and they are carried at amortized
cost.
Currency Risk
The Company invests in nancial instruments and enters into
transactions that are denominated in currencies other than USD.
Consequently, the Company is exposed to risks that the exchange
rate of the USD relative to other foreign currencies may change in
a manner that has an adverse effect on the fair value of future
cash ows of that portion of the Company's nancial assets or
liabilities denominated in currencies other than USD.
The Company primarily utilizes forward exchange contracts and
currency options to hedge foreign currency denominated investments,
though it may invest in such instruments for other purposes. The
primary purpose of the Company's foreign currency economic hedging
activities is to protect against the foreign currency exposure
associated with investments denominated in foreign currencies.
Increases or decreases in the fair value of the Company's foreign
currency denominated investments are partially offset by gains and
losses on the economic hedging instruments. Also refer to the
Condensed Schedule of Investments on pages 103-104 (which is
explicitly incorporated by reference into these Notes to Financial
Statements) for additional details of the Company's nancial assets
and liabilities.
The following tables show the currencies to which the Company
had signi cant direct exposure at December 31, 2020 and December
31, 2019 on its nancial assets and nancial liabilities. The
analysis calculates the effect of a reasonably possible movement of
the currency rate against USD on equity and on pro t or loss with
all other variables held constant.
Effect on Net Assets
Net Foreign Change in Attributable to all
Currency Currency Currency Shareholders and on
(2020) Exposure Rate Profit/(Loss) for the Year
CAD $ 4,115,711 +7% $ 2,087,157
CAD $ 4,115,711 -7% $ 1,712,478
EUR $ 96,929,247 +7% $ 7,187,473
EUR $ 96,929,247 -7% $ (7,187,473)
Effect on Net Assets
Net Foreign Change in Attributable to all
Currency Currency Currency Shareholders and on
(2019) Exposure Rate Profit/(Loss) for the Year
CAD $ 11,206,411 +8% $ (15,644,761)
CAD $ 11,206,411 -8% $ (2,174,972)
Equity Price Risk
The Company's portfolio is highly concentrated, and may invest a
signi cant proportion of its capital in one or a limited set of
investments. A substantial majority of the Company's portfolio is
typically allocated to 8 to 12 core holdings usually comprised of
highly liquid, listed large cap North American companies. Because
the portfolio is highly concentrated and primarily invested in
public equities (or derivative instruments which reference public
equities), uctuations in equity prices are a signi cant risk to the
portfolio. Refer to the Company Performance on page 2, Investment
Manager's Portfolio Update on pages 15-20 and the Condensed
Schedule of Investments on pages 103-104 (each of which is
explicitly incorporated by reference into these Notes to Financial
Statements) for quantitative and qualitative discussion of the
Company's portfolio and additional details regarding the Company's
nancial assets and nancial liabilities.
The following table estimates the effect on the Company's net
assets due to a possible change in equity prices with all other
variables held constant.
% Change in Net Assets
Attributable to all Shareholders
Change in Equity Price (2020)
+10% +12%
-10% -12%
% Change in Net Assets Attributable to all
Shareholders
Change in Equity Price (2019)
+9% +11%
-9% -11%
The following table analyzes the Company's concentration of
equity price risk in the Company's equity portfolio by geographical
distribution (based on issuer's place of primary listing or, if not
listed, place of domicile).
As of December 31 2020 2019
North America 100% 100%
Total 100% 100%
The following table analyzes the Company's concentration of
equity price risk in the Company's equity portfolio by industry
sectors:
As of December 31 2020 2019
Restaurant 37 % 40 %
Retail 18 % 14 %
Hospitality 13 % 16 %
Life Science Tools/Industrials 13 % 3 %
Special Purpose Acquisition Company 8 % --
Real Estate Development and Operating 6 % 5 %
Financial Services 5 % 9 %
Insurance/Industrials -- 13 %
Total 100 % 100 %
Liquidity Risk
The Company's policy and the Investment Manager's approach to
managing liquidity are to ensure, as much as possible, that it will
have sufficient liquidity to meet its liabilities when due, under
both normal and stressful market conditions. The Company invests
primarily in liquid, large-capitalization securities which, under
normal market conditions, are readily convertible to cash. Less
liquidity is tolerated in situations where the risk/reward
trade-off is sufficiently attractive to justify a greater degree of
illiquidity. The following tables summarize the liquidity pro le of
the Company's nancial assets and nancial liabilities, cash and cash
equivalents (including due to/from brokers) and trade receivables
and payables based on undiscounted cash ows:
As of
December 31, Less than 1 6 to 12
2020 Month 1 to 3 Months 3 to 6 Months Months Over 1 Year Total
Assets
Cash and cash
equivalents $ 1,879,639,109 $ -- $ -- $ -- $ -- $ 1,879,639,109
Due from
brokers 955,676,624 -- -- -- -- 955,676,624
Trade and
other
receivables 8,865,622 -- -- -- -- 8,865,622
Financial
assets at
fair value
through pro t
or loss:
Investments in
securities 6,499,107,690 1,752,399,222 350,611,391 274,256,888 217,086,628 9,093,461,819
Derivative
nancial
instruments* 62,616,855 2,051,500 1,844,034 611,368 536,440,242** 603,563,999
Total Assets $ 9,405,905,900 $ 1,754,450,722 $ 352,455,425 $ 274,868,256 $ 753,526,870 $ 12,541,207,173
Liabilities
Due to brokers $ 46,004,594 $ -- $ -- $ -- $ -- $ 46,004,594
Trade and
other
payables 693,840,621 -- -- -- -- 693,840,621
Deferred tax
expense
payable 6,033,240 11,792,241 17,825,481 16,795,888 -- 52,446,850
Bonds 39,716,667 -- 8,711,806 48,525,000 2,723,650,000 2,820,603,473
Financial
liabilities
at fair value
through pro t
or loss:
Derivative
nancial
instruments* 531,367,705 10,727,553 16,216,069 15,279,435 -- 573,590,762
Total
liabilities
excluding net
assets
attributable
to
shareholders 1,316,962,827 22,519,794 42,753,356 80,600,323 2,723,650,000 4,186,486,300
Net assets
attributable
to
shareholders -- -- -- -- -- --
Total
Liabilities $ 1,316,962,827 $ 22,519,794 $ 42,753,356 $ 80,600,323 $ 2,723,650,000 $ 4,186,486,300
* In the case of derivatives that reference equity securities, the derivative
terms provide that the counterparty, if directed, may terminate the derivative
directly in the marketplace without requiring any upfront cash payment and
such termination would follow the above liquidation time horizons.
** Represents the fair value of the Forward Purchase Units, which is the value
that would be received to sell these assets in an orderly transaction between
market participants at the measurement date. Pursuant to the Forward Purchase
Agreement, the Company has an obligation to purchase Committed Forward
Purchase Units and the option to purchase Additional Forward Purchase Units no
later than simultaneously with the closing of PSTH's IBC. The Committed
Forward Purchase Units and Additional Forward Purchase Units each have a
purchase price of $20.00. See Note 14 for further details.
As of
December 31, Less than 1 6 to 12
2019 Month 1 to 3 Months 3 to 6 Months Months Over 1 Year Total
Assets
Cash and cash
equivalents $ 1,222,846,586 $ -- $ -- $ -- $ -- $ 1,222,846,586
Due from
brokers 114,975,502 -- -- -- -- 114,975,502
Trade and
other
receivables 7,124,045 -- -- -- -- 7,124,045
Financial
assets at
fair value
through pro t
or loss:
Investments in
securities 4,703,594,767 726,462,406 249,674,918 54,603,934 -- 5,734,336,025
Derivative
nancial
instruments* 51,792,308 48,447,390 26,965,946 3,655,159 -- 130,860,803
Total Assets $ 6,100,333,208 $ 774,909,796 $ 276,640,864 $ 58,259,093 $ -- $ 7,210,142,961
Liabilities
Due to
brokers $ -- $ -- $ -- $ -- $ -- $ --
Trade and
other
payables 45,497,324 -- -- -- -- 45,497,324
Deferred tax
expense
payable 3,025,184 5,912,860 4,570,802 -- -- 13,508,846
Bonds 36,850,000 -- -- 37,400,000 1,886,200,000 1,960,450,000
Financial
liabilities
at fair value
through pro t
or loss:
Derivative
nancial
instruments* 7,607,415 -- -- -- -- 7,607,415
Total
liabilities
excluding net
assets
attributable
to management
shareholders 92,979,923 5,912,860 4,570,802 37,400,000 1,886,200,000 2,027,063,585
Net assets
attributable
to management
shareholders -- 134,828,916 -- -- 17,535,993 152,364,909
Total
Liabilities $ 92,979,923 $ 140,741,776 $ 4,570,802 $ 37,400,000 $ 1,903,735,993 $ 2,179,428,494
* In the case of derivatives that reference equity securities, the derivative
terms provide that the counterparty, if directed, may terminate the derivative
directly in the marketplace without requiring any upfront cash payment and
such termination would follow the above liquidation time horizons.
Although a majority of the Company's portfolio is comprised of
liquid, large-capitalization securities, there may be contractual
or regulatory restrictions on trading, or "trading windows" imposed
with respect to certain issuers for which the Investment Manager
has board representation or is otherwise restricted. Although these
limitations are considered in connection with the portfolio
liquidation analysis, these restrictions are not taken into
consideration when calculating the overall liquidity in the table
above as the Investment Manager has been able to liquidate such
securities successfully through block trades or automatic
purchase/sale plans. The Investment Manager believes that the
appropriate metric for assessing portfolio liquidity is to
calculate how many days it would require to liquidate a position
assuming the Investment Manager were able to capture 20% of the
trailing 90-day average trading volume. On a monthly basis, this
metric is applied to the existing portfolio to assess how long it
will take to divest the Company (and the other PSCM- managed funds)
of its portfolio positions.
Credit Risk
Credit risk is the risk that a counterparty to a nancial
instrument will fail to discharge an obligation or commitment that
is entered into with the Company, resulting in a nancial loss to
the Company. It arises principally from derivative nancial assets,
cash and cash equivalents, and balances due from brokers. In order
to mitigate credit risk, the Company seeks to trade only with
reputable counterparties that the Investment Manager believes to be
creditworthy. The Investment Manager has negotiated its ISDA
agreements to include bilateral collateral agreements. Thereafter
the Investment Manager monitors exposure, performs reconciliations,
and posts/receives cash or U.S. Treasury collateral to/from each of
the Company's counterparties on a daily basis. The Company invests
substantially all cash collateral received in U.S. Treasurys or
short-term U.S. Treasury money market funds. In addition, from time
to time, the Company purchases credit default swap contracts on the
Company's counterparties as a form of credit protection. The
Investment Manager prepares daily reports that set forth the
Company's exposure (along with that of the other PSCM-managed
funds) to each counterparty. Such reports include the credit
default swap notional exposure, the net unhedged/(over hedged)
exposure, initial margin posted and the net counterparty exposure.
In addition, the Investment Manager reviews credit ratings reports
on its counterparties on a weekly basis. Please refer to the
Condensed Schedule of Investments on pages 103-104 (which is
explicitly incorporated by reference into these Notes to Financial
Statements) for additional details regarding the Company's nancial
assets and nancial liabilities.
After taking into effect the offsetting permitted under IAS 32,
the Company views its credit exposure to be $156,794,838 and
$236,389,446 at December 31, 2020 and December 31, 2019,
respectively, representing the fair value of derivative contracts
in net asset position net of derivative contracts in net liability
position and net of any collateral received by or given to ISDA
counterparties. The Company may purchase credit default swap
contracts to hedge against a portion of the Company's credit
exposure to certain derivative counterparties. At December 31, 2020
and December 31, 2019, the Company held no credit default swap
contracts on its counterparties. The Company did however, utilize
index credit default swaps and credit default swaps referencing
unrelated counterparties during 2020 to hedge its portfolio against
market downturns as a result of the global pandemic.
The Company maintains its cash and cash equivalents position at
major nancial institutions. At times, cash balances may exceed
federally insured limits and, as such, the Company has credit risk
associated with such nancial institutions. The cash and cash
equivalents balances are re ected in the statement of nancial
position. At December 31, 2020 and December 31, 2019, cash was
primarily invested in U.S. Treasury money market funds with daily
liquidity as disclosed in Note 10.
The Company's prime brokers are required to provide custody
services for the Company's securities. The prime brokers are not
permitted under U.S. law to lend out (or "re-hypothecate") the
Company's securities if these securities are fully paid. If the
Company uses margin leverage, the prime brokers may lend out the
Company's securities to fund the prime brokers' business, but are
restricted under U.S. law; that is, the prime brokers may only lend
out an amount of the Company's securities that is less than or
equal to 140% of the debit balance that the prime broker extends to
the Company as credit. The Company monitors its accounts to avoid
running a debit balance for a signi cant period of time.
Additionally, the Company has processes in place that allow it to
quickly move securities from its prime brokers into a regulated
bank entity which is not legally permitted to re-hypothecate client
securities.
The following table analyzes the Company's cash and cash
equivalents (2020: $1,879,639,109, 2019: $1,222,846,586), due from
brokers (2020: $955,676,624, 2019: $114,975,502) and nancial assets
portfolio (2020: $9,697,025,818, 2019: $5,865,196,828) based on the
underlying custodians' and counterparties' credit rating, with the
exception of the Company's investments in PSTH Sponsor and the
Additional and Committed Forward Purchase Units which the Company
excluded for purposes of this calculation. For cash held at the
Company's futures commission merchant ("FCM"), the Company has
exposure to both the FCM and the clearing house which securities
are cleared. This calculation only considers the credit rating of
the FCM.
As of December 31 2020 2019
AAA 16% 17%
A 83% 81%
BBB+ 1% 2%
Total 100% 100%
The following tables reconcile the Company's due from brokers
and due to brokers balances from a gross basis to a net basis under
which they are presented on the statement of nancial position.
As of December 31 2020 2019
Due from brokers
Cash held at prime brokers $ 1,418,813 $ 8,475,934
Gross ISDA collateral posted 199,340,019 228,867,416
Cash/collateral held at FCM 770,647,811 --
Netting of collateral allowable under
ISDA agreements (15,730,019) (122,367,848)
$ 955,676,624 $ 114,975,502
As of December 31 2020 2019
Due to brokers
Gross ISDA collateral received $ (61,734,613) $ (122,367,848)
Netting of collateral allowable under
ISDA agreements 15,730,019 122,367,848
$ (46,004,594) $ --
14. COMMITMENTS AND CONTINGENCIES
The Pershing Square Funds entered into a forward purchase
agreement with PSTH on June 21, 2020. Pursuant to the forward
purchase agreement, the Pershing Square Funds have agreed to
purchase an aggregate of $1,000,000,000 of units (the "Committed
Forward Purchase Units"), which will have a purchase price of
$20.00 and consist of one share of PSTH Class A common stock and
one-third of one warrant. The purchase of the 50,000,000 Committed
Forward Purchase Units will take place in one or more private
placements in such amounts and at such time or times as the
Pershing Square Funds determine, with the full amount to have been
purchased no later than simultaneously with the closing of PSTH's
IBC. The obligation to purchase the Committed Forward Purchase
Units may not be transferred to any other parties.
The forward purchase agreement also provides that the Pershing
Square Funds (and/or affiliated co-investment funds) may elect to
purchase up to an additional aggregate amount of $2,000,000,000 of
units (the "Additional Forward Purchase Units" and collectively
with the Committed Forward Purchase Units, the "Forward Purchase
Units"), which will also have a purchase price of $20.00 and
consist of one share of Class A common stock and one-third of one
warrant. Any elections to purchase Additional Forward Purchase
Units will also take place in one or more private placements, in
such amounts and at such time or times as the Pershing Square Funds
determine, but no later than simultaneously with the closing of
PSTH's IBC. The Pershing Square Funds' right to purchase the
Additional Forward Purchase Units may be transferred, in whole or
in part, to any entity that is managed by PSCM, but not to third
parties. PSTH and the Pershing Square Funds may determine, by
mutual agreement, to increase the number of Additional Forward
Purchase Units at any time prior to the IBC.
The Pershing Square Funds' obligation or right, as applicable,
to purchase the Forward Purchase Units was allocated among the
Company, PSLP and PSI at 90.72%, 5.73% and 3.55%, respectively.
Other than disclosed above, there were no other commitments or
contingencies as of December 31, 2020 and December 31, 2019.
15. INVESTMENT MANAGEMENT AGREEMENT -- FEES, PERFORMANCE FEES
AND TERMINATION
The Investment Manager receives management fees and performance
fees, if any, from the Company pursuant to the IMA.
Management Fee
The Investment Manager receives a quarterly management fee
payable in advance each quarter in an amount equal to 0.375% (1.5%
per annum) of the net assets (before any accrued performance fee)
attributable to fee-paying shares. The fee-paying shares of the
Company are the Public Shares and the Special Voting Share.
For the years ended December 31, 2020 and 2019, the Investment
Manager earned management fees from the Company of $95,794,204 and
$64,422,781, respectively.
The Investment Manager chose to reduce the management fees paid
by the Company and three affiliated entities managed by the
Investment Manager for eight consecutive quarters beginning with
the management fee payable on April 1, 2018 by a total of $32.2
million. This amount is equal to the amount by which performance
fees would have been reduced had Allergan-related settlement
expenses been incurred in 2014 contemporaneously with gains from
the Allergan investment. The reduced fees were allocated among the
Company and three affiliated entities based upon the amount of
settlement reserves previously recognized at the years ended 2016
and 2017. As a result, the Company's management fees were reduced
by a total of $14.4 million.
The Investment Manager reduced the management fees paid by the
Company and three affiliated entities on March 1, 2019 as a result
of the Investment Manager's sale of its investment in IEX Group,
Inc. ("IEX"). The Company's portion of the reduction was
$2,477,980. See Note 16 for further details.
Performance Fee
Generally, the Investment Manager receives performance fees
annually and upon payment of dividends in an amount equal to 16% of
the NAV appreciation attributable to the fee-paying shares of the
Company above a high water mark (the "16% performance fee") and
before giving effect to the accrued performance fees minus the
Additional Reduction (de ned below). The 16% performance fees paid
in connection with dividends are prorated to re ect the ratio of
the dividend to the Company's net asset value at the time the
dividend is paid. The Company's payment of a dividend will reduce
the high water mark by the percentage of net asset value the
dividend represents. These performance fees are de ned as the
"Variable Performance Fee" in the IMA. No Variable Performance Fee
can be higher than the 16% performance fee, but it may, as a result
of the Additional Reduction, be lower (although it can never be a
negative amount).
The "Additional Reduction" is an amount equal to (i) the lesser
of the 16% performance fee and the Potential Reduction Amount (de
ned below), offset (up to such lesser amount) by (ii) the then
current portion of the Potential Offset Amount.
The "Potential Reduction Amount" is equal to (i) 20% of the
aggregate performance fees and allocation earned by the Investment
Manager and its affiliates in respect of the same calculation
period on the gains of current and certain future funds managed by
the Investment Manager or any of its affiliates plus (ii) if the
Potential Reduction Amount for the previous calculation period
exceeded the 16% performance fee, the excess amount (which is in
effect carried forward).
The "Potential Offset Amount" refers to the fees and other costs
of the offering and admission on Euronext Amsterdam of the Public
Shares and the commissions paid to placement agents and other
formation and offering expenses incurred prior to the IPO of the
Company that were, in each case, borne by the Investment Manager
pursuant to the IMA. The Potential Offset Amount will be reduced by
each dollar applied to reduce the Additional Reduction, until it is
fully reduced to zero.
The Potential Offset Amount is not a Company obligation but
instead is a component used in the calculation of the Variable
Performance Fee. Thus, if the Company or the Investment Manager
terminates the IMA or the Company liquidates and the Company pays
the Variable Performance Fee that may crystallize in connection
therewith, the Company has no obligation to pay any remaining
portion of the Potential Offset Amount.
The Potential Offset Amount equaled $120 million in the
aggregate at the time of the IPO. After giving effect to the
Potential Reduction Amount of $30.1 million in 2020, the Potential
Offset Amount was reduced to $52.4 million as of December 31, 2020
(2019: $82.5 million).
For the year ended December 31, 2020, the Investment Manager
earned performance fees of $3,522,993 in connection with the
payment of the quarterly dividend and an annual performance fee of
$692,171,565. For the year ended December 31, 2019, the Investment
Manager earned performance fees of $275,219 in connection with the
payment of the quarterly dividend and an annual performance fee of
$38,704,421.
Termination
The IMA automatically renews annually, except that it may be
terminated (a) as of December 31st of any year upon four months'
prior written notice by either party, subject, in the case of
termination by the Company, to approval by a 66 2/3% vote (by
voting power) of the holders of the then outstanding voting shares
of the Company, together with a 66 2 3% vote (by voting power) of
the holders of the then outstanding Public Shares; and (b) in case
of dissolution or liquidation of either party or if a receiver or
provisional liquidator or administrator or similar officer is
appointed over any of the assets of such party or if either party
commits a material breach of its obligations under the IMA and such
breach remains uncured for more than 30 calendar days after the
notice thereof delivered to the party in breach by the other party
in accordance with the IMA.
The termination of the IMA at any time will be a crystallization
event, which will result in the Variable Performance Fee described
above being payable.
16. RELATED PARTY DISCLOSURES
Rebalancing Transactions
The Investment Manager may seek to effect rebalancing
transactions from time to time pursuant to policies that are
intended to result in the Company and the affiliated entities
managed by the Investment Manager generally holding investment
positions on a proportionate basis relating to their respective
adjusted net asset values, which are equal to each of the entities'
net asset values plus any accrued (but not crystallized)
performance fees and the net proceeds of any outstanding long-term
debt, including the current portion thereof (which in the case of
the Company, includes the net proceeds from the Bonds as further
discussed below in Note 18). Rebalancing transactions involve
either the Company purchasing securities or other nancial
instruments held by one or more affiliated entities or selling
securities or other nancial instruments to one or more affiliated
entities.
Rebalancing transactions are subject to a number of
considerations including, but not limited to, cash balances and
liquidity needs, tax, regulatory, risk and other considerations,
which may preclude these transactions from occurring or limit their
scope at the time of the transactions. The Investment Manager
effects rebalancing transactions based on independent market
prices, and consistent with the valuation procedures established by
the Investment Manager. Neither the Investment Manager nor any of
its affiliates receive any compensation in connection with
rebalancing transactions. In addition, rebalancing transactions are
generally effected without brokerage commissions being charged. To
the extent that rebalancing transactions may be viewed as principal
transactions due to the ownership interest in the Company or an
affiliated entity by the Investment Manager and its personnel, the
Investment Manager will either not effect such transactions or
comply with the requirements of Section 206(3) of the U.S.
Investment Advisers Act of 1940, as amended, including that the
Investment Manager will notify the relevant entity (or an
independent representative of that entity) in writing of the
transaction and obtain the consent of that entity (or an
independent representative of that entity), and any other
applicable law or regulation.
The Investment Manager effected rebalancing transactions among
the Company, PSLP and PSINTL in relation to certain of the
Company's investments. The aggregate fair value of these
rebalancing transactions was $8,119,333 and $105,934,754 for the
years ended 2020 and 2019, respectively. Rebalancing transactions
pertaining to the Company's investment in PSVI are discussed in
"Pershing Square VI Investments".
Pershing Square VI Investments
During the period from January 1, 2019 to July 31, 2019, the
Company held investments in each of PS VI Intl and PS VI LP. As of
the PS VI Cessation Date, the Company had ownership percentages in
PS VI Intl and PS VI LP of 49.70% and 19.84%, respectively. On the
PS VI Cessation Date, PS VI transferred to the Company its
ownership of 1,392,332 ADP common shares (with a value of
$228,342,448), as a partial redemption in kind of its indirect
ownership interests in the PS VI Master Fund. Immediately following
the ownership transfer, the PS VI Master Fund sold such ADP shares
through a block sale as agent to the Company. On August 8, 2019,
the remainder of the Company's ownership was paid out in cash
except for cash held back for any adjustments required to be made
pursuant to the PS VI nal audits. The nal distribution was made on
October 17, 2019.
The Investment Manager had determined that the Company's
investments in PS VI were fair valued in accordance with IFRS and
the Company's accounting policy. No fair value adjustments were
made for trading restrictions. The Company was not charged a
management fee or performance fee in relation to its investments in
PS VI.
All realized and unrealized gains and losses from the
investments in PS VI were re ected in the statement of
comprehensive income for the year ended December 31, 2019. The
Company did not recognize gains or losses of any kind subsequent to
the nal distribution date of October 17, 2019.
During 2019, the Investment Manager effected rebalancing
transactions in PS VI on April 1, 2019 and July 1, 2019 among the
Company, PSLP and PSINTL. On April 1, 2019, the Company purchased
$21,532,957 and $23,146,526 of PSINTL's interests in PS VI Intl and
PSLP's interest in PS VI LP, respectively. On July 1, 2019, the
Company purchased $18,715,681 and $17,691,431 of PSINTL's interests
in PS VI Intl and PSLP's interest in PS VI LP, respectively. The
Company's purchases were completed at the fair market values of PS
VI LP and PS VI Intl based on the closing prices of the PS VI
Master Fund's underlying securities on the date prior to the
transactions. In connection with each rebalancing transaction, the
Company sold certain direct interests it owned in ADP so that after
the rebalancing transactions the Company's delta-adjusted exposure
to ADP reached the intended percentage of its adjusted net
assets.
Pershing Square Tontine Holdings, Ltd.
The Pershing Square Funds wholly own PSTH Sponsor, an affiliate
of the Investment Manager, and are its only source of funding. PSTH
Sponsor is the sponsor entity for PSTH, which is a newly organized
blank-check company formed for the purpose of effecting a merger,
capital stock exchange, asset acquisition, stock purchase,
reorganization or similar business combination with one or more
businesses.
On May 7, 2020, the Pershing Square Funds made a capital
contribution of $25,000 to PSTH Sponsor to fund PSTH Sponsor's
acquisition of 100 shares of PSTH Class B common stock at a price
of $250.00 a share. The Company's portion of the contribution was
$21,076. The number of votes carried by each share of Class B
common stock will be such that, the 100 shares of Class B common
stock will, in the aggregate, hold 20.0% of the voting power of the
Class A common stock and Class B common stock issued and
outstanding immediately following PSTH's IPO and will not be
adjusted following PSTH's IBC or upon the issuance of any Forward
Purchase Units.
In addition to the Pershing Square Funds' initial capital
contribution, PSTH Sponsor agreed to loan PSTH up to $1,500,000 to
cover certain expenses pursuant to a promissory note. The loan was
unsecured, accrued interest on a monthly basis at the applicable
federal rate, and was payable no later than the end of the 24-month
(or 30-month, as applicable) period from the PSTH IPO in which PSTH
must complete its IBC.
From May 26, 2020 to July 2, 2020, the Company made additional
contributions to PSTH Sponsor totaling $957,355, all of which PSTH
Sponsor loaned to PSTH under the promissory note. On July 24, 2020
all amounts drawn down by PSTH under the promissory note with PSTH
Sponsor, along with a nominal amount of interest, were fully repaid
and immediately distributed to the Pershing Square Funds.
On July 21, 2020, PSTH Sponsor agreed to purchase the Sponsor
Warrants from PSTH for an aggregate purchase price of $65,000,000.
The Company's pro-rata portion of the Sponsor Warrants' purchase
price was $58,967,000. The Sponsor Warrants will generally not be
salable, transferable or exercisable until three years after the
date of PSTH's initial business combination (the "IBC"), and will
be exercisable, in whole or in part, for that number of shares
constituting 5.95% of the common shares of the post-combination
business on a fully diluted basis at the time immediately following
the PSTH's IBC, as more fully described in the PSTH S-1. The
Sponsor Warrants will have a term of 10 years from the consummation
of PSTH's IBC.
As of December 31, 2020, the market value of PSTH Sponsor's
investment in the Sponsor Warrants and Class B common stock of PSTH
was $238,940,673 and $2,772, respectively, and $238,943,445 in
total. Based on the Company's 90.72% ownership of PSTH Sponsor, the
market value of the Company's investment in PSTH Sponsor was
$216,765,432 as of December 31, 2020. All realized and unrealized
gains and losses from the Company's investment in PSTH Sponsor are
re ected in the statement of comprehensive income for the year
ended December 31, 2020. See Note 7 for the discussion on the fair
value measurement.
In addition to the Company's investment in PSTH Sponsor, the
Company agreed to purchase the Committed Forward Purchase Units
from PSTH and may elect to purchase Additional Forward Purchase
Units. See Note 14 for further details regarding these
investments.
Director's Fees
For the year ended December 31, 2020, the Company's independent
Directors' fees in relation to their services for the Company were
$331,525 of which none were payable as of December 31, 2020. For
the year ended December 31, 2019, the Company's independent
Directors' fees in relation to their services for the Company were
$357,559 of which none were payable as of December 31, 2019.
Management and Performance Fees
The relationship between the Company and the Investment Manager
and the fees earned are disclosed in Note 15.
The IMA was amended February 12, 2019 to account for the effect
of a dividend on fees paid to the Investment Manager. This
amendment constituted a small transaction for the purposes of
Chapter 11 of the Listing Rules and was therefore exempt from the
requirements thereof.
In January 2013, PSCM invested $1 million in IEX, a private
alternative trading system company. IEX's business objective is to
create an execution alternative to reduce the trading costs of
large investors (including the Company). The Pershing Square Funds
were prohibited from investing in IEX due to restrictions on
investments in private companies. Because PSCM believed that the
success of the IEX platform would bene t all funds managed by PSCM
and that the funds would likely trade on the IEX platform, in order
to eliminate any potential for con icts of interest, PSCM chose to
invest in IEX effectively on behalf of the funds, including the
Company.
At the time of PSCM's $1 million investment in IEX, PSCM
committed to bear 100% of any losses from its investment in IEX. In
the event the investment in IEX was pro table, PSCM committed to
reduce the aggregate management fees that the Pershing Square Funds
and Pershing Square II, L.P. paid by an amount equal to any pro t
realized in respect of the disposition, as adjusted in its sole
discretion, for any fees, costs, taxes, or expenses incurred by
PSCM from the investment.
PSCM sold its investment in IEX in March 2019 and realized $3.7
million in net pro ts after adjusting for taxes and other expenses.
As previously agreed by PSCM, the pro ts were used to reduce the
management fees payable by the Pershing Square Funds and Pershing
Square II, L.P. The reduction was allocated pro-rata among these
funds based on each fund's respective net asset value as of March
1, 2019. As a result, the 2019 management fees payable by the
Company were reduced by $2,477,980.
Beneficial Ownership of Portfolio Companies
In the normal course of business, the Company and its affiliates
make concentrated investments in portfolio companies where the
aggregate bene cial holdings of the Company and its affiliates may
be in excess of 10% of one or more portfolio companies' classes of
outstanding securities. At such ownership levels, a variety of
securities laws may, under certain circumstances, restrict or
otherwise limit the timing, manner and volume of disposition of
such securities. In addition, with respect to such securities, the
Company and its affiliates may have disclosures or other public
reporting obligations with respect to acquisitions and/or
dispositions of such securities.
As of December 31, 2020 and December 31, 2019, the Company and
its affiliates bene cially owned in excess of 10% of the
outstanding common equity securities of The Howard Hughes
Corporation. Additionally, as of December 31, 2020, assuming full
election of the Forward Purchase Units, the Company and its
affiliates bene cially owned in excess of 10% of PSTH.
William A. Ackman is the chairman of the board of The Howard
Hughes Corporation, and Ryan Israel, a member of PSCM's investment
team, was a board member of Platform Specialty Products Corporation
until his resignation on February 4, 2019.
PSH Ownership
During the year ended December 31, 2020, William Ackman and
other affiliates of PSCM purchased and sold Public Shares as well
as option contracts referencing the Public Shares. As a result of
these transactions, assuming full exercise by their terms of all
such call option contracts, which Mr. Ackman intends to exercise in
2021, the share ownership of the Company held by William Ackman,
Nicholas Botta and other affiliates of PSCM would be approximately
25% at December 31, 2020 on a fully diluted basis (December 31,
2019: 22%).
17. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") is calculated by
dividing the pro t/(loss) for the year attributable to the Public
Shares and the Special Voting Share over the weighted average
number of Public Shares and the Special Voting Share outstanding,
respectively. In accordance with IFRS, the weighted average shares
outstanding calculated for the Public Shares and the Special Voting
Share were 197,168,930 and 1, respectively, for the year ended
December 31, 2020 and 214,402,994 and 1, respectively, for the year
ended December 31, 2019.
18. BONDS
The Company has issued the following Senior Notes as
follows:
Bond Date of Bond Face Fixed Rate Maturity
Issuance Coupon Date
2022 Bonds June 26, 2015 $ 1,000,000,000 5.50% per July 15,
annum 2022
2039 Bonds July 25, 2019 $ 400,000,000 4.95% per July 15,
annum 2039
2032 Bonds August 26, $ 200,000,000 3.00% per July 15,
2020 annum 2032
2030 Bonds November 2, $ 500,000,000 3.25% per November 15,
2020 annum 2030
The Bonds are listed on the Euronext Dublin with a trading
symbol of PSHNA.
The xed rate coupon of each Bond is paid semi-annually. The
proceeds from each offering of Bonds were in U.S. Dollars and were
used to make investments or hold assets in accordance with the
Company's Investment Policy. The Bonds rank equally in right of
payment with each other and contain substantially the same
covenants. The Company has the option to redeem all or some of the
2022 Bonds prior to June 15, 2022, at a redemption price equal to
the greater of (1) 100% of the principal amount of the 2022 Bonds
to be redeemed or (2) the sum of the present values of the
remaining scheduled principal and interest payments (exclusive of
accrued and unpaid interest to the date of redemption) on the 2022
Bonds to be redeemed, discounted to the redemption date on a
semi-annual basis using the applicable U.S. Treasury rate plus 50
basis points, plus accrued and unpaid interest.
Each of the 2039, 2032 and 2030 Bonds are callable at par plus a
customary make whole premium until a certain date (the "Par Call
Date") and thereafter become callable at 100% of Par. The Par Call
Date for the 2039 Bonds is July 15, 2034, for the 2032 Bonds is
July 15, 2030 and for the 2030 Bonds is August 15, 2030.
Until July 15, 2022, the 2039, 2032 and 2030 Bonds each have the
same key man provision as the 2022 Bonds, which requires the
Company to make an offer to acquire the 2022 Bonds and 2039 Bonds
at 101% of par plus accrued interest if a key man event occurs.
After July 15, 2022 the covenant is modi ed to provide that if a
key man event occurs, the speci ed debt to capital ratio in the
debt covenant is reduced from 1.0 to 3.0 to 1.0 to 4.0. If at the
time of the key man event, the Company's debt to capital ratio is
above 1.0 to 4.0, the Company has a one- time obligation to reduce
its debt to a 1.0 to 4.0 ratio within 180 days. In the event a
reduction is required, a portion of each Bond becomes callable at
101% of par in the amount necessary to achieve the required debt
repayment.
The fair value of the Bonds as of December 31, 2020 and December
31, 2019 is summarized in the table below:
As of December 31 2020 2019
Fair Value of the Bonds
2022 Bonds $ 1,057,350,000 $ 1,059,430,000
2039 Bonds 469,480,000 440,160,000
2032 Bonds 198,538,000 --
2030 Bonds 506,925,000 --
$ 2,232,293,000 $ 1,499,590,000
In accordance with IFRS 9, the Bonds' carrying value on the
statement of nancial position as of December 31, 2020 and December
31, 2019, is $2,122,787,844 and $1,422,883,554, respectively. The
Bonds' carrying value includes $27,721,656 of capitalized
transaction costs which are amortized over the life of the Bonds
using the effective interest method.
2020
At December 31, 2019 $ 1,422,883,554
Write-off of 2039 Bonds issue costs 86,988
2032 Bonds issued 200,000,000
2032 Bonds issue costs (1,936,379)
2030 Bonds issued 500,000,000
2030 Bonds issue costs (6,075,836)
Finance costs for the year 82,079,517
Bonds coupon payments during the year (74,250,000)
At December 31, 2020 $ 2,122,787,844
Finance costs for the year:
Bonds coupon expense $ 79,602,528
Amortization of Bonds issue costs incurred as nance costs 2,476,989
Interest expense $ 82,079,517
2019
At December 31, 2018 $ 1,017,411,979
2039 Bonds issued 400,000,000
2039 Bonds issue costs (5,294,101)
Finance costs for the year 65,765,676
Bonds coupon payments during the year (55,000,000)
At December 31, 2019 $ 1,422,883,554
Finance costs for the year:
Bonds coupon expense $ 63,592,033
Amortization of Bonds issue costs incurred as nance costs 2,173,643
Interest expense $ 65,765,676
19. DEFERRED TAX EXPENSE
As a foreign corporation holding a bene cial ownership in a U.S.
real property interest (The Howard Hughes Corporation), the Company
will be subject to the Foreign Investment in Real Property Tax Act
of 1980 ("FIRPTA") income tax withholding upon disposition of such
investment. Foreign corporations purchasing U.S. real property
interests are required to pay the U.S. corporate tax rate
(currently 21%) on the gain realized upon the disposition. To
accrue for this potential withholding the Company assessed a 21%
rate on the unrealized gains on the stock and equity forward
contracts purchased, if any, which resulted in a deferred tax
expense of $38,938,005 and $13,508,846 for the years ended December
31, 2020 and December 31, 2019, respectively.
20. EVENTS AFTER THE REPORTING PERIOD
The Investment Manager has evaluated the need for disclosures
and/or adjustments resulting from subsequent events during the
period between the end of the reporting period and the date of
authorization of the Financial Statements. This evaluation together
with the Directors' review thereof did not result in any additional
subsequent events that necessitated disclosures and/or
adjustments.
Supplemental U.S. GAAP Disclosures
(Stated in United States Dollars)
CONDENSED SCHEDULE OF INVESTMENTS
Percentage of Net
Shares Description/Name Fair Value Assets
Investments in
Securities
Equity Securities
Common Stock
Canada:
Restaurant:
Restaurant Brands
21,389,922 International Inc. $ 1,307,138,133 14.44%
Restaurant Brands
International Limited
140,873 Partnership 8,617,944 0.10
Total Canada (cost
$837,417,419) 1,315,756,077 14.54
United States:
Financial Services 346,990,611 3.83
Hospitality:
Hilton Worldwide
11,407,293 Holdings Inc. 1,269,175,419 14.02
Life Science
Tools/Industrials:
Agilent Technologies
10,455,906 Inc. 1,238,920,302 13.69
Real Estate
Development and
Operating:
The Howard Hughes
8,632,800 Corporation 681,386,904 7.53
Restaurant:
Chipotle Mexican
962,452 Grill, Inc. 1,334,641,813 14.74
8,369,971 Starbucks Corporation 895,419,498 9.89
Retail:
10,592,116 Lowe's Companies Inc. 1,700,140,539 18.78
Total United States
(cost
$4,138,439,763) 7,466,675,086 82.48
Total Common Stock
(cost
$4,975,857,182) 8,782,431,163 97.02
Preferred Stock
United States:
Financial Services
(cost $87,085,587) 94,265,224 1.04
Total Equity
Securities (cost
$5,062,942,769) 8,876,696,387 98.06
Investment in
Affiliated Entity
United States:
Special Purpose
Acquisition Company:
Pershing Square TH
Sponsor, LLC
Sponsor Warrants(1) 216,762,909 2.39
Class B Common
Stock(1) 2,523 0.00
Total Investment in
Affiliated Entity
(cost $58,988,076) 216,765,432 2.39
Total Investments in
Securities (cost
$5,121,930,845) $ 9,093,461,819 100.45%
(1) Figures relate to the Company's investment in Pershing Square TH Sponsor,
LLC which holds Sponsor Warrants and Class B Common Stock referencing Pershing
Square Tontine Holdings, Ltd. Refer to Note 16 for further details.
CONDENSED SCHEDULE OF INVESTMENTS (CONTINUED)
Percentage of Net
Shares Description/Name Fair Value Assets
Derivative Contracts
Currency Call/Put
Options Purchased
Currency Put Options,
U.S. Dollar Call
Options (cost
$6,341,207)
Credit Default Swaps,
Buy Protection
United States:
Financial Services
(premiums received
$1,221,906) (1,260,780) (0.01)
Equity Options Written
Real Estate Development
and Operating:
The Howard Hughes
Corporation, Put
Options, $75.08 -
$91.63, 01/06/2021 -
08/11/2021 (premiums
6,925,000 received $168,958,095) (47,711,572) (0.53)
Foreign Currency
Forwards
Currencies 222,752 0.00
Forward Purchase Units
United States:
Special Purpose
Acquisition Company:
Pershing Square Tontine
Holdings, Ltd.
Committed Forward
Purchase Units(2) 387,563,628 4.28
Additional Forward
Purchase Units(2) 148,876,614 1.65
Total Forward Purchase
Units 536,440,242 5.93
Index Credit Default
Swaps, Buy Protection
Europe (308,616,726) (3.41)
United States (216,001,684) (2.39)
Total Index Credit
Default Swaps, Buy
Protection (premiums
received $511,487,493) (524,618,410) (5.80)
Interest Rate Swaptions
Purchased
Interest Rate Swaptions
(cost $63,834,613) 61,101,294 0.68
Total Return Swaps,
Long Exposure
United States:
Financial Services 5,556,245 0.06
Total Derivative
Contracts (net
cost/premiums received
$611,491,674) $ 29,973,237 0.33 %
(2) Figures relate to the Company's investments in the Committed Forward
Purchase Units and the Additional Forward Purchase Units as discussed further
in Note 14.
FINANCIAL HIGHLIGHTS
For the year ended 2020 Public Shares
Per share operating performance
Beginning net asset value at January 1, 2020 $ 26.94
Change in net assets resulting from nancing:
Accretion from share buyback 0.66
Dividends paid (0.40)
Change in net assets resulting from operations:
Net investment loss (4.19)
Net gain from investments and derivatives(1) 22.45
Ending net asset value at December 31, 2020 $ 45.46
Total return prior to performance fees 83.54 %
Performance fees (13.31)
Total return after performance fees
Ratios to average net assets 70.23 %
Expenses before performance fees 2.68 %
Performance fees 9.94
Expenses after performance fees 12.62 %
Net investment income/(loss)(2) (1.80)%
(1) Net gain from investments and derivatives includes deferred tax expense.
See Note 19 for further details.
(2) Net investment income/(loss) ratio includes dividend income, interest
income, management fees, interest expense, professional fees, other expenses
and withholding tax(dividends) as shown on the statement of comprehensive
income.
Certain Regulatory Disclosures
1. None of the Company's assets are subject to special
arrangements arising from an illiquid nature.
2. There have been no material changes to the Company's risk pro
le and risk management system as disclosed in the Prospectus of the
Company dated October 2, 2014.
3. a) There have been no changes to the maximum amount of
leverage which the Investment Manager may employ on behalf of the
Company since the Company's inception. The terms of the Company's
Bonds restrict the Company from incurring indebtedness beyond a
total debt-to-capital ratio of 33.3%. If a key man event occurs
after July 15, 2022, the terms of the Bonds reduce the Company's
permitted total debt-to-capital ratio to 25%.
Articles 7 and 8 of the Level 2 Regulations of the Alternative
Investment Fund Managers Directive (the "Directive") set forth the
methodology of calculating the leverage of the Company in
accordance with the gross method and the commitment method.
Leverage is expressed as the exposure of the Company. Exposures are
calculated using the sum of the absolute values of all positions
valued in accordance with Article 19 of the Directive and all
delegated acts adopted pursuant to Article 19. For derivatives,
exposures are calculated using the conversion methodology set forth
in Annex II to the Level 2 Regulations. For all other securities,
exposures are calculated using market values. The gross method
excludes cash and cash equivalents held in the Company's base
currency as per Article 7. The commitment method includes cash and
cash equivalents and employs netting and hedging arrangements as
per Article 8. The total amount of leverage employed by the Company
as per these calculations as of December 31, 2020 is shown
below.
Gross method: $34,889,040,780
Commitment method: $36,679,119,432
The amounts disclosed in the calculation above are substantially
higher than in the previous year due to the Company's large
notionally sized investments in the ownership of index credit
default swaps and interest rate swaptions.
The Company generally does not expect to use a signi cant amount
of margin nancing. In the past, securities purchased by the Company
pursuant to prime brokerage services agreements typically, but not
always, have been fully paid for. Although it is anticipated that
securities purchased in the future typically will be fully paid
for, this may not be the case in all circumstances.
In addition, the Company, from time to time, enters into total
return swaps, options, forward contracts and other derivatives,
some of which have inherent recourse leverage. The Company
generally uses such derivatives to take advantage of investment
opportunities or manage regulatory, tax, legal or other issues and
not in order to obtain leverage. However, depending on the
investment strategies employed by the Company and speci c market
opportunities, the Company may use such derivatives for
leverage.
b) There have been no material changes to the right of the
re-use of collateral or any guarantee granted under any leveraging
arrangement.
From time to time, the Company may permit third-party banks,
broker-dealers, nancial institutions and/ or derivatives
counterparties ("Third Parties"), to whom assets have been pledged
(in order to secure such Third Party's credit exposure to the
Company), to use, reuse, lend, borrow, hypothecate or
re-hypothecate such assets. Typically, with respect to derivatives,
the Company pledges to Third Parties cash, U.S. Treasury securities
and/or other liquid securities ("Collateral") as initial margin and
as variation margin. Collateral may be transferred either to the
Third Party or to an unaffiliated custodian for the bene t of the
Third Party. In the case where Collateral is transferred to the
Third Party, the Third Party pursuant to these derivatives
arrangements will be permitted to use, reuse, lend, borrow,
hypothecate or re-hypothecate such Collateral. The Third Parties
will have no obligation to retain an equivalent amount of similar
property in their possession and control, until such time as the
Company's obligations to the Third Party are satis ed. The Company
has no right to this Collateral, but has the right to receive
fungible, equivalent Collateral upon the Company's satisfaction of
the Company's obligation under the derivatives. Collateral held as
securities by an unaffiliated custodian may not be used, reused,
lent, borrowed, hypothecated or re-hypothecated. From time to time,
the Company may offer guarantees to Third Parties with respect to
derivatives, prime brokerage and other arrangements. These
guarantees are not provided by the Company as a guarantee of the
payment and performance by other funds managed by the Investment
Manager to such Third Parties. Rather, the guarantees are typically
to guarantee the payment and performance by entities that are
direct or indirect subsidiaries of the Company. Such entities are
typically set up to manage regulatory, tax, legal or other issues.
To the extent that a subsidiary is not 100% owned by the Company,
the Company will typically only guarantee such subsidiary for the
bene t of Third Parties to the extent of the Company's ownership
interest in the subsidiary.
4. With respect to the liquidity management procedures of the
Company, the Company is a closed-ended investment fund, the Public
Shares of which are admitted to trading on Euronext Amsterdam and
the LSE. As such, Public Shares have no redemption rights and
shareholders' only source of liquidity is their ability to trade
Public Shares on Euronext Amsterdam and the LSE.
5. The Bonds are subject to the following transfer
restrictions:
(a) Each holder of the Bonds is required to be either (a) a
quali ed institutional buyer ("QIB") as de ned in Rule 144A under
the U.S. Securities Act of 1933, as amended (the "Securities Act")
who is also a quali ed purchaser ("QP") as de ned in Section
2(a)(51) of the U.S. Investment Company Act of 1940 or (b) a
non-U.S. person, provided that, in each case, such holder can make
the representations set forth in the Listing Particulars, dated
June 24, 2015,
(b) The Bonds can only be transferred to a person that is a
QIB/QP in a transaction that is exempt from the registration
requirements of the Securities Act pursuant to Rule 144A or to a
non-U.S.person in an offshore transaction that is not subject to
the registration requirements of the Securities Act pursuant to
Regulation S, or to the Company, and
(c) The Company has the right to force any holder who is not a
QIB/QPor a non-U.S. person to sell its Bonds.
6. Remuneration
For the Year Fixed Variable Number of
Ended 2020 Remuneration(1) Remuneration(1) Total Beneficiaries
Total
remuneration
of entire
PSCM staff
(2) $10,444,400 $669,022,621 $679,467,021 36
Remuneration
of PSCM staff
who are fully
or partly
involved in
the
activities of
the Company
(3) $8,545,250 $662,614,763 $671,160,013 24
Proportion of
remuneration
of PSCM staff
who are
involved in
the
activities of
the Company
as a
percentage of
the total
PSCM staff
remuneration 81.82% 99.04% 98.78% 24 out of 36
Remuneration
of senior
management
and PSCM
staff whose
actions have
a material
impact on the
risk pro le
of the
Company $5,902,600 $636,186,117 $642,088,717 12
(1) Fixed remuneration reflects salaries and guaranteed remuneration earned in
2020 by PSCM staff. All other remuneration earned in 2020 is considered to be
variable remuneration.
(2) Total remuneration reflects salaries, bonuses and performance
fees/allocations earned by PSCM staff in 2020 for services provided to PSCM,
the Company and/or other funds managed by PSCM.
(3) Remuneration earned in 2020 by any staff member involved in the activities
of the Company for services provided by such staff member to PSCM, the Company
and/or other funds managed by PSCM.
Affirmation of the Commodity Pool Operator
To the best of the knowledge and belief of the undersigned, the
information contained in the audited Financial Statements of
Pershing Square Holdings, Ltd. for the year ended December 31, 2020
is accurate and complete.
/s/ Michael Gonnella
Michael Gonnella
By: Michael Gonnella
Chief Financial Officer
Pershing Square Capital Management, L.P.
Commodity Pool Operator
Pershing Square Holdings, Ltd.
Commodity Pool
Endnotes and Disclaimers
NOTES TO CHAIRMAN'S STATEMENT
(i) Calculated with respect to Public Shares only and as of
December 31, 2020. Performance results are presented on a
net-of-fees basis. Net returns include the reinvestment of all
dividends, interest, and capital gains from underlying portfolio
companies and assume an investor has participated in any "new
issues" as such term is de ned under Rules 5130 and 5131 of FINRA.
Net returns also re ect the deduction of, among other things,
management fees, brokerage commissions, administrative expenses and
performance fees (if any). Performance is based on the dollar
return for the speci c period, including any and all dividends paid
by the Company, calculated from the beginning of such period to the
end of such period. Past performance is not a guarantee of future
results.
(ii) Total shareholder return for 2020 is calculated based on
PSH's Public Shares traded on Euronext Amsterdam. Over the same
period, the total shareholder return for Public Shares listed in
Sterling and USD on the London Stock Exchange was 78.5% and 84.2%,
respectively. Total shareholder return for Public Shares includes
dividends paid with respect to such shares.
(iii) Please see Endnote 3 in "Endnotes to Company Performance
and Investment Manager's Report.
(iv) The Company's total debt to capital ratio is calculated in
accordance with the "Total Indebtedness to Total Capital Ratio"
under the PSH Bonds' Indentures. Under the Indentures, the
Company's "Total Capital" re ects the sum of its NAV and its "Total
Indebtedness". Total Indebtedness re ects the total "Indebtedness"
of the Company and any consolidated subsidiaries (excluding any
margin debt that does not exceed 10% of the Company's total
capital), plus the proportionate amount of indebtedness of any
unconsolidated subsidiary or affiliated special investment vehicle.
As de ned in the Indentures, "Indebtedness" re ects indebtedness
(i) in respect of borrowed money, (ii) evidenced by bonds, notes,
debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof), representing capital
lease obligations, (iv) representing the balance deferred and
unpaid of the purchase price of any property or services (excluding
accrued expenses and trade payables in the ordinary course of
business) due more than one year after such property is acquired or
such services are completed or (v) in respect of the Company's
capital stock that is repayable or redeemable, pursuant to a
sinking fund obligation or otherwise, or preferred stock of any of
the Company's future subsidiaries. Indebtedness does not include,
among other things, NAV attributable to any management shares or
hedging obligations or other derivative transactions and any
obligation to return collateral posted by counterparties in respect
thereto.
(v) As of March 23, 2021 for PSH's Shares traded on Euronext
Amsterdam.
(vi) The weighted average dividend yield of the S&P 500 was
1.5% as of March 23, 2021.
(vii) Free oat refers to the number of Public Shares not owned
by affiliates of Pershing Square.
(viii) Holdings of affiliates of the Investment Manager have not
been aggregated for regulatory reporting purposes.
(ix) Calculated based on the Company's Public Shares traded on
Euronext Amsterdam. Over the same periods, the discount to NAV of
Public Shares listed in Sterling on the London Stock Exchange
narrowed from 28.5% to 22.8% as of December 31, 2020 and widened to
25.6% as of March 23, 2021 and the discount for Public Shares
listed in USD narrowed from 28.7% to 23.1% as of December 31, 2020
and widened to 24.8% as of March 23, 2021.
(x) PSTH units were issued on July 22, 2020 at $20. Each unit
consisted of one share of PSTH Class A common stock and one-ninth
of one redeemable warrant. On September 11, 2020, the redeemable
warrants began trading separately (NYSE: PSTH/WS) from the PSTH
Class A common stock (NYSE: PSTH). The premium to the PSTH IPO
price re ects the closing price of one share of PSTH Class A common
stock and one-ninth of the price of one redeemable warrant on March
23, 2021.
NOTES TO COMPANY PERFORMANCE AND INVESTMENT MANAGER'S REPORT
1. Performance results are presented on a net-of-fees basis. Net
returns include the reinvestment of all dividends, interest, and
capital gains from underlying portfolio companies and re ect the
deduction of, among other things, management fees, brokerage
commissions, administrative expenses and accrued and/or
crystallized performance allocation/fees (if any). The Company's
performance is based on the dollar return for the speci c period,
including any and all dividends paid by the Company, calculated
from the beginning of such period to the end of such period. Where
the Company's performance is presented with that of PSLP,
performance results assume that an investor (i) has been invested
in PSLP since inception, has not invested in Tranche G, and has
participated in any "new issues," as such term is de ned under
Rules 5130 and 5131 of FINRA and (ii) investor invested in PSLP at
its inception on January 1, 2004 and converted to PSH at its
inception on December 31, 2012. Depending on the timing of an
individual investor's speci c investment in the Company and/or
PSLP, net performance for an individual investor may vary from the
net performance as stated herein.
2. PSLP's net performance results are presented as it is the
Pershing Square fund with the longest track record and
substantially the same investment strategy to the Company. The
inception date for PSLP is January 1, 2004. In 2004, Pershing
Square earned a $1.5 million (approximately 3.9%) annual management
fee and PSLP's general partner earned a performance allocation
equal to 20% above a 6% hurdle from PSLP, in accordance with the
terms of the limited partnership agreement of PSLP then in effect.
That limited partnership agreement was later amended to provide for
a 1.5% annual management fee and 20% performance allocation
effective January 1, 2005. The net returns for PSLP presented
herein re ect the different fee arrangements in 2004, and
subsequently, except that the performance of the tranche of
interests subject to a 30% performance allocation and a 5% hard
hurdle (non- cumulative) issued on January 1, 2017 is not re ected
in PSLP's returns. In addition, pursuant to a separate agreement,
in 2004 the sole unaffiliated limited partner of PSLP paid Pershing
Square an additional $840,000 for overhead expenses in connection
with services provided unrelated to PSLP, which have not been taken
into account in determining PSLP's net returns. To the extent that
such overhead expenses had been included as fund expenses of PSLP,
net returns would have been lower.
3. The S&P 500 Total Return Index ("index") has been
selected for purposes of comparing the performance of an investment
in the Company or PSLP, as applicable, with a well-known,
broad-based equity benchmark. The statistical data regarding the
index has been obtained from Bloomberg and the returns are
calculated assuming all dividends are reinvested. The index is not
subject to any of the fees or expenses to which the Pershing Square
funds are subject. The Pershing Square funds are not restricted to
investing in those securities which comprise this index, their
performance may or may not correlate to this index and they should
not be considered a proxy for this index. The volatility of an
index may materially differ from the volatility of the Pershing
Square funds' portfolios. The S&P500 is comprised of a
representative sample of 500 U.S. large cap companies. The index is
an unmanaged, oat-weighted index with each stock's weight in the
index in proportion to its oat, as determined by Standard &
Poor's. The S&P 500 index is proprietary to and is calculated,
distributed and marketed by S&P Opco, LLC (a subsidiary of
S&P Dow Jones Indices LLC), its affiliates and/or its licensors
and has been licensed for use. S&P(R) and S&P 500(R), are
registered trademarks of Standard & Poor's Financial Services
LLC. (c) 2021 S&P Dow Jones Indices LLC, its affiliates and/or
its licensors. All rights reserved.
4. The performance data presented on page 2 under "Cumulative
(Since Inception)" and "Cumulative PSH (Since Inception)" is
calculated from January 1, 2004 and December 31, 2012,
respectively.
5. NAV performance is presented as net of all fees and is
compared to Pershing Square Funds with substantially the same
investment strategy to the Company. Please also refer to endnotes i
and ii of the Chairman's Statement.
6. Please refer to Endnote 3.
7. Refer to Endnotes 1 and 4.
8. Please refer to Endnote 1. The Company's share return is
calculated based on PSH's Public Shares traded on Euronext
Amsterdam. The return using Public Shares listed in Sterling and
USD on the London Stock Exchange was 15.1% and 15.2%, respectively.
The return for Public Shares includes dividends paid with respect
to such shares.
9. Net investment gain re ects total investment gains and
losses, dividend income, withholding tax on dividends and deferred
tax expense on the statement of comprehensive income.
10. Calculated based on the dollar change of the Company's
portfolio from January 1, 2020 to December 31, 2020, including
dividends received.
11. Assets re ect the Company's net assets calculated on
February 4, 2021 and March 23, 2021 in accordance with IFRS without
deducting amounts attributable to accrued performance fees, while
adding back the Company's value of its debt outstanding ($2.1
billion).
12. Ownership stake on a fully diluted basis, includes PSCM
affiliates and assumes the exercise of all call option
contracts.
13. This report re ects the contributors and detractors to the
performance of the portfolio of the Company. Other than share
buyback accretion and bond interest expense, positions with
contributions or detractions to performance of 50 basis points or
more are listed separately, while positions with contributions or
detractions to performance of less than 50 basis points are
aggregated. Since June 20, 2019, the Company has engaged in share
repurchases whereby its buyback agent has repurchased Public Shares
subject to certain limitations. The accretion from the share
buyback program is re ected herein.
The contributions and detractions to performance presented
herein are based on gross returns which do not re ect the deduction
of certain fees or expenses charged to the Company, including,
without limitation, management fees and accrued performance
allocation/fees (if any).
Inclusion of such fees and expenses would produce lower returns
than presented here. In addition, at times, Pershing Square may
engage in hedging transactions to seek to reduce risk in the
portfolio, including investment- speci c hedges that do not relate
to the underlying securities of an issuer in which the Company is
invested.
For each issuer, the gross returns re ected herein (i) include
only returns on the investment in the underlying issuer and the
hedge positions that directly relate to the securities that
reference the underlying issuer (e.g., if the Company was long
Issuer A stock and also purchased puts on Issuer A stock, the gross
return re ects the pro t/loss on the stock and the pro t/loss on
the put); (ii) do not re ect the cost/ bene t of hedges that do not
relate to the securities that reference the underlying issuer
(e.g., if the Company was long Issuer A stock and short Issuer B
stock, the pro t/loss on the Issuer B stock is not included in the
gross returns attributable to the investment in Issuer A); and
(iii) do not re ect the cost/ bene t of portfolio hedges.
Performance with respect to currency hedging related to a speci c
issuer is included in the overall performance attribution of such
issuer. For all other currency derivatives, the long/short classi
cation is determined by the non-USD leg of the derivative. For
example, a long USD call/GBP put option position would be
considered a short exposure, and a long USD put/GBP call option
would be considered a long exposure.
The contributors and detractors to the gross returns presented
herein are for illustrative purposes only. The securities on this
list may not have been held by the Company for the entire calendar
year. All investments involve risk including the loss of principal.
It should not be assumed that investments made in the future will
be pro table or will equal the performance of the securities on
this list. Past performance is not indicative of future results.
Please refer to the net performance gures presented on page 2.
14. While the Pershing Square funds are concentrated and often
take an active role with respect to certain investments, they will
own, and in the past have owned, other investments, including
passive investments and hedging-related positions. "Short Activist
Positions" includes options, credit default swaps and other
instruments that provide short economic exposure. All trademarks
are the property of their respective owners. It should not be
assumed that any of the securities transactions or holdings
discussed herein were or will prove to be pro table, or that the
investment recommendations or decisions Pershing Square makes in
the future will be pro table or will equal the investment
performance of the securities discussed herein. Companies shown in
this gure are meant to demonstrate Pershing Square's active
investment style and the types of industries in which the Pershing
Square funds invest, and were not selected based on past
performance.
Limitations of Performance Data
Past performance is not necessarily indicative of future
results. All investments involve risk including the loss of
principal. This report does not constitute a recommendation, an
offer to sell or a solicitation of an offer to purchase any
security or investment product. This report contains information
and analyses relating to all publicly disclosed positions above 50
basis points in the Company's portfolio during 2020. Pershing
Square may currently or in the future buy, sell, cover or otherwise
change the form of its investment in the companies discussed in
this report for any reason. Pershing Square hereby disclaims any
duty to provide any updates or changes to the information contained
here including, without limitation, the manner or type of any
Pershing Square investment.
Forward-Looking Statements
This report also contains forward-looking statements, which re
ect Pershing Square's views. These forward-looking statements can
be identi ed by reference to words such as "believe", "expect",
potential", "continue", "may", "will", "should", "seek",
"approximately", "predict", "intend", "plan", "estimate",
"anticipate" or other comparable words. These forward-looking
statements are subject to various risks, uncertainties and
assumptions. Accordingly, there are or will be important factors
that could cause actual outcomes or results to differ materially
from those indicated in these statements. Should any assumptions
underlying the forward-looking statements contained herein prove to
be incorrect, the actual outcome or results may differ materially
from outcomes or results projected in these statements. None of the
Company, Pershing Square or any of their respective affiliates
undertakes any obligation to update or review any forward-looking
statement, whether as a result of new information, future
developments or otherwise, except as required by applicable law or
regulation.
Pershing Square Holdings, Ltd.
pershingsquareholdings.com
Media Contact
Camarco
Ed Gascoigne-Pees / Hazel Stevenson +44 020 3757 4989,
media-pershingsquareholdings@camarco.co.uk
View source version on businesswire.com:
https://www.businesswire.com/news/home/20210329005729/en/
CONTACT:
Pershing Square Holdings, Ltd.
SOURCE: Pershing Square Holdings, Ltd.
Copyright Business Wire 2021
(END) Dow Jones Newswires
March 30, 2021 02:00 ET (06:00 GMT)
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