02/26/2014

Pershing Square Brushes Aside Redemptions

An internal analysis by Pershing Square Capital showing that its short bet on Herbalife ranks as its “biggest loser” in 10 years also highlights a gradual increase in investor withdrawals.

Limited partners in the firm’s “core funds” last year pulled out capital equal to 17.9% of net assets, while subscriptions amounted to just 8.2%. That translates to net outflows of nearly 10% of the funds’ average net asset value during 2013 — or more than $1 billion. Indeed, if not for a 9.7% investment gain for its flagship domestic vehicle, Pershing Square LP, the activist manager would have finished 2013 with less capital than it had at the start of the year. The firm reported $12 billion under management at yearend, with all but about $400 million in the core funds.

A presentation by the firm at its annual investor dinner on Feb. 13 attracted wide attention for the disclosure that its high-profile bet against supplement maker Herbalife had lost 49% as of yearend. But the headline number overshadowed a longer-term trend that has seen Pershing Square’s firm-wide redemption rate rise from around 2% of NAV in late 2011 to about 6% currently. During the financial crisis, the rate briefly spiked above 10% — a relatively modest hit compared to what many other hedge fund managers were dealing with at the time.

The recent outflows contrast with $5.2 billion of net inflows that activist managers as a whole took in last year, according to Hedge Fund Research. Still, the rising redemption rate doesn’t appear to have Pershing Square worried. For one thing, a chunk of last year’s withdrawals were the result of George Soros pulling out. Soros, who owned a substantial amount of Herbalife stock, had several hundred million dollars invested with Pershing Square, a source said.

Meanwhile, the firm’s core funds have gained more than 9% so far this year, matching the performance for all of last year despite a weak stock market. The year-to-date increase has lifted overall assets to a peak of $12.8 billion — roughly where the firm wants to be.

Mounting redemptions could reflect any number of factors, including the liquidity needs of investors, but Pershing Square’s reputation as a savvy investor has been dented by Herbalife and another recent play, JC Penney. Its JC Penney investment, which it exited last year, lost 41% — qualifying as the second-biggest loser since the firm’s inception in 2004.

Because certain share classes restrict withdrawals for the first two years following a redemption order, it’s possible Pershing Square’s Herbalife bet could trigger more outflows down the road. For its part, Herbalife is actively pursuing such an outcome, hiring investment bank Moelis & Co. in December to approach Pershing Square investors and encourage them to walk.

Despite its strong performance this year, Pershing Square’s recent returns have been less than stellar. Its flagship fund was running a 19.2% average annual return at yearend, but the last time it hit or exceeded that mark was in 2010. That was also the last year that Pershing Square bested the return of the S&P 500 Index or Russell 1000 Index.

Meanwhile, the firm has lagged its peers in the last two years. The HFRI Activist Index rose 16.1% last year following a 20.9% increase in 2012 — when Pershing Square’s main fund rose 13.3%.

The firm hasn’t actively raised capital for most of its funds in a couple of years. But it has been laying the groundwork for an initial public offering for a vehicle called Pershing Square Holdings, which currently has about $2.6 billion of private capital. The plan is to raise additional money from investors in Europe before listing the vehicle on the London Stock Exchange.

But Pershing Square founder William Ackman has promised investors that he won’t pull the trigger on a public offering until it becomes clear that post-IPO assets will total at least $4 billion. That’s to address investor concerns about the liquidity of public shares if the float is too small.

What’s clear is that Pershing Square Holdings has taken in relatively little fresh capital since launching with $2.2 billion in late 2012 — raising uncertainty about the timing of an IPO. “Our goal is to proceed with the IPO at the earliest possible date,” the firm told investors in a recent “operational due diligence” report. The fund gained 9.6% last year.

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