PSH-Annual-Report

Annual Report Year Ended December 31, 2014or alternatively they rise in price (the problematiccase).One of the reasons why we prefer liquid securitiesto illiquid situations is because of the greaterprobability that we will be able to acquire a positionat or around the price that our analysis was basedupon. Unless we believe that at the time ofpurchase, it is a once-in-a-lifetime buyingopportunity (think GGP), we typically leave someroom to increase our position if the price/valuerelationship becomes even more favorable in thefuture. Unlike many investors, we do not take tokenpositions as we begin work and then add topositions as we build conviction. We are either allin(while often retaining a “re-buy” ticket in ourpocket), or we keep our chips in a large pile of U.S.Treasurys.Scale and Shareholder ActivismWe believe that large scale shareholder activism isone of the few investment strategies where thereare economies and competitive advantages thatcome with scale. The economies of scale arisefrom the fact that large capitalization companieshave typically never been pushed by an activist ora private equity investor and, as such, often offerunrecognized opportunities for value creation.These opportunities arise due to hidden value inundervalued subsidiaries or divisions, inefficientuses of capital, and opportunities for cost reductionand margin expansion. As our funds have grown insize, we are able to invest in and influence auniverse of companies that previously were toolarge for us to work with. Historically, we haveaddressed this problem by raising SPVs to pursuea particular investment, although there aredisclosure and other risks associated with usingSPVs to address this issue.From a competitive standpoint, we have fewcompetitors in large cap shareholder activism, andwe believe that we are unlikely to have many suchnew competitors in the future. This is due to thedifficulty of raising sufficient capital to form a startup to pursue this strategy, and the time required tobuild the reputational equity needed to effectuateit. Large cap activism is one of the few investmentstrategies where one’s track record on previousinvestments increases the probability of successon future such investments. It takes years to buildsuch a record, and as such, our track record ofsuccessful activism is an important long-termcompetitive advantage for Pershing Square.While there are certain situations today that we willpass on because of their small size, there areothers that we can now pursue that we would nothave had the resources to execute in the past. Inother words, while some smaller names havedropped off the list, new larger names have beenadded to our investment universe.We believe that these larger businesses generallyoffer greater opportunities for the kinds ofcorporate change that we often pursue. This is dueto the fact that these large enterprises have notbeen owned by active investors historically andhave been largely insulated from private equity andother unsolicited investors because of their scale.As a result, we continue to believe that for theforeseeable future, scale will be an asset forPershing Square, and, therefore, we have kept the[core private] funds open to new subscriptions. Thegoal has not been to raise additional capital, butrather to maintain capital stability by acceptingcapital to replace redeeming investors over time.That said, we intend to manage our capital flowscarefully. If we receive commitments for amountsthat we feel we cannot invest or which will causeunacceptable dilution in current holdings, we willpostpone accepting these funds until ourcircumstances change. While this may cause someinvestor nuisance, we will do our best to keep youin the loop so that we minimize any inconvenienceon your part.The alternative would be to close the fundstemporarily or permanently. In light of the openendedstructure of [some of] our funds, we thinkthat such an approach would lead to reducedstability in our capital base.TransparencyOur goal in our communications with you is to giveyou the information we would want if our positionswere reversed, that is, if we were the investor andyou the investment manager. Using this paradigm,we endeavor to inform you about businesschallenges and related developments as promptlyas practicable, as good news generally takes careof itself. We will, however, not disclose informationto anyone (unless of course we are required to doso by law) if we believe it may compromise ourinvestment program. Fortunately, our investmentstrategy by its nature is readily transparentbecause it is largely comprised of a small numberof long investments in listed North Americancompanies, and the amount of turnover in theportfolio is generally modest.PERSHING SQUARE HOLDINGS, LTD. 23