TIDMPSH
Pershing Square Holdings, Ltd. ("PSH") (LN:PSH) (NA:PSH) today
announced that its Annual General Meeting of Shareholders ("AGM")
will be held on Tuesday, 24 April 2018 at 10:00 a.m. BST at Royal
Chambers in St. Peter Port, Guernsey. The PSH annual report and
financial statements for the year ended 31 December 2017 are now
available on PSH's website,
https://www.pershingsquareholdings.com/company-reports/financial-statements/
.
At the AGM, shareholders will consider the receipt of the annual
report and the financial statements, the re-election of PSH's four
directors, the election of two additional new directors and the
re-appointment of PSH's auditor.
Shareholders will also consider resolutions authorizing PSH to
buy back shares and launch a tender offer for up to an aggregate
amount of $300 million of PSH's public shares, proposals to make
certain amendments to the Articles of Incorporation of the Company
to remove the existing ownership limit of 4.99% of the value of
PSH's Public Shares and permit certain conversions of Public Shares
into Management Shares, and the disapplication of shareholders'
pre-emption rights.
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/
.
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
Bronwyn Curtis and Richard Wohanka for election as non-executive
Directors to the PSH board of directors at the upcoming AGM. The
election of Ms. Curtis and Mr. Wohanka would expand the board to
six members, five of whom are independent.
"The board is pleased to recommend that shareholders elect
Bronwyn and Richard to the PSH board," said PSH Chairman Anne
Farlow. "Bronwyn's global financial services leadership roles and
experience as an investment trust director and Richard's strong
track record as an asset management CEO with deep knowledge of the
investment community would add valuable perspective to the board. I
am confident that the addition of Bronwyn and Richard to the board
will complement well the existing expertise of the board."
Bronwyn Curtis
Bronwyn Nanette Curtis is an experienced global financial
economist who has held senior executive positions in both the
financial and media sectors. She currently serves as a
non-executive director of a number of institutions including JP
Morgan Asian Investment Trust, 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
since 2006.
Ms. Curtis held several senior positions at HSBC from 2008 to
2012 where she managed the global research operations and portfolio
including the economic, fixed 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 financial news coverage.
Prior to joining Bloomberg, Ms. Curtis held positions at Nomura
International, Deutsche Bank and Gill and Duffus Group. Ms. Curtis
graduated from the London School of Economics with a Masters in
Economics in 1974, and an Economics degree from La Trobe
University, Australia in 1969.
Richard Wohanka
Richard Wohanka is an experienced Asset Management CEO and
currently serves as a non-executive director of BTG, Old Mutual
Global Investors, Union Bancaire Privee Japan, Embark Group,
Nuclear Liabilities Fund, James Neill Pension Fund and Scottish
Widows. He previously served as a non-executive director of Julius
Baer International.
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.
Mr. Wohanka worked at Banque Paribas from 1983 to 1996, where he
was the Chief Executive of Paribas Asset Management and Banque
Paribas Board Member from 1993 to 1996, and in the Asset Management
division from 1990 to 1993. He was 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.
There is no further information to disclose in accordance with
LR 9.6.13. The appointment of Ms. Curtis and Mr. Wohanka is also
subject to regulatory clearance.
About Pershing Square Holdings, Ltd.
Pershing Square Holdings, Ltd. (LN:PSH) (NA:PSH) is an
investment holding company structured as a closed ended fund that
makes concentrated investments principally in North American
companies.
This is a disclosure according to Article 17 of the EU Market
Abuse Regulation (Regulation 596/2014/EU).
Contents
The Company 1
Chairman's Statement 2
2017 Key Highlights 6
Investment Manager's Report 7
Directors 19
Corporate Governance Report 21
Report of the Audit Committee 25
Report of the Directors 28
Report of Independent Auditor 35
Audited Financial Statements
Statement of Financial Position 40
Statement of Comprehensive Income 42
Statement of Changes in Net Assets Attributable 43
to Management Shareholders
Statement of Changes in Equity 44
Statement of Cash Flows 45
Notes to Financial Statements 46
Supplemental U.S. GAAP Disclosures
Condensed Schedule of Investments 73
Financial Highlights 75
Certain Regulatory Disclosures 76
Affirmation of the Commodity Pool Operator 78
The Company
Pershing Square Holdings, Ltd. (the "Company" or "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 the Company commenced trading
on Euronext Amsterdam N.V. ("Euronext Amsterdam") on October 13,
2014 with a trading symbol of PSH. On May 2, 2017, the Company
announced that its Public Shares had been admitted to the Official
List of the UK Listing Authority and had commenced trading on the
Premium Segment of the Main Market of the London Stock Exchange
(the "LSE").
The Company has appointed Pershing Square Capital Management,
L.P. ("PSCM," the "Investment Manager" or "Pershing Square"), a
Delaware limited partnership, as its investment manager pursuant to
an agreement between the Company and the Investment Manager. The
Investment Manager has responsibility, subject to the overall
supervision of the Board of Directors, for the investment of the
Company's assets and liabilities in accordance with the investment
policy of the Company set forth in this Annual Report.
The Company's investment objective is to preserve capital and to
seek maximum, long-term capital appreciation commensurate with
reasonable risk. The Company seeks to achieve its investment
objective through long and occasionally short positions in equity
or debt securities of public U.S. and non-U.S. issuers (including
securities convertible into equity or debt securities), derivative
instruments and any other financial instruments that the Investment
Manager believes will achieve the Company's investment
objective.
Chairman's Statement
INTRODUCTION
Historically, PSH has traded exclusively on Euronext Amsterdam.
In May 2017, PSH ordinary shares began to also trade on the Main
Market of the London Stock Exchange ("LSE"). The LSE listing was an
important accomplishment for PSH and was the culmination of an
effort to improve market access for investors, increase liquidity
in PSH shares and assist in narrowing the discount to Net Asset
Value ("NAV") at which PSH shares trade. Soon after the LSE
listing, the FTSE Russell added PSH to the FTSE All-Share and the
FTSE 250 indices, another important step for PSH.
The Company faced two major challenges in 2017: (i) weak
investment performance; and (ii) the shares continued to trade at a
significant discount to NAV. This was the third year of portfolio
losses, albeit modest, but not satisfactory given the increase in
the stock market over the same period. The persistent discount to
NAV at which the shares trade indicates that some investors have
lost confidence in the ability of the Investment Manager to
generate superior investment returns for shareholders. On the other
hand, we also have investors who believe that now is an interesting
time to invest in PSH, to obtain exposure to an Investment Manager
who has an enviable long-term track record at a discount to the NAV
of the underlying portfolio, with low management fees and a high
watermark. The Board of PSH has a duty to govern the Company in a
manner that ensures the success of the Company, while also acting
in the best interests of all shareholders. To that end, the Board
has worked with the Investment Manager to address the persistent
discount to NAV at which PSH shares trade, to monitor investment
performance, and to evaluate the steps the Investment Manager is
taking to address recent sub-par performance.
INVESTMENT PERFORMANCE
During the year ended December 31, 2017, PSH's NAV declined by
4.0% i , ending the year at $17.41 per share. Performance since
Valeant began its decline in August 2015 is in stark contrast to
PSCM's long-term track record of a 13.6% ii compound annual net
return from its inception on January 1, 2004, through the end of
2017. The Board and the Investment Manager find recent performance
to be particularly unsatisfactory in light of last year's strong
stock market returns, and are working to improve performance.
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 PSCM 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.
The Board was pleased to see the robust generation of new
investment ideas by the Investment Manager in 2017. During the
year, PSCM established five new investments which all made a
positive contribution to 2017 investment performance. However, due
to substantially increasing share prices in a rising market during
the accumulation period, PSCM was unable to build sufficiently
large positions for three of these investments, and thus they did
not contribute materially to the overall 2017 performance.
The Board notes that the Investment Manager has taken a number
of important steps to minimize potential losses, and position the
portfolio for future profits. These include the settlement of the
Allergan litigation and the conversion of the Herbalife short
position to put options and its subsequent exit.
The Board recognizes that PSCM's negative investment performance
over the past three years has been in sharp contrast to its
historical track record. PSCM has acknowledged that such
underperformance is unsatisfactory and is working diligently to
address the factors leading to the underperformance. The Board
believes that the Investment Manager has taken meaningful steps to
position PSH to recover from these difficult years, and to improve
returns for our shareholders.
DISCOUNT MANAGEMENT
PSH shares continued to trade at a significant discount to NAV
during 2017. The Board took several steps to address the discount
during the year. On May 2, 2017, PSH's Public Shares commenced
trading on the Premium Segment of the Main Market of the LSE. In
July of 2017, PSH was included in the FTSE All-Share and FTSE 250
indices. We believe that approximately 6% of shares outstanding
were acquired by index funds at that time. Contemporaneously with
the listing, the Company launched a share buyback program for up to
approximately 5% of PSH's outstanding shares. From the inception of
the buyback program on May 2, 2017 to date, PSH invested $77.2
million to purchase 5,474,173 public shares at an average discount
of 20.1% and has remaining capacity under the current buyback
program to purchase an additional 6,525,827 of public shares. In
November 2017, PSH announced that it amended the terms of the share
buyback program to permit share purchases on Euronext Amsterdam,
alongside the LSE. This has enabled PSH to greatly increase the
pace of the buyback.
PROPOSED COMPANY TER OFFER
On February 28, 2018, PSCM Acquisition Co LLC ("PSCMAC"), an
entity owned by affiliates of PSCM, withdrew its proposed tender
offer for PSH publicly traded shares, which had originally been
announced on January 2, 2018, due to the Dutch Authority for
Financial Markets' (Autoriteit Financiële Markten, "AFM")
interpretation of certain applicable rules regarding the proposed
tender offer, which, in PSCMAC's view, made the proposed tender
offer not feasible.
As a result of PSCMAC's withdrawal of its tender offer, the
Board of Directors of PSH intends that PSH should conduct a tender
offer to purchase up to an aggregate amount of $300 million of its
publicly traded shares (the "Company Tender"). PSH anticipates that
the Company Tender would be structured as a Dutch-auction style
tender which is priced at a discount to PSH's prevailing net asset
value per public share, with the specific terms being detailed in
the Company Tender document to be issued in due course.
The Company Tender will be subject to applicable shareholder
approvals (discussed further below), including approval to remove
the current 4.99% shareholder ownership limit, which will be sought
at PSH's upcoming Annual General Meeting ("AGM") on April 24, 2018.
It is expected that the Company Tender would be launched shortly
following the AGM. The Company Tender would be financed from PSH's
cash on hand.
We believe that a tender offer made directly by the Company is
now appropriate in order to address the continuing imbalance
between supply and demand for the public shares. In addition, we
believe that the tender offer is a good use of available cash given
that the tender offer is expected to result in NAV accretion and in
light of the current trading prices of PSH's underlying
investments.
VOTE ON REMOVAL OF OWNERSHIP LIMIT
Historically, PSH has had an ownership limit of 4.99% because of
tax issues relating to the United States Real Property Holding
Company ("USRPHC") rules under the Foreign Investment in Real
Property Tax Act ("FIRPTA") provisions of the U.S. Internal Revenue
Code. Under current FIRPTA tax regulations, PSH may not own more
than 5% of the equity of a USRPHC without incurring adverse tax
consequences upon the disposal of the USRPHC. Should a PSH
shareholder own more than 5% of PSH and also own equity in the same
USRPHC, that shareholder's direct and indirect ownership of the
USRPHC would be attributed to PSH, potentially causing PSH to own
constructively more than 5% of the USRPHC, leading to adverse tax
consequences for all investors in PSH.
The Board has proposed to give PSH shareholders the opportunity
to vote on the removal of the ownership limit at the upcoming AGM.
If shareholders vote to remove the ownership limit, PSH will no
longer be able to invest in the common and preferred shares of
USRPHCs (including REITs and real estate C corps) without
potentially incurring the adverse tax consequences. However,
removing the ownership limit will give the Board the flexibility to
undertake the Company Tender and Company share repurchases in the
market if it is attractive to do so without the concern that a
shareholder who owns less than 5% of PSH shares prior to such
repurchase might own more than 5% afterwards. The Investment
Manager will use its best efforts to mitigate the effect of the
restriction on investments in USRPHCs by obtaining economic
exposure to USRPHCs in which it sees value by investing in total
return swaps and similar instruments, which do not have voting
rights.
William Ackman, CEO of PSCM, and other affiliates of PSCM have
indicated they intend to vote in favor of the removal of the
ownership limitation.
LEVERAGE
The PSH Bonds ($1 billion aggregate principal amount of Senior
Notes with a 5.5% per annum interest rate), traded up from
approximately par at the beginning of 2017 to approximately 105 by
the end of the year. The Bonds are rated BBB+ with a stable outlook
by Fitch and rated BBB with a negative outlook by S&P.
The terms of the Bonds do not allow PSH to incur debt beyond a
total debt-to-capital ratio of 1.0 to 3.0 and will restrict Company
buybacks that would cause the ratio to be exceeded. As of December
31, 2017, the Company's total debt to capital ratio was 19.1% iii .
The leverage of the Bonds amplified losses during 2017, but should
also accelerate the increase in NAV as the portfolio recovers. The
Board and PSCM continue to believe that a prudent amount of
long-term leverage should enhance the returns to PSH
shareholders.
CORPORATE GOVERNANCE/BOARD
The Board continues to work effectively. While I always
appreciate the work of the PSH Directors, I would particularly like
to thank the Directors for their continued wisdom and support over
the past year, which, given the LSE listing and other events,
imposed significant additional demands on their time. In addition,
in 2017, the Board appointed a Management Engagement Committee and
a Nomination Committee, both of which include only Directors
independent of the Investment Manager (the functions of these
committees are discussed further in the Corporate Governance
Report). Having separate committees is considered best practice.
Prior to the establishment of these committees, the Board satisfied
the functions of a Management Engagement Committee and Nomination
Committee by having only those Directors not affiliated with the
Investment Manager participate in the discussion of and vote upon
any matter that would typically come before either committee.
On February 12, 2018, Jonathan Kestenbaum retired as a
non-executive Director of the Company due to the increased demands
of his executive commitments. I would like to thank him for his
contribution to the Company since his appointment in 2014. We have
benefited greatly from his wise counsel during that time, and he
retires from the Board with our best wishes for the future.
Subsequent to Jonathan Kestenbaum's retirement, the Nomination
Committee promptly commenced a search process for prospective
candidates. After consideration of the results of initial
interviews and the notable background details of a number of highly
qualified candidates, the Nomination Committee recommended that the
Board submit two candidates for shareholder approval as
non-executive Directors of the Company at the upcoming AGM. Details
of the nominees' backgrounds are contained in the AGM circular also
issued at the time of this financial report.
EVENTS: SHAREHOLDER PORTFOLIO UPDATE AND ANNUAL GENERAL
MEETING
The Investment Manager presented a portfolio update to
shareholders in London on January 29, 2018 which discussed in
greater detail the events of 2017, identified the steps the
Investment Manager is taking to improve performance, and provided
an update on the portfolio. Slides from that presentation are
available on PSH's website: www.pershingsquareholdings.com .
PSH's AGM will be held in Guernsey on April 24, 2018. Details of
the event will be posted on www.pershingsquareholdings.com . I will
report to you on the first half of 2018 in August 2018, and the
Investment Manager will keep you informed of any significant
developments in the portfolio before then, when appropriate.
/s/ Anne Farlow Anne Farlow Chairman of the Board March 23,
2018
i Calculated with respect to Public Shares only. ii Past
performance is not a guarantee of future results. Net returns
include the reinvestment of all dividends, interest, and capital
gains and assume an investor has participated in any "new issues"
as such term is defined under Rules 5130 and 5131 of FINRA. Net
returns also reflect the deduction of, among other things,
management fees, brokerage commissions, administrative expenses and
performance allocation/fees (if any). Compound annual returns are
those of Pershing Square, L.P. ("PSLP"), the Pershing Square fund
with the longest track record and substantially the same investment
strategy to the Company. Please see footnote 5 in "Footnotes to
2017 Key Highlights and Investment Manager's Report" on page 18 for
further information. iii The Company's total debt to capital ratio
is calculated in accordance with the "Total Indebtedness to Total
Capital Ratio" under the PSH Bonds' Indenture. Under the Indenture,
the Company's "Total Capital" reflects the sum of its NAV and its
"Total Indebtedness". Total Indebtedness reflects 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 defined in the Indenture, "Indebtedness" reflects
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), (iii)
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.
Please see additional important disclaimers and notes on page
18.
2017 Key Highlights
PERFORMANCE
Pershing Square Holdings, Ltd. Performance vs. the S&P 500
PSH Gross Return(1) PSH Net Return(1) S&P 500(3)
2017 (2.6)% (4.0)% 21.8%
PERFORMANCE ATTRIBUTION(4)
Below are the attributions to gross performance of the portfolio
of the Company for 2017.
Winners Losers
Restaurant Brands 5.2% Herbalife Ltd. (4.0)%
International
Inc.
Automatic Data Processing, 3.5% Mondelez International, Inc. (3.5)%
Inc.
The Howard Hughes 1.6% Chipotle Mexican Grill, Inc. (2.7)%
Corporation
Nomad Foods Limited 1.3% Federal National Mortgage (2.1)%
Association
Hilton Worldwide 0.9% Federal Home Loan Mortgage (1.2)%
Holdings Inc. Corporation
Nike, Inc. 0.8% Valeant Pharmaceuticals (1.0)%
International, Inc.
Accretion 0.4% All Other Positions (2.7)%
All Other Positions 0.9%
Total Winners 14.6% Total Losers (17.2)%
Total Winners and Losers 2017 (2.6)%
Positions with performance attributions of 50 basis points or
more are listed above separately, while positions with performance
attributions of less than 50 basis points are aggregated. On May 2,
2017, the Company began its share buyback program whereby its
buyback agent began to repurchase Public Shares subject to certain
limitations. The accretion from the share buyback program is
reflected above.
Past performance is not a guarantee of future results. All
investments involve risk, including the loss of principal. Please
see accompanying footnotes on page 18.
Investment Manager's Report
HISTORICAL PERFORMANCE
Pershing Square Holdings, Ltd. Performance vs. the S&P 500
PSH Net Return(1) S&P 500(3)
2013 9.6% 32.4%
2014 40.4% 13.7%
2015 (20.5)% 1.4%
2016 (13.5)% 11.9%
2017 (4.0)% 21.8%
2013 - 2017(2)
Cumulative (Since Inception) 1.5% 107.9%
Compound Annual Return 0.3% 15.8%
The table and chart below reflect the net performance of
Pershing Square, L.P. ("PSLP"), the Pershing Square fund with the
longest track record, since inception. We present the PSLP track
record using its historical performance fee of 20%.
Pershing Square, L.P. Performance vs. the S&P 500
PSLP Net Return(1,5) S&P 500(3)
2004 42.6% 10.9%
2005 39.9% 4.9%
2006 22.5% 15.8%
2007 22.0% 5.5%
2008 (13.0)% (37.0)%
2009 40.6% 26.5%
2010 29.7% 15.1%
2011 (1.1)% 2.1%
2012 13.3% 16.0%
2013 9.7% 32.4%
2014 36.9% 13.7%
2015 (16.2)% 1.4%
2016 (9.6)% 11.9%
2017 (1.6)% 21.8%
2004 - 2017(2)
Cumulative (Since Inception) 493.6% 220.8%
Compound Annual Return 13.6% 8.7%
LETTER TO SHAREHOLDERS
Dear Pershing Square Investor,
For the first nearly 12 years of the Pershing Square strategy
from January 1, 2004 through July 31, 2015 investors earned a 20.5%
(1, 5) compounded annual return (a nine-fold return on a day-one
investment) compared to 7.8% for the S&P 500 over the same
period. As a result of three calendar years of underperformance,
our compounded annual return since inception has been reduced to
13.6% representing a six-fold return on a day-one investment in the
strategy. While the overall record is satisfactory for early
investors, it has been very disappointing for PSH investors who
invested in recent years. Our recent underperformance has been
further impacted by the widening of the discount to NAV at which
PSH shares trade. The obvious question is: What are we going to do
about it?
We have taken a number of important steps in 2017 and early 2018
that position the portfolio and our investment operation for
profits in the future. These steps included: (1) minimizing
potential risk exposures by (a) receiving preliminary approval from
the Court for the settlement of the Allergan litigation (which we
anticipate to be finalized later this year), and (b) by capping our
exposure to Herbalife by converting our short position into put
options and then subsequently exiting the position; (2)
restructuring the management company into a smaller
investment-centric organization with future asset growth driven by
investment results; and (3) reinforcing the implementation of our
core investment principles which have guided the substantial
majority of our performance since inception.
2017 should have been a stronger year for Pershing Square. I
attribute our underperformance last year to three principal
factors. First, legacy issues impacted performance including the
cost of the Allergan settlement, losses on the exit from Valeant
and from our short position in Herbalife. Second, while we
generated a substantial number of profitable investment ideas -
including ADP, Hilton, Nike, and S&P Global - other than for
ADP, increases in the prices of these investments due to the rapid
rise of the market, both during the research process and the
accumulation period, prevented us from building large enough
positions to materially impact performance. Third, although
positive contributors to returns in 2017 generated +14.6%, four
positions accounted for negative contribution of -13.5% (-4.0% HLF,
-3.5% MDLZ, -3.3% FNMA and FMCC and -2.7% CMG). Excluding HLF,
which we have exited, we remain optimistic about the risk/return
profile of these positions to a greater extent than before because
of their reduced prices.
With respect to the NAV discount, and as discussed in the
Chairman's Statement, PSH proposes to conduct a Company Tender for
$300 million subject to applicable shareholder approvals which will
be sought at the April 24, 2018 AGM. I and the other members of the
PSCM management team believe that PSH and our current portfolio are
substantially undervalued. Subject to applicable laws and
restrictions (including art. 7 para. 7 of the Dutch Decree on
Public Takeover Bids), I, along with others on the management team,
remain at liberty to purchase, directly or indirectly, PSH publicly
traded shares, including through open market purchases (regelmatig
beursverkeer), although we do not intend to do so until the company
tender is completed.
We believe that this is a particularly attractive time to invest
in PSH because:
-- our portfolio trades at a wide spread to intrinsic value with
catalysts which we believe should contribute to value
recognition
(which we discuss in detail in the Portfolio Update);
-- the shares are currently trading at approximately 23% discount to NAV,
which we would expect will narrow with improved investment
performance;
-- the idea generation engine is intact and productive;
-- we have largely resolved the potential liabilities that have caused
concern, namely the risk of a short squeeze at Herbalife and
the
Allergan litigation; and
-- fees are low as we have reduced management fees by $14.4 million over
the next eight quarters in connection with the Allergan
settlement,
and performance fees will not be payable until PSH recovers
above the
high water mark NAV of $26.37 per share.
While none of the above factors guarantee a good investment
outcome, they substantially increase the probability of our
success. PSH's negative performance was accentuated by PSH's
leverage (it has $1 billion of bonds outstanding), and its stock
price performance was further impacted by the widening of the NAV
discount. If we are successful in delivering substantial positive
investment performance, shareholders should receive the benefit of
a reversal of these two factors, further enhanced by the
substantially reduced fees charged by the investment manager.
As the largest investor in the Pershing Square funds, I and the
other members of the Pershing Square team have experienced our
recent underperformance first hand, but it is much worse to
generate losses for shareholders who are relying on our efforts for
their needs. You can be assured that we are working very hard to
deliver the results that you expect from us.
Thank you for your patience and support.
Sincerely,
William A. Ackman
PORTFOLIO UPDATE
Automatic Data Processing, Inc. (ADP)
ADP, a classic Pershing Square investment, was PSH's largest new
investment in 2017 and a meaningful contributor to returns for the
year. ADP is a simple, predictable, free-cash-flow generative
business that has underperformed its potential. We took an active
approach to our investment in the company and ran a proxy contest
to highlight the significant opportunity for improvement at the
company. Though we ultimately did not obtain board representation
as a result of the proxy contest, we believe that the proxy contest
was an effective tool to highlight the value-creation opportunity
that exists at ADP.
During our numerous public presentations throughout the proxy
campaign (which are still available at www.ADPascending.com ), we
emphasized the opportunity for ADP to 1) better its Enterprise
market offering 2) accelerate growth and 3) improve margins.
In our November letter to investors, we noted that as a result
of our proxy campaign and increased awareness and acceptance
regarding the opportunity for improvement, ADP's management has
committed to:
(1) Enterprise Product Launch: ADP stated that it has an
"upcoming" release of an Enterprise human capital management
product which will enable ADP to stem and potentially reverse
Enterprise market share losses;
(2) Accelerated Revenue Growth: after Employer Services' organic
revenue growth decelerates to 2% to 4% this fiscal year, growth
will reaccelerate to approximately 7% to 9% in the fiscal year
beginning July 1, 2018, and will continue into fiscal year 2020 in
order to achieve the company's guidance of 6% to 7% organic growth
over the next three fiscal years; and
(3) Margin Improvement: ADP will increase operational profit
margins by 500 basis points over the next three fiscal years
despite a projected decline in operational profit in the first
fiscal year.
ADP will have to meet the commitments it made to its
shareholders during the proxy contest, which when added to the
benefits of tax reform and rising interest rates will drive a
significant increase in earnings. ADP's potential for further
improvements beyond the modest commitments to date remains
significant. We continue to believe that Employer Services' (ADP's
core business which generates 2/3 of profit) growth can increase
from 2% to 4% to 7%+ while operating margins should increase from
19% today to 35% or greater once the business is optimized. These
improvements would imply $10 of EPS by FY 2022, more than double
the current earnings and a greater than 50% increase relative to
the status quo potential.
Since our proxy campaign concluded in November, we have engaged
in a dialogue with the company. The company's recently reported
fiscal Q2 2018 results make clear that ADP continues to have a
significant opportunity for improvement. While rising interest
rates and tax reform are driving strong overall results and
management's increase in fiscal year EPS growth guidance to
12%-13%, we were disappointed that the company's organic
operational growth in Employer Services remains weak, bookings
growth of 6% remains modest in light of an easy comparison with
last year, and management projects a 50 basis point decline in
overall margins for the year. While we and other shareholders were
not expecting material improvement in the first quarter since the
proxy contest, investor expectations will grow substantially over
the course of 2018.
Pro-forma for tax reform, ADP trades at 23 times its fiscal year
June 2019 EPS guidance, a reasonable price for a business of this
quality and growth characteristics. The current valuation is below
the valuation at which we initiated the position when considering
the positive benefits of tax reform, rising interest rates (which
increase the company's earnings from float), and modest organic
growth which have outpaced the stock price increase. We believe
that ADP stock is substantially undervalued if the company's
operations are optimized.
CEO Carlos Rodriguez recently stated that there is "no
disagreement about the potential that ADP has, it's really about
pace," and noted that the proxy campaign has "strengthened our
resolve to accelerate the execution of a strategy that I think was
on the right path to begin with," and that there is "nothing wrong
with a little bit of acceleration." We and other shareholders
expect ADP to comprehensively outline its plans to improve
long-term growth and margins in the coming months.
Restaurant Brands International Inc. (QSR)
QSR was PSH's largest contributor to returns in 2017. We
continue to believe that QSR is a high-quality business that
reflects our core investment principles and remains undervalued. In
our 2016 annual report, we wrote: "We believe [QSR's] highly
scalable and replicable operating strategy can be applied to
potential future acquisition opportunities."
In March 2017, QSR added Popeyes Louisiana Kitchen to existing
brands Burger King and Tim Hortons, and showed significant progress
in improving Popeyes' cost structure. We continue to believe that
over time, the company should be able to successfully execute
additional value-creating acquisitions.
QSR continued to show strong underlying business growth
throughout the year. QSR exhibited net unit growth of 7% at Burger
King and 3% at Tim Hortons. The company increased EBITDA margins by
300 basis points at Burger King and more than 1,500 basis points at
Popeyes. Same-store-sales growth at Burger King increased by 3%
which more than offset flat results at Tim Hortons.
Despite its significant share price appreciation in 2017, we
believe that QSR remains an attractive investment opportunity as it
is undervalued relative to intrinsic value and its peers. Despite
QSR's higher long-term growth potential compared to its peers, QSR
currently trades at 21 times our estimate of 2018 free cash flow
per share while peers trade at an average of 24 times free cash
flow per share based on analyst estimates.
Mondelez International (MDLZ)
MDLZ trades at less than 18 times consensus estimates of 2018
earnings per share, a significant discount to both peer valuations
and its historical average multiple despite its high business
quality, secular growth potential, and substantial margin
improvement opportunity. We believe this undervaluation is driven
by concerns that emerged in 2017 concerning the U.S. grocery
landscape, MDLZ's growth potential, and the recent CEO
transition.
While we believe there are enormous pressures facing U.S.
center-of-plate packaged food companies, MDLZ is not such a
company. Unlike other large cap packaged food companies based in
the U.S., MDLZ generates 75% of its sales overseas, including 40%
in emerging markets, and 85% of its global sales from snacks. This
advantaged geographic and category footprint should allow MDLZ to
generate superior long-term revenue growth. In the near-to-medium
term, revenue growth should be boosted by favorable foreign
currency exchange rates, product portfolio rationalization, and the
macroeconomic environment in emerging markets, which have all
turned from headwinds to tailwinds. The company started to show
good progress in accelerating revenue growth in 2017, with
underlying organic revenue up 2% in the second half after only 0.3%
growth in the first half, and reported revenue growing 5% in the
second half after a 2% decline in the first half.
In November, Dirk Van de Put, previously President and CEO of
McCain Foods, succeeded Irene Rosenfeld as CEO of MDLZ. He held his
first earnings call as CEO in late January 2018, during which he
issued 2018 guidance that was slightly below analyst expectations
for organic revenue growth and margin expansion, but 5% above
expectations for EPS growth. This guidance was widely viewed as
conservative, with the company admitting on the call that there
"should be some upside" to guidance. Despite conservative guidance,
we believe investor fears around a larger potential earnings
"rebase" when Mr. Van de Put outlines his multi-year strategic plan
at the end of the summer are unfounded given: (1) the substantial
capital invested over the last several years to upgrade the
manufacturing base and reduce product and procurement complexity;
(2) a strong current portfolio of products, given the significant
SKU rationalization over the last three years; (3) the healthy 9%
of sales that the company currently invests in advertising and
promotion, which is at the high end of its peer group given its
scale; and (4) the fact that the 2018 margin goal of 17% is still
materially below optimized levels.
We expect continued acceleration in revenue growth, double-digit
EPS growth, and clarity on Mr. Van de Put's strategy will cause
MDLZ's valuation to rise to levels approaching intrinsic value.
The Howard Hughes Corporation (HHC)
HHC is currently PSCM's longest standing investment in the
portfolio.
Until 2017, HHC operated largely below the radar of the
investment community. In 2017, HHC conducted its first Investor Day
on May 17 at the South Street Seaport in New York City. PSCM also
presented HHC at the Sohn Conference on May 8, 2017, in a
presentation entitled SimCities . We believe that over time,
increased transparency and continued progress on HHC's key
developments will enable the market to understand and assign
appropriate values to the significant underlying assets of HHC and
ultimately, to the HHC franchise.
In 2017, HHC continued to make excellent progress across its
portfolio. The Seaport District, one of HHC's most valuable assets,
is on track for its opening in the summer of 2018. ESPN recently
signed a long-term lease for 19,000 sq.ft. to broadcast its daily
shows from the Seaport which will bring greater visibility to this
unique location.
The company also made progress with Ward Village in Hawaii where
93% of the company's existing condo inventory has been sold or is
under contract. Summerlin, HHC's Las Vegas master planned
community, had its fifth straight year with over $100 million in
land sales. The company also achieved increased land sales at both
its Bridgeland and Woodlands MPCs in Houston. HHC has 50 million
sq.ft of remaining vertical development entitlements at its
existing MPCs alone, which is greater than 10 times the amount of
development that HHC has executed since 2011.
HHC has superb management led by David Weinreb and Grant
Herlitz, HHC's CEO and President, who recently entered into 10-year
employment agreements. As part of these agreements, David and Grant
completed their respective purchases of $50 million and $2 million
of warrants from the company, which they are restricted from
selling or hedging for the next five years. This represents one of
the largest investment commitments that we have seen from a
management team, highlighting their strong shareholder alignment
and long-term commitment.
In January 2018, Pershing Square Holdings sold its common stock
in HHC (but increased its HHC total return swaps position) allowing
PSH to maintain a more than 10% exposure to HHC. These transactions
give greater flexibility to PSH to take certain future steps to
address the discount to NAV.
Chipotle Mexican Grill, Inc. (CMG)
While 2017 was a difficult year for CMG's business and stock
price performance, we believe it was a year of transition. With
recent changes, we believe Chipotle represents a highly compelling
turnaround opportunity.
On November 29, CMG announced a search for a new CEO and the
transition of founder Steve Ells to Executive Chairman. On February
13, 2018, Chipotle announced that Brian Niccol would become the
company's new CEO and would be added to the board, effective March
5, 2018. Pershing Square partner and Chipotle board director Ali
Namvar was a member of the three-person CEO search committee that
helped identify and recruit Niccol.
Brian was most recently the CEO of Yum! Brands' Taco Bell
Division, where he was responsible for the highly successful
turnaround of the business. Under his leadership, Taco Bell
successfully repositioned the brand as a lifestyle brand and
launched numerous product initiatives, including the new breakfast
daypart, the fastest growing daypart in the industry. He
transformed Taco Bell into a social media leader and revolutionized
its digital approach through mobile ordering and payment across
their 7,000 restaurants.
Prior to Taco Bell, Niccol held leadership roles at Pizza Hut,
including Vice President of Strategy, Chief Marketing Officer, and
General Manager. Niccol began his career at Procter & Gamble
where he spent 10 years in various brand management positions.
Niccol is a proven executive with experience and expertise in
digital technologies, restaurant operations and branding. We are
thrilled that he has joined CMG as CEO at this pivotal time and
believe that he is the right leader to reinvigorate the company and
help it achieve its enormous potential.
Fannie Mae (FNMA) / Freddie Mac (FMCC)
FNMA and FMCC were negative contributors to returns in 2017.
Following the November 2016 presidential election, the prices of
both stocks increased significantly as investors believed the
likelihood of housing finance reform had increased as a result of
the election. Those gains were largely retraced in 2017 due to: (i)
an adverse court ruling in February 2017 in one of the GSE
shareholder lawsuits against the federal government (which does not
affect the government takings case that we and others have
brought); (ii) concerns that a rumored potential housing finance
reform bill will contain provisions that are unfavorable for
shareholders; and (iii) concerns that the Trump administration and
Congress are now occupied with other agenda items delaying a
potential resolution. Despite these factors, we believe that since
our initial investment in 2013, FNMA's and FMCC's intrinsic
business value and the probability of a favorable investment
outcome have increased materially.
For any proposal for housing finance reform to succeed, in our
view, it will need to satisfy a number of conditions including:
(1) Simplicity: The solution must be simple in order to ensure
broad support and minimize systemic risk; (2) Visibility: In order
to raise the enormous amount of required new private capital,
investors must have visibility into the long-term earnings power of
FNMA and FMCC; and (3) Fair treatment: Current investors in FNMA
and FMCC must be treated fairly in order for new capital to be
raised, as new investors will be highly sceptical as to how they
will be treated if the ultimate outcome is poor for legacy
shareholders.
While the timing of GSE and housing finance reform remains
uncertain, a number of positive developments in 2017 in the
political and regulatory landscape, which we have previously
described, cause us to be optimistic about the possibility of a
favorable resolution. Although the momentum for reform is much
stronger now than it was when we made our initial investment,
several key points of debate remain as roadblocks to reform:
(1) Feasibility and desirability of creating new competitors;
(2) Appropriate capital levels, rates of return and degree of
regulation; and (3) Treatment of various classes of securities in
Fannie and Freddie.
In recent months, we purchased preferred stock of both
companies. Our preferred stock represents approximately 21% of our
total investment in Fannie and Freddie, or about 1% of net assets.
While the substantial majority of our investment historically has
been in Fannie/Freddie common stock, we acquired preferred stock
recently because (1) we believe that the timing of a favorable
outcome for the two companies is more proximate (timing is an
important consideration for the preferred shares as they are
noncumulative and perpetual), (2) it hedges our risk of a
restructuring that disproportionately benefits the preferred versus
the common shares, and (3) we found the trading prices of the
preferred securities attractive at current levels. We still prefer
our investment in the common shares because the government and
taxpayers' interests, as owners of 79.9% of the common stock of
both companies, are aligned with the interests of common
shareholders. If housing reform is successful, we believe that both
FNMA and FMCC common and preferred stock will likely be worth
multiples of their current share prices.
Platform Specialty Products Corporation (PAH)
2017 was an important year of progress and recovery for PAH.
During 2017, the company generated 7% organic EBITDA growth driven
by 4% organic revenue growth and cost savings. The company also
refinanced $4 billion of debt, significantly lowering interest
expense. In August 2017, PAH announced that it intends to separate
its Ag and Performance Solutions businesses into two publicly
traded companies by the second half of this year in order to
increase long-term value.
While PAH made substantial business progress in 2017, this
progress was not reflected in the company's stock price as the
stock ended the year essentially unchanged. If PAH shares were to
trade at a valuation comparable to that of its competitors and
achieve analyst earnings estimates, they would be worth more than
$19, nearly 75% more than current levels.
Nike, Inc. (NKE)
NKE was one of five new investments for PSCM in 2017. NKE is a
classic Pershing Square-style investment as it is a high quality
business that we expect can compound long-term earnings at a high
rate due to strong revenue growth and margin expansion.
We seek to invest in businesses with dominant market share and
significant barriers to entry. As one of the world's most iconic
brands and the market leader in the athletic footwear and apparel
industry, NKE fits squarely in that category. NKE has unmatched
marketing spend and brand loyalty, patented innovations and
manufacturing skill (primarily footwear) and substantial leverage
with suppliers and retailer customers.
Athletic footwear accounts for 67% of the company's revenue and
has an attractive industry structure with favorable competitive
dynamics. We believe its historical high-single-digit annual
revenue growth rate is likely to continue as a result of:
(1) Positive secular trends in health & wellness and
casualization; (2) Substantial growth in emerging markets, which
comprise 30% of revenue; (3) Strong pricing power due to product
innovation and marketing; and (4) A significant margin opportunity
due to new manufacturing processes and rapid growth in distribution
channels with more favorable economics.
During the course of our four-month ownership of Nike (we sold
the position recently), the stock price appreciated by 34%,
reducing the returns to be earned from our investment to a level at
which we believed our capital could be allocated to more attractive
opportunities. It is rare that we are a short-term investor. That
said, we are always willing to redeploy capital if an investment
appreciates to a level that no longer offers sufficient returns
relative to other potential opportunities.
Herbalife Ltd. (HLF) Short
As discussed in detail in our Q3 2017 investor letter, we
restructured our HLF position into put options in order to limit
our downside exposure. This structure created a more attractive
risk-reward ratio while minimizing the risks associated with short
selling, which became more pronounced throughout the year following
Herbalife's share buyback program. Despite continued deteriorating
fundamentals, HLF negatively impacted PSH's 2017 performance as its
stock price increased during the year driven by a large share
buyback program and self-tender in August 2017 which substantially
reduced Herbalife's share count and free float.
While we have been correct in our belief that Herbalife's
business fundamentals would deteriorate as earnings per share,
revenue growth, and other measures of business performance weakened
substantially since we initiated the investment, we underestimated
Herbalife's ability to access debt capital and use financial
engineering which - coupled with Mr. Icahn's share purchases to
materially reduce the company's free float - has driven share price
appreciation. The reduction in free float is best evidenced by the
cover page of Herbalife's recently filed 10-K which reports 87.4
million shares outstanding of which only 22.7 million are held by
non-affiliates of the issuer as of June 30, 2017 (it is unclear why
the company does not report this calculation as of a more recent
date). In light of the large number of shares that are held by
index funds which are non-affiliates of the issuer, and the
company's recent announcement of another tender offer, it is not
surprising that the shares have continued to increase substantially
in price without regard to fundamental value as there is almost no
supply of shares for sale from non-affiliates of the company.
While we believe that deteriorating business fundamentals and a
high valuation are a good recipe for an attractive short sale,
technical factors are a critically important additional
consideration. While we continue to believe our analysis of
Herbalife's business remains correct, the shares have become a
highly risky short sale in light of the extremely limited free
float, and as a result, we have exited this investment.
Exited Positions
S&P Global Inc. (S&P)
Like Nike, S&P was a new investment in 2017 in which we were
unable to establish a meaningful position at an attractive price.
We found S&P attractive because of the annuity-like
characteristics of its business combined with pricing power, strong
secular growth and a margin opportunity. The company has two main
businesses: 1) credit ratings 55% of EBIT; and 2) financial data
services 45% of EBIT.
The credit ratings business is a great business because credit
ratings are a "must-have" for new debt issuance. Furthermore, the
industry is highly consolidated, with S&P and Moody's
comprising the substantial majority of the market, and is
characterized by high barriers to entry. S&P's financial data
services business is also attractive because of its stable
recurring revenue stream due to its valuable proprietary data sets.
Overall, strong revenue growth at S&P has been supported by
pricing power and growth of financial markets along with the
potential for margin improvement.
We sold our shares in S&P as the large stock price increase
during our accumulation period prevented us from establishing a
meaningful position in the company.
Other Exited Positions:
PSH also exited its investments in Air Products, Hilton, Nomad
Foods, an additional undisclosed position, and Valeant, during the
year. Other than for Valeant, all of the exited positions generated
gains for PSH.
FOOTNOTES TO 2017 KEY HIGHLIGHTS AND INVESTMENT MANAGER'S
REPORT
1 Performance results are presented on a gross and net-of-fees
basis. Gross and net returns include the reinvestment of all
dividends, interest, and capital gains and reflect the deduction
of, among other things, brokerage commissions and administrative
expenses. Net returns also reflect the deduction of management fees
and historical or accrued performance allocation/fees (if any). All
performance results provided herein assume an investor has been
invested in the Company or PSLP, as applicable, since inception and
participated in any "new issues", as such term is defined under
Rules 5130 and 5131 of FINRA.
2 The inception date for the Company is December 31, 2012 and
the inception date for PSLP is January 1, 2004. The performance
data presented on pages 7 to 8 for the S&P 500 under
"Cumulative (Since Inception)" is calculated from December 31, 2012
or January 1, 2004, as applicable.
3 The S&P 500 ("index") has been selected for purposes of
comparing the performance of an investment in the Company or PSLP
as applicable (together the "Pershing Square funds") 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 a
Pershing Square fund is 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
it 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' portfolio. The S&P 500 is comprised of a
representative sample of 500 U.S. large cap companies. The index is
an unmanaged, float-weighted index with each stock's weight in the
index in proportion to its float, 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 ® and S&P 500 ® , among
other famous marks, are registered trademarks of Standard &
Poor's Financial Services LLC. © 2016 S&P Dow Jones Indices
LLC, its affiliates and/or its licensors. All rights reserved.
4 This report reflects the attributions to performance of the
portfolio of the Company. Positions with performance attributions
of 50 basis points or more are listed separately, while positions
with performance attributions of less than 50 basis points are
aggregated. On May 2, 2017, the Company began its share buyback
program whereby its buyback agent began to repurchase Public Shares
subject to certain limitations. The accretion from the share
buyback program is reflected herein.
The attributions presented herein are based on gross returns
which do not reflect 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-specific hedges that do not relate to the underlying
securities of an issuer in which the Company is invested. The gross
returns reflected 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 reflects the profit/loss
on the stock and the profit/loss on the put); (ii) do not reflect
the cost/benefit 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 profit/loss on the
Issuer B stock is not included in the gross returns attributable to
the investment in Issuer A); and (iii) do not reflect the
cost/benefit of portfolio hedges. Performance with respect to
currency hedging related to a specific issuer is included in the
overall performance attribution of such issuer.
The performance attributions to the gross returns provided
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 profitable 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 figures presented on page
7.
5 PSLP's 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 set out herein reflect
the different fee arrangements in 2004, and subsequently, except
that the tranche of interests subject to a 30% performance
allocation and a 5% hard hurdle (non-cumulative) issued on January
1, 2017 is not reflected in the returns. In addition, pursuant to a
separate agreement, in 2004 the sole unaffiliated limited partner
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, net returns would have been lower.
6 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, a larger number of investments,
including passive investments and hedging-related positions. "Short
equity" includes options 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 profitable,
or that the investment recommendations or decisions Pershing Square
makes in the future will be profitable or will equal the investment
performance of the securities discussed herein. Companies shown in
this figure 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 2017. 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
reflect Pershing Square's views. These forward-looking statements
can be identified 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.
Directors
Anne Farlow(Chairman) 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. 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. Since 2005, she has been an active investor
in and non-executive director of various unlisted companies. 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 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, of which Juridica Investments Limited, Princess Private Equity
Holding Limited, Better Capital PCC Limited and NB Global Floating Rate Income Fund Limited are listed. 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, first in London with J. Henry Schroder Wagg & Co. Limited and Schroder Investment Management, then in Guernsey as finance 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. Mr Battey is a chartered accountant having qualified with Baker Sutton & Co. in 1977.
Nicholas Botta 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 certified public accountant.
William Scott Mr Scott, a Guernsey resident, has been an independent Director of the Company since 2012. Mr Scott also currently serves as independent non-executive director of
a number of investment companies and funds, of which Axiom European Financial Debt Fund Limited is listed on the Specialist Fund Segment of the LSE. He is also
a director of The Flight and Partners Recovery Fund Limited and a number of funds sponsored by Man Group (Absolute Alpha Fund PCC Limited, AHL Strategies PCC Limited
and MAN AHL Diversified PCC Limited) which are listed on The International Stock Exchange. From 2003 to 2004, Mr Scott worked as senior vice president with
FRM Investment Management Limited, which is now part of Man Group plc. Previously, Mr Scott was a director at Rea Brothers (which became part of the Close Brothers
group in 1999) from 1989 to 2002 and assistant investment manager with the London Residuary Body Superannuation Scheme from 1987 to 1989. Mr Scott graduated
from the University of Edinburgh in 1982 and is a chartered accountant having qualified with Arthur Young (now Ernst & Young LLP) in 1987. Mr Scott also holds
the Securities Institute Diploma and is a chartered fellow of the Chartered Institute for Securities & Investment. He is also a chartered wealth manager.
Jonathan Kestenbaum(retired as of February 12, 2018) Jonathan Kestenbaum, a U.K. resident, has been an independent Director of the Company since 2014. Jonathan Kestenbaum is currently the Chief Operating Officer of RIT Capital
Partners plc and a member of its executive committee. He is also a director of the company's operating business, J Rothschild Capital Management. Jonathan Kestenbaum is a
director of The Capital Holdings Funds plc and a director of Windmill Hill Asset Management. He is a former chief executive of the National Endowment for Science, Technology
and the Arts (NESTA) and previously chief of staff to Sir Ronald Cohen, the chairman of Apax Partners. Jonathan Kestenbaum graduated from the London School of Economics
before pursuing post graduate work at Cambridge University. He earned a MBA with distinction from the Cass Business School, and is also a graduate of the Strategic Agility
Programme at Harvard Business School. He completed the cabinet office top management program and is an adjunct professor at the Imperial College Business School. Jonathan
Kestenbaum was created a life peer in November 2010 and became Lord Kestenbaum of Foxcote in the county of Somerset. He was introduced in the House of Lords on January
26, 2011 and speaks in the Lords on Economic Affairs and Innovation. In December 2013, Jonathan Kestenbaum was appointed as chancellor of Plymouth University.
Corporate Governance Report
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").
The Company is a member of the Association of Investment
Companies and complies with the AIC Code of Corporate Governance
(the "AIC Code"), to the extent practicable. The Guernsey Code
provides that companies which report in accordance with the AIC
Code are deemed to meet the requirements of the Guernsey Code.
By reason of the premium listing of the Public Shares on the
LSE, the Company is required to report on how it has applied the UK
Corporate Governance Code. The AIC Code, as explained by the AIC's
Corporate Governance Guide for Investment Companies (the "AIC
Guide"), addresses all the principles set out in the UK Corporate
Governance Code as well as setting out additional principles and
recommendations on issues that are of specific relevance to
investment companies such as the Company.
The AIC Code and the AIC Guide are available on the AIC's
website, www.theaic.co.uk . The UK Corporate Governance Code is
available on the UK Financial Reporting Council's website,
www.frc.org.uk .
The manner in which the Board has complied with the various
principles of the AIC Code and the relevant provisions of the UK
Corporate Governance Code is explained in this report, the Report
of the Directors and Report of the Audit Committee. The Directors
believe that the corporate governance framework that has been
established by the Board is appropriate for the Company.
The Board considers that the Company has materially complied
with the principles and recommendations of the AIC Code and the
relevant provisions of the UK Corporate Governance Code, with the
exception of the following aspects and those set out in the Report
of the Audit Committee:
-- The Company has not established a separate remuneration committee as
the Board considers that, due to its composition and the
structure of
the Company, establishing a remuneration committee is
unnecessary. The
Board is satisfied that any relevant matters are properly
considered
by the Board as a whole. Mr. Botta does not take part in
discussions
regarding or vote on matters concerning the remuneration of
the
Investment Manager.
-- The Board does not have a formal policy on tenure as the Directors are
required to submit themselves to annual re-election by
shareholders in
accordance with the Articles of the Company.
-- The Board has not formally appointed a senior independent director.
The Board deems this to be unnecessary as three of the four
Directors
are independent, including the Chairman of the Board, Ms
Farlow.
-- The Board does not have a formal policy on diversity. The Board is
committed to appointing the best possible applicant for any
open
positions, taking into account the current composition and needs
of
the Board. The Board considers the diverse backgrounds of the
current
Directors to contribute to the Board's effectiveness, in light
of
their balance of relevant skills, experience, independence,
knowledge
and opinions.
-- The Chairman believes the Directors are appropriately qualified and
experienced, and has encouraged each Director to assess their
training
needs on an ongoing basis. The Directors undertake relevant
training
as appropriate (including continuing professional development as
part
of their professional qualifications) and, where they deem
necessary
to the furtherance of their duties, have access to
independent
professional advice at the Company's expense.
The UK Corporate Governance Code includes provisions relating
to:
-- The role of the chief executive;
-- Executive directors' remuneration; and
-- The need for an internal audit function.
For the reasons set out in the AIC Guide, the Board does not
consider these provisions to be relevant to the Company, given that
it is an externally managed investment company. In particular, all
of the Company's day-to-day management and administrative functions
are outsourced to third parties. As a result, the Company has no
full time executive Directors, no direct employees or internal
operations. The Company has therefore not reported further in
respect of these provisions.
THE BOARD COMPOSITION AND DELEGATION OF FUNCTIONS AND
ACTIVITIES
The Board consists of four non-executive Directors, three of
whom are independent. Mr Botta, as President of the Investment
Manager, is deemed not to be an independent Director of the
Company.
On February 12, 2018, Jonathan Kestenbaum retired as a
non-executive Director of the Company and had served as an
independent non-executive Director of the Company since 2014.
The Company has no executive directors and no 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 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.
BOARD TENURE AND SUCCESSION PLANNING
Any Director appointed in accordance with the Articles of
Incorporation will hold office only until the next following annual
general meeting, and will then be eligible for re-election. As
such, no issues are expected to arise with respect to long tenure.
To date, no Director has served for longer than eight years. In
accordance with the AIC Code, if and when any Director has been in
office (or upon re-election would at the end of that term, be in
office) for more than nine years, the Company will consider whether
there is a risk that such Director might reasonably be deemed to
have lost independence through such long service
As mentioned above, on February 12, 2018, Jonathan Kestenbaum
retired from the Board. The Nomination Committee promptly commenced
a search process for prospective candidates and engaged Egon
Zehnder, an executive search firm with no other connection to the
Company, to assist the Nomination Committee in identifying suitable
candidates. In directing the search firm and when evaluating
candidates, the Nomination Committee gave full consideration to the
challenges and opportunities facing the Company, the balance of
skills, knowledge and experience on the Board and the expertise
needed on the Board in the future.
Following discussion of a number of highly qualified candidates
proposed by the search firm, a shortlist of candidates was chosen
and these candidates were interviewed by the Chairman of the
Nomination Committee and a senior member of the Investment Manager.
After consideration of the results of the initial interviews and
the notable backgrounds of these candidates, two candidates were
interviewed by the remaining members of the Nomination Committee
and Mr. Ackman. Following this process, the Nomination Committee
recommended that the Board submit both candidates for shareholder
approval as non-executive Directors of the Company at the upcoming
AGM.
The election of Jonathan Kestenbaum's successors and any future
changes to the Board's composition are expected to be managed
without undue disruption to the operation of the Board.
THE BOARD'S PROCESSES
The Board meets regularly throughout the year, at least on a
quarterly basis, and maintains regular contact with the Investment
Manager and Elysium Fund Management Limited (the "Administrator").
At each quarterly Board meeting, the Directors review the Company's
investments, principal risks, share price performance and the
premium/discount to NAV at which the Company's Public Shares are
trading, investor relations and compliance with regulations.
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 Directors are kept
informed of investments and other matters relevant to the operation
of the Company that would be expected to be brought to the Board's
attention.
Between meetings there is regular contact amongst the Investment
Manager, Administrator and the Board. The Board is supplied with
information in a timely manner by the Investment Manager,
Administrator and other advisers to enable it to discharge its
duties efficiently and effectively.
The Directors received full information about the Company upon
their appointment to the Board. The Directors, where necessary in
the furtherance of their duties, have access to independent
professional advice at the Company's expense.
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 formal meetings attended by each Director in
the year ended December 31, 2017:
Scheduled Quarterly Ad-hoc Board Audit Committee Meetings
Board Meetings Meetings (attended / conducted)
(attended / (attended /
conducted) conducted)
Anne Farlow 4 / 4 3 / 3 5 / 5
Richard Battey 4 / 4 3 / 3 5 / 5
Nicholas Botta1 4 / 4 1 / 3 N/A
Jonathan Kestenbaum 4 / 4 3 / 3 5 / 5
William Scott 4 / 4 3 / 3 4 / 5
1Mr Botta does not attend meetings as a Director where such attendance may conflict with his interests as President and a partner of the Investment Manager.
The above ad-hoc Board meetings were convened at short notice
and required a minimum quorum of two Directors.
COMMITTEES OF THE BOARD
The Board has established an Audit Committee, a Management
Engagement Committee, and a Nomination Committee. All Committee
members are 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.
Management Engagement Committee
The Board has established a Management Engagement Committee to
adhere to the principles of the UK Corporate Governance Code in
connection with the listing of the Public Shares on the LSE. 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. Until his retirement as a Director on February 12,
2018, Jonathan Kestenbaum was the Chairman of the Management
Engagement Committee. William Scott has been appointed to succeed
Jonathan Kestenbaum as the Chairman of the Management Engagement
Committee.
The written terms of reference of the Management Engagement
Committee are available on the Company's website or, on request,
from the Company's Administrator.
Prior to the establishment of this committee it was the practice
of the Board to satisfy the functions of a Management Engagement
Committee by having all independent Directors engage in any
activities that would typically come before a Management Engagement
Committee.
Nomination Committee
The Board has established a Nomination Committee to adhere to
the principles of the UK Corporate Governance Code in connection
with the listing of the Public Shares on the LSE. 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
fill vacancies, taking into account the challenges and
opportunities facing the Company and the skills, knowledge and
experience needed on the Board. The Nomination Committee reports
its recommendations to the full Board. Ms Farlow is the Chairman of
the Nomination Committee.
The written terms of reference of the Nomination Committee are
available on the Company's website or, on request, from the
Company's Administrator.
COMMITTEES OF THE INVESTMENT MANAGER
The Investment Manager operates a Conflicts Committee, which
meets no less frequently than annually and on an as-needed basis; a
Best Execution Committee and a Cybersecurity Committee, which meet
no less frequently than quarterly and on an as-needed basis; and a
Valuation Committee and a Disclosure Committee, which meet no less
frequently than semi-annually and on an as-needed basis. The
minutes from the meetings are presented to the Board at the
quarterly Board meetings, or sooner if necessary.
BOARD PERFORMANCE
During 2017, the Board engaged Deloitte LLP as an external
adviser to facilitate the evaluation of its own performance and
that of each individual Director. The external adviser assessed the
effectiveness of the Board, including the Board's composition,
engagement, governance structure, agenda and planning, dynamics,
and the Chairman's leadership by a review of the relevant
documentation and by conducting individual interviews with each
Director, certain Investment Manager representatives and the
Company Secretary. The report did not identify any material
deficiencies in the Board's performance and identified Director
engagement and the Chairman's leadership as key strengths. The
Board has considered the findings and recommendations of the
external adviser and has concluded that it has operated effectively
in 2017.
ENVIRONMENTAL, EMPLOYEE, SOCIAL AND COMMUNITY ISSUES
As an investment company, the Company does not have any
employees or physical property, and most of its activities are
outsourced to other firms. Therefore, the Company does not, for
example, engage in any activities that would directly impact the
environment or the community.
GER DIVERSITY
The Board currently comprises one female and three male
directors. The Board will consider the gender diversity of the
Board, along with all other relevant factors when considering
future Board appointments. Further details regarding the Board's
commitment to diversity are provided on page 21.
RELATIONS WITH SHAREHOLDERS
The Board recognizes that it is important to maintain
appropriate contact with shareholders to understand their issues
and concerns. The Investment Manager maintains regular contact with
shareholders via quarterly investor calls, the publication of
weekly and monthly NAV estimates, and on an ad-hoc basis when
queries from shareholders arise. In addition, the Chairman has held
meetings with several major shareholders. To further enhance
communication with shareholders, the Company has appointed
Jefferies International Limited and Fidante Capital plc to act as
corporate brokers. Investor feedback from the Investment Manager
and other advisers is reported to the Board on a regular basis.
Each year, shareholders will have the opportunity to vote and to
attend the AGM where the Directors will be present. In addition, on
a more formal basis, the Directors report to shareholders
throughout the year with the publication of the annual and
half-yearly reports.
Shareholders may contact the Directors in writing at the
Company's registered office or by email at
elysium@elysiumfundman.com .
/s/ Anne Farlow Anne Farlow Chairman of the Board March 23,
2018
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.
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 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's Administrator.
The Audit Committee considers the appointment, independence and
remuneration of the auditor and reviews the annual accounts and
half-yearly reports. Where non-audit services are to be provided by
the auditor, the Audit Committee reviews the scope and terms of the
engagement and gives full consideration to the financial and other
implications of the engagement on the independence of the auditor
before proceeding.
The principal duties of the Audit Committee are to monitor the
integrity of the Financial Statements of the Company, including its
annual and half-yearly reports and formal announcements relating to
the Company's financial performance, and reviewing and reporting to
the Board on significant financial reporting issues and judgments
communicated to the Committee by the auditor. In particular, the
Audit Committee reviews and assesses, where necessary:
-- The consistency of, and any changes to, significant accounting
policies both on a year on year basis and across the
Company;
-- The methods used to account for significant or unusual transactions
where different approaches are possible;
-- Whether the Company has followed appropriate accounting standards and
made appropriate estimates and judgments, taking into account
the
views of the external auditor;
-- The clarity of disclosure in the Company's financial 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, Report
of
the Directors 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, 2017 audit, prior to the year end,
the Audit Committee was involved in the planning and preparation
for the Annual Report, Financial Statements and the audit. The
Audit Committee along with the Investment Manager, Administrator
and the auditor had a meeting in November to discuss the overall
cohesion and understandability of the Annual Report, Financial
Statements and the auditor's audit plan. 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 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 obtain comfort regarding the operation and
suitability of these processes.
The Audit Committee commented on the design and detailed content
of the Annual Report and Financial Statements, ensuring that
examples of best practices had been carefully considered in the
context of the Company. The Audit Committee used the Investment
Manager's, Administrator's and auditor's knowledge to determine the
overall fairness, balance and understandability prior to final
approval by the Board. This allowed the Audit Committee and the
Board to be satisfied that the Annual Report and Financial
Statements taken as a whole is fair, balanced and understandable.
The Audit Committee will continue to monitor feedback for future
enhancements.
SIGNIFICANT REPORTING MATTERS
The Audit Committee reviewed and discussed the most relevant
audit issues for the Company and received a report from the
auditor. The Audit Committee made the following assessments during
the year:
The Audit Committee has confirmed that when the fair value of
financial assets and financial liabilities recorded in the
statement of financial position cannot be derived from active
markets, their fair value is determined by the Investment Manager
using prices obtained from counterparties or 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 satisfied itself
that the valuation techniques are accurate and appropriate for the
Company's investments and are consistent with the requirements of
International Financial Reporting Standards ("IFRS").
The Audit Committee reviewed the Board's procedures regarding
the identification, management, and monitoring of risks that could
affect the Company. The Audit Committee considers that the Board is
engaged on an ongoing basis in the process of identifying,
evaluating and managing (where possible) the principal risks facing
the Company as described in "Risk Management" in the Report of the
Directors.
The Audit Committee continues to monitor the review by the Board
of the Company's compliance with newly applicable regulations and
corporate governance standards following the admission to trading
of the Company's Public Shares on the Main Market of the LSE.
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 satisfied that the audit was
undertaken in an effective manner and addressed the main risks.
INTERNAL CONTROLS
It is the duty of the Audit Committee to examine the
effectiveness of the Company's internal control systems and for the
Board to undertake an annual review of the significant operational
risks faced by the Company and to consider the effectiveness of the
procedures in place to control these operational risks. At each
quarterly Board meeting since the Company was formed, the Board has
reviewed the significant operational risks faced by the Company and
the procedures that are in place to manage those operational
risks.
The Board is ultimately responsible for the Company's system of
internal controls and for reviewing its effectiveness for 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 confirms there is an
ongoing process for identifying, evaluating and managing the
significant operational risks faced by the Company, and that this
process has been in place for the year ended December 31, 2017, and
up to the date of the approval of the Annual Report and Financial
Statements. This is in accordance with relevant best practice
detailed in the Financial Reporting Council's guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting.
The Company does not have an internal audit department. All of
the Company's management functions are delegated to independent
third parties and it is therefore felt that there is no need for
the Company to have an internal audit facility. The Board has
familiarized itself with the internal control systems of its
material service providers, which report regularly to the Board.
The Board is satisfied 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 to be put to
shareholders for approval at the AGM, in respect of the
appointment of
an external auditor;
-- 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 first Financial
Statements, for the period ended December 31, 2012. A resolution to
re-appoint Ernst & Young LLP as auditor will be proposed at the
forthcoming AGM.
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 6, 2017. The Audit Committee recommended to the
Board that it accept the auditor's proposed fee of approximately
$166,000 (2016 Actual: $203,700) for the audit of the Annual Report
and Financial Statements. During the year the Company paid the
auditor approximately $52,000 (2016: $46,000) for the interim
review and approximately $282,000 (2016: $201,000) for other
permissible non-audit services, including services provided in
connection with the Company's application for admission of the
Public Shares to trading on the LSE.
The Audit Committee understands the importance of auditor
independence and reviews the scope and results of the audit, its
cost effectiveness and the independence and objectivity of the
external auditor. During the year, the Audit Committee received a
report from the external auditor confirming its independence and
the controls it has in place to ensure its independence is not
compromised. In addition, the Audit Committee has given particular
regard to non-audit fees and whether the auditor is the most
appropriate party to provide any non-audit services. In particular,
when considering the provision of services related to the LSE
listing, Ernst & Young LLP was determined to have the requisite
experience and capacity to satisfy the short timeframe and
technical demands of the LSE listing process. Notwithstanding such
services the Audit Committee considers Ernst & Young LLP to be
independent of the Company and that the provision of such non-audit
services is not a threat to the objectivity and independence of the
conduct of the audit.
To fulfill 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 conflicts 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 fulfilment 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 satisfied with Ernst & Young LLP's
effectiveness and independence as external auditor having
considered the degree of diligence and professional scepticism
demonstrated by them and 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
satisfied 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, 2018.
Shareholders should note that the primary reporting framework
for the Company's audit is International Standards on Auditing
(UK); the auditor's report thereunder is set out on pages 35 to 38.
The Annual Report also includes on page 39 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 23, 2018
Report of the Directors
We present below the Annual Report and Financial Statements of
the Company for the year ended December 31, 2017.
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 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 defined 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 significant valuation
discrepancies between current trading prices and intrinsic business
(or net asset) value, often with a catalyst for value
recognition.
The Company's investments may include both publicly traded and
privately placed securities of public issuers as well as publicly
traded securities of private issuers. The Company 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 will not make an initial investment in the equity of
companies whose securities are not publicly traded (i.e., private
equity) but it is possible that, in limited circumstances, public
companies in which the Company has invested may later be taken
private and the Company may make additional investments in the
equity or debt of those companies.
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 fixed-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 financial 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 financial 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 highly
liquid, listed mid-to-large cap 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 "Investment Company Act"), 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 of making the investment.
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 financial instrument is held by such
fund in the appropriate ratio relative to its adjusted net asset
value, or because a security or financial 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. Treasuries pending the identification 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, defined 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
half-yearly Financial Statements of the Company), shall in no event
exceed 50% at the time of incurrence of any borrowing or drawdown.
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-specific non-recourse leverage in an
effort to reduce the capital commitment to a specific investment,
while potentially enhancing the returns on the capital invested in
that investment. In addition, the Company may invest in
co-investment vehicles which may also employ equity options. In
2017, the Company invested in a co-investment vehicle which
purchased a mix of securities and equity options (refer to page
52).
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 the Company's investment policy will
require approval by a special resolution of the holders of the
Public Shares.
RESULTS AND NAV
The Company had a loss attributable to all shareholders for the
year ended December 31, 2017 of $197 million (2016: loss of $700
million). The net assets attributable to all shareholders at
December 31, 2017 were $4.24 billion (2016: $4.52 billion). For the
Company's returns, please see the 2017 Key Highlights and Financial
Highlights sections on pages 6 and 75, respectively.
The Company announces the monthly and weekly NAV 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, monthly performance
and transparency reports are published on the Company's
website.
The Company released half-yearly Financial Statements on August
17, 2017 relating to the first half of the year of 2017. The
Company intends to release the half-yearly Financial Statements of
2018 in the third quarter.
LONDON STOCK EXCHANGE LISTING AND DISCOUNT CONTROL
On a regular basis, the Board monitors the trading activity of
the Public Shares and the discount or premium of the share price to
NAV. During 2016 and 2017, the Board paid particular attention to
the discount at which the share price has traded in relation to
NAV.
In an effort to increase liquidity and narrow this discount, on
March 23, 2017, the Company announced its intention to apply for
admission of its Public Shares to the Official List of the UK
Listing Authority and for trading on the Main Market of the
LSE.
On April 19, 2017, the Company announced a share buyback program
for up to 5% of the Company's outstanding Public Shares. Jefferies
International Limited, the buyback agent, commenced the program on
May 2, 2017 with purchases on the LSE. On November 8, 2017, the
buyback program was extended to Euronext Amsterdam in order to
accelerate its pace. As of December 31, 2017, a total of 5,411,736
shares (representing 45.1% of the total buyback program) had been
repurchased. The Company believes that the repurchase is an
attractive investment at current discount levels which should
contribute to performance, and may assist in reducing the current
discount between the Company's share price and NAV.
On May 2, 2017, the Company announced that its Public Shares had
been admitted to the Official List of the UK Listing Authority and
shares commenced trading on the Premium Segment of the Main Market
of the LSE. Since then, investors have been able to trade a single
class of PSH shares on both the LSE and Euronext Amsterdam under
the same ISIN/SEDOL number. PSH shares are quoted and traded in
Sterling in London and in USD on Euronext Amsterdam.
On May 31, 2017, it was announced that PSH shares had qualified
for inclusion in the FTSE 250 and FTSE All-Share indices. The
inclusion was effective on Monday, June 19, 2017.
In connection with the LSE listing, PSH changed its primary
central securities depositary ("CSD") from the Nederlands Centraal
Instituut voor Giraal Effectenverkeer BV ("Euroclear NL") to
Euroclear UK & Ireland Limited ("Euroclear UI" or "CREST").
PSH's Public Shares are now accepted for clearance both through the
book-entry facilities of Euroclear NL and CREST, the electronic
securities settlement system operated by Euroclear UI which enables
securities to be evidenced otherwise than by certificates and
transferred otherwise than by written instrument.
As discussed in the Chairman's Statement, the Company has
proposed to conduct a Company Tender for $300 million subject to
applicable shareholder approvals which will be sought at the
AGM.
Following completion of the Company Tender and depending on
market conditions and other considerations, the Company may decide
to utilise the remaining amount of the share buyback authority to
acquire Public Shares in the market.
The Board remains committed to addressing the discount at which
the Public Shares have traded in relation to NAV and the Board and
its independent advisers have undertaken a detailed review of the
discount management options available to the Company following
feedback from shareholders, taking into account the circumstances
of the Company's investment strategy and capital structure.
BOND OFFERING
On June 26, 2015, the Company issued at par $1 billion in Senior
Notes at 5.5% due 2022 (the "Bonds"). The Bonds will mature at par
on July 15, 2022 and pay a fixed rate interest coupon of 5.5% per
annum, which is paid semi-annually. The Bonds are listed on the
Irish Stock Exchange.
DIVID
The Directors did not recommend the payment of a dividend for
the year ended December 31, 2017 (2016: $nil).
DIRECTORS
The present members of the Board, all of whom are non-executive
Directors, are listed on pages 19 to 20 and served throughout the
year. Further information is provided on page 21 in the Corporate
Governance Report. On February 12, 2018, Jonathan Kestenbaum
retired as a non-executive Director of the Company. Jonathan
Kestenbaum had served as an independent non-executive Director of
the Company since 2014.
At December 31, 2017, the Directors' interests in the Company
were as follows:
Director Class of Shares Held Numberof Shares
Richard Battey Public Shares 4,000
Nicholas Botta Management Shares 229,971
Anne Farlow Public Shares 10,139
Jonathan Kestenbaum Public Shares 10,000
William Scott N/A 0
There have been no changes in the interests of Directors between
December 31, 2017 and the date of signing this report, or, with
respect to Jonathan Kestenbaum, until the date of his
retirement.
There are no service contracts in place between the Company and
the Directors. The Chairman of the Board is paid an annual fee of
GBP75,000 and the Chairman of the Audit Committee is paid an annual
fee of GBP55,000. The other independent Directors are currently
paid an annual fee of GBP50,000 per annum. Mr Botta does not
receive a fee for his services as a Director.
The Company has undertaken, subject to certain limitations, to
indemnify each Director out of the assets and profits 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.
The Company maintains directors and officer's liability
insurance in relation to the actions of the Directors on behalf of
the Company.
MATERIAL CONTRACTS
The Company's material contracts are with:
-- PSCM which serves as Investment Manager to the Company and, as such,
manages the investments of the Company and the risks related
thereto:
PSCM receives a quarterly management fee and a performance fee,
if
any, from the Company as described more fully in Note 15;
-- Elysium Fund Management Limited, which serves as Administrator and
Morgan Stanley Fund Services (Bermuda) Ltd., which serves as
Sub-Administrator. The Administrator provides the Company with
certain
administration services, including, among other things, the
maintenance of the Company's accounting and statutory records,
and the
Administrator delegates certain of these services to the
Sub-Administrator;
-- Goldman Sachs & Co and UBS Securities LLC, which each serve as Prime
Broker and Custodian for the Company;
-- Fidante Capital plc, which serves as corporate broker for the Company;
and
-- Jefferies International Limited, which serves as corporate broker and
buyback agent and which acted as sponsor for the Company in
connection
with the LSE listing.
The Board continuously monitors the performance of the
Investment Manager and a formal review of the Investment Manager's
performance was undertaken during 2017. Following a review of the
Investment Manager's investment process, resources devoted to the
Company and experience in managing fund vehicles, the Board
determined that notwithstanding the disappointing performance of
the Investment Manager for the year ended December 31, 2017, in the
opinion of the Board, the continued appointment of the Investment
Manager on the terms agreed is in the interests of the Company's
shareholders as a whole.
The Directors reviewed the 2016 performance of the other service
providers with material contracts in April 2017. The Board
concluded that these service providers performed well during the
2016 financial year and that it is in the best interests of the
Company to retain the services of these entities.
RISK MANAGEMENT
The Board has ultimate responsibility for risk management. Given
that there are certain inherent risks related to the business and
operations of the Company, the Board believes that developing an
effective risk management strategy is crucial to the ongoing
viability of the Company. The Board carries out a robust assessment
of the principal risks facing the Company, including those that
would threaten its business model, future performance, solvency or
liquidity.
The Company is subject to a number of risks specific to its
investment activities, structure and operations, as well as risks
relating to general market conditions. The Board has adopted
procedures and controls for the ongoing assessment, monitoring and
mitigation of material risks and reviews the management of these
risks at each quarterly Board meeting.
The Board believes that the risks described below are the
principal risks faced by the Company. This is not intended to be a
complete list of all risks. Please refer to the Company's
Prospectus, available on the Company's website (
www.pershingsquareholdings.com ), for a more complete description
of the risks applicable to the Company. Additional information
related to risk management is provided in Note 13.
Risks Related to Investment Activities
There are certain risks associated with the Investment Manager's
investment activities that are largely a result of the Company's
investment program (e.g., its highly concentrated portfolio) and
certain investment techniques used by the Investment Manager, which
are inherently risky (e.g., activist campaigns, short selling). In
addition, the Company's investment strategy depends on the ability
of the Investment Manager to successfully identify attractive
investment opportunities.
With respect to the concentration of the Company's portfolio,
the Board acknowledges that there are numerous risks associated
with having a highly concentrated portfolio and that the primary
risk management tool used by the Investment Manager is the
extensive research performed by the investment team prior to
investment, along with the ongoing monitoring of the position once
held in the Company's portfolio. 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 Manager has broad investment authority in
executing the Company's investment program and may use whatever
investment techniques it believes are suitable for the Company,
including novel or untested approaches. The Investment Manager may
pursue an activist role with respect to an investment, which may
involve substantial costs in time, resources and capital and which
depend on circumstances that are only partially within the control
of the Investment Manager, particularly in the event of litigation
or opposition of the target company's management, board or
shareholders. The Board notes the Investment Manager's experience
with activist campaigns and various investment strategies.
From time to time, the Investment Manager's investment program
may include short selling, which theoretically could result in
unlimited loss. The Board notes that the Investment Manager enters
into these positions infrequently, may use CDS or other derivative
positions to obtain economic short exposure and relies on extensive
due diligence prior to putting on a short position.
In order to monitor risks related to the Investment Manager's
activities, the Board receives a report from the Investment Manager
at each quarterly Board meeting or more frequently, as necessary,
on developments and risks relating to portfolio positions, activist
engagements, financial instruments used in the portfolio and the
portfolio composition as a whole.
Risks Related to the Use of Leverage
The Company has incurred indebtedness as a result of issuing the
Bonds, and may incur additional indebtedness in the future,
provided that it complies with certain restrictive covenants
contained in the Bonds' Indenture. While such leverage may have the
effect of increasing losses, the Board notes that unlike margin
debt, the Bonds do not have mark-to-market covenants which could
require forced sales when equity prices decline.
The Board further notes that the Investment Manager generally
does not believe in the use of a material amount of margin leverage
because of the potential risk of forced sales at inferior prices in
the event of short-term declines in security prices in a margined
portfolio. The Company may however use derivatives, including
equity options, in order to obtain security-specific non-recourse
leverage in an effort to reduce the capital commitment to a
specific investment, while potentially enhancing the returns on the
capital invested in that investment. The Board regularly reviews
information regarding the Bonds and the Company's other forms of
leverage at each quarterly Board meeting.
Regulatory Risk
Regulatory risk can negatively impact the Company in a number of
ways. For example, changes in laws or regulations, or a failure to
comply with these, could have a detrimental impact on the Company's
ability to freely acquire and dispose of certain securities. Prior
to initiating a position, the Investment Manager considers the
possible legal and regulatory issues that could impact its ability
to achieve the objective with respect to such position. The
Investment Manager's legal and compliance team monitors regulatory
changes on an ongoing basis. To monitor regulatory risks, the Board
is apprised of any regulatory inquiries and material regulatory
developments.
Reputational Risk
Reputational damage to the Investment Manager and the Company as
a result of negative publicity could impair the Investment
Manager's ability to affect its investment strategy on behalf of
the Company. To address this risk, PSCM has an internal Director of
Communications who works alongside an external public relations
firm to monitor media coverage and actively engage with media
sources as necessary. Internal PSCM personnel and the Board receive
media clips daily to monitor public sentiment of PSCM's activities.
The Board receives an update on media-related activity on a
quarterly basis and considers measures to address concerns as they
arise.
Risk Related to Business Continuity
The Investment Manager is dependent on William Ackman to conduct
its investment advisory services as he has ultimate investment
discretion with respect to all investment decisions. As a result,
one of the principal risks to the business is the loss of Mr.
Ackman. The Board notes that the investment team and other senior
personnel at the Investment Manager are experienced, longstanding
employees. The Board has reviewed the Investment Manager's
succession plan and has deemed it to be satisfactory. The Board
further notes that, if necessary, there are key man provisions in
place that will trigger a continuation vote if a key man event
occurs prior to October 2021.
The Company's Shares May Trade at a Significant Discount to
NAV
Another principal risk to the Company is that the shares of the
Company will trade at a significant discount to NAV or that
ownership restrictions will affect the liquidity of the shares. For
the recent actions the Company has taken to address the discount,
please see "London Stock Exchange Listing and Discount Control" The
Company has also retained advisers to maintain regular contact with
existing and potential shareholders and to consider other potential
measures to reduce the discount of share price to NAV. The Board
monitors the trading activity of the shares on a regular basis and
addresses the discount to NAV at its regular quarterly
meetings.
Market Risk
Adverse changes affecting the global financial markets and
economy as a whole may have a material negative impact on the
performance of the Company's investments. Further, the Company's
non-U.S. currency investments may be affected by fluctuations in
currency exchange rates. Prices of financial and derivative
instruments in which the Company invests are subject to high
volatility due to market risk.
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 the Company is
not committed to maintaining market hedges at any time.
Counterparty Credit Risk
The Company is subject to the risk that a counterparty to a
financial instrument will fail to discharge an obligation or
commitment that is entered into with the Company, resulting in a
financial loss to the Company. In order to mitigate this risk the
Company seeks to trade only with reputable counterparties that the
Investment Manager believes to be creditworthy. The Investment
Manager negotiates its International Swaps and Derivatives
Association ("ISDA") agreements to include bilateral collateral
arrangements and, in certain cases, tri-party agreements where
collateral is held by a third party custodian. 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. Treasuries 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.
GOING CONCERN
The Company's investment activities, together with factors
likely to affect its future development, performance and position
are set out in the Risk Management section above and Note 13.
The Board has considered the financial prospects of the Company
for the next twelve months from the date of approval of the
Financial Statements 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, 2017 of $4,242,954,525;
-- The liquidity of the Company's assets (at December 31, 2017, 69.6% of
its assets comprised of cash and cash equivalents and Level 1
assets);
and
-- The Company's debt to capital ratio of 19.1% at December 31, 2017.
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 confirm 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 they 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 Principal 21 of the AIC Code, the Board has
carefully considered the aforementioned principal risks 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.
The Board has evaluated quantitative data as of December 31,
2017 including shareholders' net assets, the liquidity of the
Company's assets and the Company's total liabilities, and has also
considered projections of expected outflows, management fees and
performance fees for the next three years (if any). The Board
believes that the three-year timeframe is appropriate given the
general business conditions affecting PSH portfolio positions and
the regulatory environment in which PSH operates, which is
undergoing constant change.
On the basis of these projections, the Board has determined that
the Company will remain viable for the upcoming three year
period.
The Board is confident 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. This
assessment will be conducted annually by the Board.
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
financial year which give a true and fair view of the state of
affairs of the Company as at the end of the financial year and of
the profit 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 judgments 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
financial position of the Company and 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 the applicable
regulations under English and Dutch law. They are also responsible
for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
Each of the Directors confirms to the best of her or his
knowledge and belief that:
-- the Financial Statements, prepared in accordance with IFRS, give a
true and fair view of the assets, liabilities, financial
position and
profit 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 confirm 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 relevant
audit information of which the Company's auditor is unaware, and
each has taken all the 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 23, 2018 March 23, 2018
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 2017
which comprise the Statement of Financial Position, the Statement
of Comprehensive Income, 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
19, including a summary of significant accounting policies. The
financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting
Standards ("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 2017 and of its loss 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 ("the Companies Law").
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 in the UK,
including the FRC's Ethical Standard as applied to listed entities,
and we have fulfilled 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.
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.
Conclusions Relating to Principal Risks, Going Concern and
Viability Statement
We have nothing to report in respect of the following
information in the annual report, in relation to which the ISAs
(UK) require us to report to you whether we have anything material
to add or draw attention to:
-- the disclosures in the annual report, set out on pages 64 - 68, that
describe the principal risks and explain how they are being
managed or
mitigated;
-- the directors' confirmation, set out on page 31, in the annual report
that they have carried out a robust assessment of the principal
risks
facing the entity, including those that would threaten its
business
model, future performance, solvency or liquidity;
-- the directors' statement, set out on page 33, in the Financial
Statements about whether they considered it appropriate to adopt
the
going concern basis of accounting in preparing them, and
their
identification of any material uncertainties to the entity's
ability
to continue to do so over a period of at least twelve months
from the
date of approval of the Financial Statements
-- whether the directors' statement in relation to going concern required
under the Listing Rules is materially inconsistent with our
knowledge
obtained in the audit; or
-- the directors' explanation, set out on page 33, in the annual report
as to how they have assessed the prospects of the entity, over
what
period they have done so and why they consider that period to
be
appropriate, and their statement as to whether they have a
reasonable
expectation that the entity will be able to continue in
operation and
meet its liabilities as they fall due over the period of
their
assessment, including any related disclosures drawing attention
to any
necessary qualifications or assumptions.
Overview of Our Audit Approach
Key Audit Matters Misstatement of the valuation
of the Company's investments
Audit Scope We performed an audit of the Financial Statements of
the Company for the year ended 31 December 2017
Materiality Overall materiality of $40.9m which
represents 1% of net assets.
Key Audit Matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the Financial
Statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. 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 valuation We have updated our understanding No significant findings were identified
of the Company's investments of the investment valuation in respect of investment valuation.
(2017 - assets: $3,885.3 million and process, performed a walkthrough of the
liabilities: $6.2 million; 2016 - assets: $3,658.9 investment valuation class of transactions and
million and liabilities: $576.0 million) evaluated the design of controls in this area.
Refer to the Audit Committee Report (pages
25 - 27); Accounting policies Assessed the reasonableness
(pages 47 - 49); and Note and appropriateness of the
7 of the Financial Statements (page 55 - 57) valuation model/method and determined whether
significant assumptions used
The fair value of the investment portfolio to estimate fair value
may be misstated due to application are reasonable and appropriately supported.
of inappropriate methodologies
or inputs to the valuations. For options, forwards, swaps
and warrants we instructed
The valuation of the Company's investments our internal valuation specialists
is a key driver of the to independently
Company's net asset value and total value a sample of positions and we compared
return. Investment valuation their values to the Company's valuations.
could have a significant impact
on the net asset value of the Agreed value of all investments to independent
Company and the total return sources as at 31 December 2017.
generated for shareholders.
Assessed whether the valuation determined
is in accordance with IFRS.
Considered the requirements of ISA 315 in relation
to the risk of management override.
The risk above has been modified from the previous year, where
it applied only to the valuation of investments other than Level
One. In the current year the portfolio consists of Level One and
non-complex Level Two investments only, the valuation of which is
not considered to be judgmental or subject to management bias.
In the prior year, our auditor's report included a risk of
material misstatement in relation to accounting for the offset
amount element of performance fees. In the current year we believe
that the risk of material misstatement in relation to this issue
has significantly reduced as a result of an amendment to the
Investment Management Agreement during 2016 to clarify the language
describing the calculation of performance fees, effective
retroactively to the inception of the agreement.
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 profile, 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.
Our Application of Materiality
We apply the concept of materiality in planning and performing
the audit, in evaluating the effect of identified 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 influence 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 $40.9 million
(2016: $43.6 million), which is 1% (2016: 1%) of net assets. We
believe that net assets provides us with the best measure of
materiality as the Company's primary performance measures for
internal and external reporting are based on equity.
During the course of our audit, we reassessed initial
materiality and updated its calculation to align with the year-end
net assets figure.
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% (2016: 75%) of
our planning materiality, namely $30.7m (2016: $32.7m). 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 identified 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 $2.0m (2016: $2.2m),
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.
In connection with our audit of the Financial Statements, 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
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 or a material
misstatement of the other information. 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.
In this context, we also have nothing to report in regard to our
responsibility to report as uncorrected material misstatements of
the other information where we conclude that:
-- Fair, balanced and understandable
, set out on page 34 - the
statement given by the directors that they consider the 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 performance, business model and
strategy, is
materially inconsistent with our knowledge obtained in the
audit; or
-- Audit committee reporting,
set out on pages 25 - 27 - the
section describing the work of the audit committee does not
appropriately address matters communicated by us to the
audit
committee; or
-- Directors' statement of compliance with the UK Corporate Governance
Code
, set out on page 21 - the parts of the directors' statement
required under the Listing Rules relating to the Company's
compliance
with the UK Corporate Governance Code containing provisions
specified
for review by the auditor in accordance with Listing Rule
9.8.10R(2)
do not properly disclose a departure from a relevant provision
of the
UK Corporate Governance Code.
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.
Responsibilities of Directors
As explained more fully in the directors' responsibilities
statement, set out on pages 33 - 34, the directors are responsible
for the preparation of the Financial Statements and for being
satisfied that they give a true and fair view, and for such
internal control 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 influence the
economic decisions of users taken on the basis of these Financial
Statements.
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.
/s/ Christopher James Matthews Christopher James Matthews, FCA
For and on behalf of Ernst & Young LLP Guernsey March 23,
2018
(1) The maintenance and integrity of the Pershing Square
Holdings, Ltd web site is the responsibility of the directors; the
work carried out by the auditor does not involve consideration of
these matters and, accordingly, the auditor accepts no
responsibility for any changes that may have occurred to the
Financial Statements since they were initially presented on the web
site. (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, 2017, 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 significant 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 financial position of
Pershing Square Holdings, Ltd. at December 31, 2017, and the
results of its operations, changes in net assets attributable to
management shareholders and equity, and its cash flows 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
23, 2018
Statement of Financial Position (Stated in United States
Dollars)
Notes 2017 2016
Assets
Cash and cash equivalents 10 $ 1,082,102,874 $ 2,076,161,696
Due from brokers 13 710,597,200 542,850,061
Trade and other 9 18,520,293 11,740,284
receivables
Financial assets
at fair value
through profit or loss
Investments in securities 6 3,140,815,503 2,636,767,173
Derivative financial 6, 8 744,454,840 1,022,162,881
instruments
Total assets $ 5,696,490,710 $ 6,289,682,095
Liabilities
Due to brokers 13 $ 340,795,000 $ 150,995,192
Trade and other payables 9 91,121,135 32,313,479
Financial liabilities
at fair
value through profit
or loss
Securities sold, not 6 - 385,314,274
yet purchased
Derivative financial 6, 8 6,192,314 190,734,223
instruments
Bonds 18 1,015,427,736 1,013,552,905
Liabilities excluding net 1,453,536,185 1,772,910,073
assets attributable
to management
shareholders
Net assets attributable 11 156,268,350 161,137,460
to
management
shareholders(1)
Total liabilities 1,609,804,535 1,934,047,533
Equity
Share capital 11 5,927,042,332 6,003,372,824
Accumulated deficit (1,840,356,157) (1,647,738,262)
Total equity(2) 4,086,686,175 4,355,634,562
Total liabilities $ 5,696,490,710 $ 6,289,682,095
and equity
Net assets attributable $ 4,086,575,831 $ 4,355,519,077
to Public Shares
Public Shares in issue 234,716,810 240,128,546
Net assets per $ 17.41 $ 18.14
Public Share
Net assets attributable $ 156,268,350 $ 161,137,460
to Management Shares
Management Shares 8,500,796 8,500,796
in issue
Net assets per Management $ 18.38 $ 18.96
Share
Net assets attributable $ 110,344 N/A
to
Special Voting Share
Special Voting 1 N/A
Share in issue
Net assets per Special $ 110,343.92 N/A
Voting Share
Net assets attributable N/A $ 115,485
to Class B Shares
Class B Shares in issue N/A 5,000,000,000
Net assets per N/A $ 0.00002
Class B Share
(1) Net assets attributable to management shareholders are
comprised of the aggregate net asset values of all Management
Shares as of December 31, 2017 and December 31, 2016, respectively.
(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, 2017 and Public Shares and Class B Shares as of
December 31, 2016. Under IFRS, Management Shares are classified as
financial liabilities rather than equity. See Note 2 on page 51 for
further details.
The accompanying notes form an integral part of these Financial
Statements.
These Financial Statements on pages 40 to 72 were approved by
the Board of Directors on March 23, 2018, 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 23, 2018 March 23, 2018
Statement of Comprehensive Income (Stated in United States
Dollars)
Notes 2017 2016
Investment gains and losses
Net gain/(loss) on $ (35,276,471) $ (494,233,038)
financial assets
and liabilities at fair
value through profit or loss
Net realized gain/(loss) (14,319,885) (71,064,508)
on commodity interests
Net change in unrealized 1,270,848 (2,682,541)
gain/(loss)
on commodity interests (net
of brokerage commissions
of (2017:
$118,644, 2016: $629,978))
6 (48,325,508) (567,980,087)
Income
Dividend income 59,962,586 49,703,578
Interest income 12 1,140,593 624,621
Other income 5,693 71,186
61,108,872 50,399,385
Expense
Management fees 15 (63,211,761) (63,143,490)
Interest expense 12 (64,667,520) (64,812,601)
Legal reserve 14 (57,219,862) (29,176,480)
Professional fees (11,963,798) (10,661,364)
Other expenses (3,394,472) (1,107,012)
(200,457,413) (168,900,947)
Profit/(loss) before (187,674,049) (686,481,649)
tax attributable to
equity and management
shareholders
Withholding tax (dividends) (9,812,956) (13,256,001)
Profit/(loss) attributable (197,487,005) (699,737,650)
to equity
and management shareholders
Amounts attributable (4,869,110) (22,231,044)
to management
shareholders
Profit/(loss) attributable $ (192,617,895) $ (677,506,606)
to equity shareholders(1)
Earnings per share (basic
& diluted)(2)
Public Shares 17 $ (0.81) $ (2.82)
Special Voting Share 17 $ (5,141.58) N/A
Class B Shares 17 $ N/A $ (0.00)
All the items in the above statement are derived from continuing
operations.
There is no other comprehensive income for the years ended 2017
and 2016.
(1) Profit/(loss) attributable to equity shareholders is
comprised of the net profits earned and losses incurred by
shareholders of Public Shares, Class B 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 2017 and 2016 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 (Stated in United States Dollars)
Net Assets Attributable to
Management Shareholders
As at December 31, 2016 $ 161,137,460
Amounts attributable to management (4,869,110)
shareholders
As at December 31, 2017 $ 156,268,350
Net Assets Attributable to
Management Shareholders
As at December 31, 2015 $ 183,368,504
Amounts attributable to management (22,231,044)
shareholders
As at December 31, 2016 $ 161,137,460
The accompanying notes form an integral part of these Financial
Statements.
Statement of Changes in Equity (Stated in United States
Dollars)
Share Capital Accumulated Deficit Total Equity
As at December $ 6,003,372,824 $ (1,647,738,262) $ 4,355,634,562
31, 2016(1)
Total - (192,617,895) (192,617,895)
profit/(loss)
attributable
to
equity
shareholders(2)
Share buybacks(3) (76,330,492) - (76,330,492)
As at December $ 5,927,042,332 $ (1,840,356,157) $ 4,086,686,175
31, 2017(1)
Share Capital Accumulated Deficit Total Equity
As at December $ 6,003,372,824 $ (970,231,656) $ 5,033,141,168
31, 2015
Total - (677,506,606) (677,506,606)
profit/(loss)
attributable
to
equity
shareholders(4)
As at December $ 6,003,372,824 $ (1,647,738,262) $ 4,355,634,562
31, 2016(1)
(1) 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, 2017 and Public Shares and Class B Shares as of
December 31, 2016. Under IFRS, Management Shares are classified as
financial liabilities rather than equity. See Note 2 on page 51 for
further details. (2) Profit/(loss) attributable to equity
shareholders is comprised of the net profits earned and losses
incurred by shareholders of Public Shares, Class B Shares and the
Special Voting Share. (3) On May 2, 2017, the Company began its
share buyback program whereby its buyback agent began to repurchase
Public Shares subject to certain limitations. Any repurchased
Public Shares are subsequently retired. See Note 11 for further
details. (4) Profit/(loss) attributable to equity shareholders is
comprised of the net profits earned and losses incurred by
shareholders of Public Shares and Class B Shares.
The accompanying notes form an integral part of these Financial
Statements.
Statement of Cash Flows (Stated in United States Dollars)
Notes 2017 2016
Cash flows from operating
activities
Profit/(loss) for the $ (197,487,005 ) $ (699,737,650 )
year attributable to
equity and management
shareholders
Adjustments to reconcile
changes in profit/(loss)
for the year to
net cash flows:
Bond interest expense 18 56,874,831 56,744,142
Bond interest paid(1) 18 (55,000,000 ) (57,902,776 )
(Increase)/decrease in
operating assets:
Due from brokers (167,747,139 ) 51,272,796
Trade and other receivables 9 (6,780,009 ) (2,568,885 )
Investments in securities 6 (504,048,330 ) 2,719,442,004
Derivative financial 6 277,708,041 (522,777,030 )
instruments
Increase/(decrease) in
operating liabilities:
Due to brokers 189,799,808 18,617,575
Trade and other payables 9 57,304,938 29,637,889
Securities sold, not 6 (385,314,274 ) (1,740,838 )
yet purchased
Derivative financial 6 (184,541,909 ) 64,760,020
instruments
Net cash (used in)/from (919,231,048 ) 1,655,747,247
operating activities
Cash flows from financing
activities
Purchase of Public Shares 11 (74,827,774 ) -
Net cash (used in)/from (74,827,774 ) -
financing activities
Net change in cash and (994,058,822 ) 1,655,747,247
cash equivalents
Cash and cash equivalents 2,076,161,696 420,414,449
at beginning of year
Cash and cash equivalents 10 $ 1,082,102,874 $ 2,076,161,696
at end of year
Supplemental disclosure of
cash flow information
Cash paid during the $ 63,095,570 $ 66,648,123
year for interest
Cash received during the $ 1,087,551 $ 634,615
year for interest
Cash received during the $ 56,062,606 $ 50,032,559
year for dividends
Cash deducted during the year $ 9,839,294 $ 13,412,324
for withholding taxes
Equity securities $ - $ 94,502,389
(with unrealized
appreciation
of $28,099,616) received
in-kind for proceeds from
the distribution
from PS V International,
Ltd.
(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.
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 1st Floor, Royal Chambers,
St Julian's Avenue, St Peter Port, Guernsey, 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 Objective and Policy
The Company's investment objective is to preserve capital and to
seek maximum, long-term capital appreciation commensurate with
reasonable risk. The Company seeks to achieve its investment
objective through long (and occasionally short) positions in equity
or debt securities of public U.S. and non-U.S. issuers (including
securities convertible into equity or debt securities), derivative
instruments and any other financial instruments that the Investment
Manager believes will achieve the Company's investment objective.
Please refer to "Investment Objective and 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 "Bonds").
The Bonds were issued at par at a coupon rate of 5.5% per annum,
which is paid semi-annually. The Bonds are listed on the Irish
Stock Exchange 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
strategy set forth in this Annual Report. 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, Anne Farlow,
Richard Battey, and William Scott, all of whom are non-executive
Directors. Anne Farlow is the Chairman of the Board. In addition,
on February 12, 2018, Jonathan Kestenbaum retired as a
non-executive Director of the Company. Jonathan Kestenbaum had
served as an independent non-executive Director of the Company
since 2014.
Committees of the Board
The Board has established an Audit Committee, a Management
Engagement Committee, and a Nomination 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 and Nomination
Committees are provided in the Corporate Governance Report.
Prime Brokers
Pursuant to prime broker agreements, Goldman Sachs & Co. and
UBS Securities LLC (the "Prime Brokers") both serve as custodians
and primary clearing brokers for the Company.
Administrator and Sub-Administrator
Pursuant to an administration and sub-administration agreement
dated April 2, 2012, Elysium Fund Management Limited (the
"Administrator") and Morgan Stanley Fund Services (Bermuda) Ltd.
(the "Sub-Administrator") have been appointed as administrator and
sub-administrator, respectively, to the Company.
The Administrator provides certain administrative and accounting
services including the maintenance of the Company's accounting and
statutory records. The Administrator delegates certain of these
services to the Sub-Administrator. The Administrator and
Sub-Administrator receive customary fees, plus out of pocket
expenses, based on the nature and extent of services provided.
London Stock Exchange Listing
On May 2, 2017, the Company announced that its Public Shares had
been admitted to the Official List of the UK Listing Authority and
had commenced trading on the Premium Segment of the Main Market of
the LSE. As a result, shareholders are able to trade Public Shares
on both Euronext Amsterdam and the LSE with shares quoted and
traded in USD in Amsterdam and Sterling in London. In connection
with the listing, at the annual general meeting held on April 25,
2017, the shareholders of the Company amended the Articles of
Incorporation and authorized, among other things, the exchange of
the 5,000,000,000 Class B Shares held by VoteCo (as defined below)
for a Special Voting Share and the amendment of the Company's
investment policy to add the following investment restrictions: (i)
no more than 10%, in aggregate, of the Company's total assets can
be invested 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 and
(ii) investments in (or 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 of making the
investment.
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 financial assets
and financial liabilities at fair value through profit or loss that
have been measured at fair value.
The Company presents its statement of financial 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 and having considered in
particular its holding of cash and Level 1 assets held at fair
value through profit or loss, the Investment Manager and the
Directors believe that the Company is well placed to manage its
business risks, has adequate resources to continue in operational
existence for the foreseeable future 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
(i) Classification
The Company classifies its financial assets and financial
liabilities at fair value through profit or loss at initial
recognition, in accordance with IAS 39 Financial Instruments:
Recognition and Measurement .
The category of financial assets and financial liabilities at
fair value through profit or loss is sub-divided into:
a) Financial assets and financial liabilities held for trading:
these financial assets are classified as held for trading if they
are acquired for the purpose of selling and/or repurchasing in the
near term and are acquired principally for the purpose of
generating a profit from fluctuations in price. All derivatives and
liabilities from short sales of financial instruments are
classified as held for trading by definition. Equity instruments
and other non-derivative instruments can be classified as held for
trading depending on the purpose for which they are acquired. The
Company's policy is not to apply hedge accounting.
b) Financial instruments designated at fair value through profit
or loss upon initial recognition: these financial assets are
designated upon initial recognition on the basis that they are part
of a group of financial assets which are managed and have their
performance evaluated on a fair value basis, in accordance with
investment strategies and risk management of the Company.
Investments in affiliated entities are included in this
category.
(ii) Recognition
The Company recognizes financial assets and financial
liabilities held at fair value through profit or loss on trade
date. From this date, any gains and losses arising from the changes
in fair value of the assets and liabilities are recognized in the
statement of comprehensive income.
Purchases or sales of financial assets and financial liabilities
that require delivery of assets within the time frame generally
established by regulation or convention in the market place
(regular way trades) are recognized on the trade date, i.e., the
date that the Company commits to purchase or sell the asset.
(iii) Initial Measurement
Financial assets and financial liabilities at fair value through
profit or loss are recorded in the statement of financial position
at fair value. All transaction costs for such instruments are
recognized directly within investment gains and losses.
(iv) Subsequent Measurement
After initial measurement, the Company measures financial
instruments which are classified at fair value through profit or
loss, at fair value. Subsequent changes in the fair value of those
financial instruments are recorded in net gain or loss on financial
assets and financial liabilities at fair value through profit or
loss in the statement of comprehensive income. Interest and
dividends earned or paid on these instruments are recorded
separately in interest income or expense and dividend income or
expense.
(v) Derecognition
A financial asset (or, where applicable, a part of a financial
asset or a part of a group of similar financial assets) is
derecognized when the rights to receive cash flows from the asset
have expired.
The Company will derecognize a financial liability when the
obligation under the liability is discharged, cancelled or
expired.
Bonds at Amortized Cost
(i) Classification
The Company classifies its Bonds, as discussed in Note 1 and
Note 18, at initial recognition at amortized cost, in accordance
with IAS 39 Financial Instruments: Recognition and Measurement.
(ii) Recognition
The Company recognizes its Bonds upon the date of issuance of
the Bonds.
(iii) Initial Measurement
Bonds are measured initially at their fair values plus any
directly attributable incremental costs of acquisition or
issue.
(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 offering.
(v) Derecognition
The Company will derecognize its liability associated with the
Bonds upon maturity of the Bonds 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 financial 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.
In general, the Company values 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 are valued at the average of
the most recent "bid" and "ask" prices.
Securities that are not listed on an exchange but for which
external pricing sources (such as dealer quotes or 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
reflected 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).
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 method discussed. Any material changes
in valuation methods are discussed and agreed with the Board of
Directors.
In the years ended 2017 and 2016, investments where no market
prices were available were valued at fair value based upon
independent third-party prices.
The Company's investments in affiliated entities are valued at
fair value and represent the Company's proportionate interest in
the net asset value of the affiliated entities at the reporting
date. Having considered whether there are any circumstances
requiring the need for adjustments to the net asset value of the
affiliated entities in arriving at fair value, the Board of
Directors in consultation with the Investment Manager concluded
that no such adjustments were necessary and that net asset value
approximated fair value.
Offsetting of Financial Instruments
IFRS allows financial assets and financial liabilities to be
reported net by counterparty on the statement of financial
position, provided the legal right and intention of offset exists.
Financial assets and financial liabilities are reported gross by
counterparty in the statement of financial position as it is not
the Company's intention to settle on a net basis financial assets
and financial liabilities with the collateral pledged to or
received from counterparties in the statement of financial
position.
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 does not isolate that portion of gains and
losses on investments that is due to changes in foreign exchange
rates from the portion due to changes in market prices of the
investments. Such fluctuations are included in net gain/(loss) on
financial assets and financial liabilities at fair value through
profit or loss 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 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 financial 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
financial position comprise cash at banks and money market funds
which are invested in U.S. treasuries 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 relates to the Bonds, cash,
collateral cash received/posted by the Company,
interest/amortization on fixed income securities and rebate expense
on securities sold not yet purchased. Interest income and expense
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 financial instruments
for the year and from reversal of prior years' unrealized gains and
losses for financial instruments which were realized in the
reporting period.
Realized gains and losses on disposals of financial instruments
classified at fair value through profit or loss are calculated
using the highest cost relief method (specific identification).
These gains or losses represent the differences between an
instrument's initial carrying amount and disposal amount, or cash
payments on, or receipts received from, derivative contracts.
Professional Fees
Professional fees include, but are not limited to, expenses
relating to accounting, investment valuation, administrative
services, auditing, entity-level taxes and tax preparation
expenses, legal fees and expenses, professional fees and expenses
(including fees and expenses of investment bankers, advisers,
appraisers, public and government relations firms 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, indemnification 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 filings 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 only taxes payable by the Company on its income
are withholding taxes applicable to certain investment income, such
as dividends. As a result, no other income tax liability or expense
has been recorded in the accompanying Financial Statements.
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 classifies its Public
Shares, Class B 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 the net asset values as of the last day of
each calendar month and are therefore classified as financial
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 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 or conversions, is recognized in the statement of
comprehensive income.
3. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND
ASSUMPTIONS
The preparation of the Company's Financial Statements requires
management to make judgments, 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 affected in future periods.
Judgments
In the process of applying the Company's accounting policies,
management has made the following judgments, which have a
significant effect on the amounts recognized in the Financial
Statements:
Assessment of Investment Management Agreement as an executory
contract
The Company classifies 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 definition 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 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 fees, including performance fees
crystallizing annually on December 31 (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 offset amount. 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 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 pro?tability generated
by those services (subject to standard high water mark
arrangements). Accordingly, those fees (including the offset amount
component of performance fees) arise and are recognized as the
services are performed by the Investment Manager and the Company
earns net pro?ts (if any), and the Company accrues a provision for
performance fees over the applicable period based on its net pro?ts
(after recovery of any loss carry forward amount). The Board has
assessed that in this manner, the timing of recognizing the
Company's pro?ts appropriately matches the timing of recognizing
the Company's obligation to pay fees that may be triggered by those
pro?ts.
The Company also assessed whether the offset amount gave rise to
a financial liability under the requirements to record contingent
settlement obligations in IAS 32 paragraph 25. The Company
concluded that no financial liability arises until December 31 of
each year, at which point the performance fee including the offset
amount crystallises, because the arrangements only give rise to a
financial asset for the Investment Manager at that point.
Assessment of Company investment as structured entity
Pershing Square VI, L.P. and Pershing Square VI International,
L.P., each feeder funds to Pershing Square VI Master, L.P., all of
which operate collectively as a co-investment vehicle investing
primarily in securities of (or otherwise seeking to be exposed to
the value of securities issued by) Automatic Data Processing, Inc.,
commenced operations on July 24, 2017 and are affiliated investment
funds. As of December 31, 2017, the Company held an investment in
Pershing Square VI International, L.P. ("PS VI"), which is
reflected under financial assets at fair value through profit or
loss in the statement of financial position.
All realized and unrealized gains and losses from the investment
in PS VI are reflected in the statement of comprehensive income for
the year ended 2017. The maximum exposure to loss from these
investments at December 31, 2017 was equal to the amount of the
Company's investment in PS VI. The Company has not provided, and
does not intend to provide, any financial 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 investment in PS VI.
IFRS 12 defines 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 has assessed whether PS VI should be classified as a
structured entity. The Company has considered the terms of the
investment management agreement between PS VI and the Investment
Manager and 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
its contractual agreement with the Investment Manager.
The Company, therefore, has concluded that PS VI is a structured
entity.
Estimates and Assumptions
The key assumptions concerning the future and other key sources
of estimation uncertainty at the reporting date that have a
significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial 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
reflected in the assumptions when they occur.
Fair Value of Financial Instruments
When the fair value of financial assets and financial
liabilities recorded in the statement of financial 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 service/valuation agent. The
independent third-party pricing service/valuation agent utilizes
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 flows, current and projected financial
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 financial
instruments in the statement of financial 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 modification or repackaging) or based on
available observable market data.
4. NEW STANDARDS, INTERPRETATIONS AND AMMENTS
The following relevant standards, which have been issued by the
IASB, have an effective date after the date of these Financial
Statements:
International Description Effective Date
Accounting
Standards
(IAS/IFRS)
IFRS 9 Financial Instruments January 1, 2018
In July 2014, the IASB issued the final version of IFRS 9,
Financial Instruments that replaces IAS 39, Financial Instruments:
Recognition and Measurement and all previous versions of IFRS 9.
IFRS 9 brings together all three aspects of the accounting for
financial instruments: classification and measurement, impairment
and hedge accounting. IFRS 9 is effective for annual periods
beginning on or after January 1, 2018. Except for hedge accounting,
retrospective application is required but providing comparative
information is not compulsory. For hedge accounting, the
requirements are generally applied prospectively, with some limited
exceptions.
The Directors have chosen not to early adopt the above standard
and will adopt it on the required effective date. The Company has
performed an impact assessment of all three aspects of IFRS 9. This
assessment is based on currently available information and may be
subject to changes arising from further detailed analysis or
additional information made available to the Company in the future.
Overall, the Company expects no impact on its statement of
financial position and equity.
i) Classification and measurement
IFRS 9 contains three principal classification categories for
financial assets: measured at amortized cost, fair value through
other comprehensive income and fair value through profit or loss.
IFRS 9 classification is generally based on the business model in
which a financial asset is managed and its contractual cash
flows.
Based on the Company's initial assessment, this standard is not
expected to have a material impact on the classification of
financial assets and financial liabilities of the Company. This is
because:
a) Other financial instruments currently measured at fair value
through profit or loss under IAS 39 are designated into this
category because they are managed on a fair value basis in
accordance with a documented investment strategy. These investments
are not expected to meet the SPPI criterion (solely payments of
principal and interest) and accordingly, these financial
instruments will be mandatorily measured at fair value through
profit or loss under IFRS 9; and
b) Financial instruments currently measured at amortized cost
are: cash and cash equivalents, receivables and payables. These
instruments meet the solely principal and interest criterion and
are held in a held-to-collect business model. Accordingly, they
will continue to be measured at amortized cost under IFRS 9.
The Company measures all financial assets and liabilities at
fair value which are currently held at fair value and expects to
continue with this treatment.
ii) Impairment
IFRS 9 requires the Company to record expected credit losses on
all of its debt securities, loans and trade receivables, either on
a 12-month or lifetime basis. The Company will apply the simplified
approach and record lifetime expected losses on all investment
income and other receivables. Given that investment income and
other receivables have not been impaired to date, the Company does
not expect there to be a significant impact on its equity from
recording the expected credit losses on investment income and other
receivables over their lifetimes.
iii) Hedge accounting
The Company does not currently designate any hedges as effective
hedging relationships which qualify for hedge accounting.
Therefore, the Company does not expect there to be any impact with
respect to hedge accounting on the Company as a result of applying
IFRS 9.
The Company has assessed the impact under IFRS 15 and determined
that it will not have an effect on the Company's Financial
Statements as the Company does not have any contracts with
customers which meet the definition under IFRS 15.
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
Directors' decisions are based on a single integrated investment
strategy and the Company's performance is evaluated on an overall
basis. The Company has a portfolio of long and short investments
that the Board and Investment Manager believe exhibit significant
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 financial 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 profit or loss:
2017 2016
Financial assets at fair value
through profit or loss
Investments in securities $ 3,140,815,503 $ 2,636,767,173
Derivative financial instruments 744,454,840 1,022,162,881
Financial assets at fair value $ 3,885,270,343 $ 3,658,930,054
through profit or loss
Financial liabilities at fair value through profit or loss:
2017 2016
Financial liabilities at fair
value through profit or loss
Securities sold, not yet purchased $ - $ 385,314,274
Derivative financial instruments 6,192,314 190,734,223
Financial liabilities at fair $ 6,192,314 $ 576,048,497
value through profit or loss
Net changes in fair value of financial assets and financial
liabilities through profit or loss:
2017 2016
Realized Unrealized TotalGains/(Losses) Realized Unrealized Total
Gains/(Losses)
Financial
assets
At fair $ (1,415,516,018 ) $ 1,515,299,610 $ 99,783,592 $ 310,568,832 $ (760,589,597 ) $ (450,020,765 )
value
through
profit or
loss
Financial
liabilities
At fair (132,101,825 ) (63,160,453 ) (195,262,278 ) (42,833,669 ) 92,131,134 49,297,465
value
through
profit or
loss
Derivative 73,779,646 (26,626,468 ) 47,153,178 (344,335,912 ) 177,079,125 (167,256,787 )
financial
instruments
Net changes $ (1,473,838,197 ) $ 1,425,512,689 $ (48,325,508 ) $ (76,600,749 ) $ (491,379,338 ) $ (567,980,087 )
in
fair
value
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 significant to the fair
value measurement. Assessing the significance of a particular input
requires judgment and considers factors specific 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
at the measurement date. The assets and liabilities in this
category will generally include equities listed in active markets,
treasuries (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 fixed income securities, OTC options, total
return swaps, credit default swaps, foreign currency forward
contracts and certain other derivatives. Also, included in this
category is the Company's investment in an affiliated entity valued
at net asset value, which can be redeemed by the Company as of the
measurement date, or within 90 days of the measurement date.
Level 3 - Inputs, including significant unobservable inputs,
reflect 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 private investments and certain other derivatives.
Recurring Fair Value Measurement of Assets and Liabilities
2017 2016
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
$ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000
Financial
Assets:
Equity
Securities
(Designated
at Fair Value):
Common Stock:
Business $ 449,085 $ - $ - $ 449,085 $ - $ - $ - $ -
Services
Chemicals 171,225 - - 171,225 169,327 - - 169,327
Consumer 503,835 - - 503,835 560,295 - - 560,295
Products
Financial 207,627 - - 207,627 272,162 - - 272,162
Services
Healthcare - - - - 127,487 - - 127,487
Industrials/Chemicals - - - - 89,828 - - 89,828
Real 271,399 - - 271,399 142,018 - - 142,018
Estate
Development
and Operating
Restaurant 1,269,811 - - 1,269,811 1,265,153 - - 1,265,153
Preferred Stock:
Financial 10,983 30 - 11,013 10,253 244 - 10,497
Services
Investment in - 256,821 4 - 256,821 - - - -
Affiliated
Entity
Derivative
Contracts
(Held
for Trading):
Currency - 131 1 - 131 - 12,303 1 - 12,303
Call/Put
Options
Purchased
Equity Options
Purchased:
Business - 319,031 1 - 319,031 - - - -
Services
Consumer - 367,196 1 - 367,196 - 284,692 1 - 284,692
Products
Healthcare - - - - - 4,113 1 - 4,113
Industrials/Chemicals - - - - - 530,831 1 - 530,831
Index Options - 402 1 - 402 - - - -
Purchased
Foreign Currency - - - - - 5,329 1 - 5,329
Forward
Contracts
Total Return
Swaps:
Financial - 35,401 2 - 35,401 - 86,633 2 - 86,633
Services
Real - 22,294 2 - 22,294 - 53,602 2 - 53,602
Estate
Development
and Operating
Warrants:
Real - - - - - - 44,660 3 44,660
Estate
Development
and Operating
Total $ 2,883,965 $ 1,001,306 $ - $ 3,885,271 $ 2,636,523 $ 977,747 $ 44,660 $ 3,658,930
2017 2016
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
$ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $000 $ 000
Financial
Liabilities:
Debt
Securities
(Held
for
Trading):
Convertible
Bonds:
Consumer $ - $ - $ - $ - $ - $ 27,154 $ - $ 27,154
Products
Equity
Securities
(Held
for
Trading):
Common
Stock:
Consumer - - - - 358,160 - - 358,160
Products
Derivative
Contracts
(Held
for
Trading):
Equity
Options
Written:
Healthcare - - - - - 190,734 1 - 190,734
Foreign - 741 1 - 741 - - - -
Currency
Forward
Contracts
Total
Return
Swaps:
Consumer - 488 2 - 488 - - - -
Products
Financial - 4,964 2 - 4,964 - - - -
Services
Net - - 156,268 5 156,268 - - 161,137 5 161,137
assets
attributable
to
management
shareholders
Total $ - $ 6,193 $ 156,268 $ 162,461 $ 358,160 $ 217,888 $ 161,137 $ 737,185
1 Level 2 financial instruments may include OTC currency
call/put options, equity options, equity forwards and foreign
currency forward contracts that are fair valued by the Investment
Manager using prices received from an independent third-party
pricing service. The fair values of these financial instruments may
reflect, but are not limited to, the following inputs by the
independent third-party pricing service: current market and
contractual prices from market makers or dealers, volatilities of
the underlying financial instruments and/or current foreign
exchange forward and spot rates. 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. The significant inputs
into their valuation models are market observable and are included
within Level 2.
2 Level 2 financial instruments include total return swap
contracts 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, payment
schedules and/or dividends declared.
3 Level 3 investments include warrants that are fair valued by
the Investment Manager using prices obtained from an independent
third-party valuation agent. The independent third-party valuation
agent utilizes proprietary models to determine fair value. The
valuation agent's modeling may consider, but is not limited to, the
following inputs: amount and timing of cash flows, current and
projected financial performance, volatility of the underlying
securities' stock price, dividend yields and/or interest rates. 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.
4 This figure relates to the Company's investment in PS VI as of
the year ended 2017, as discussed in Note 16. The Company's
investment in PS VI included 46.05% of Level 1 financial
instruments, 53.01% of Level 2 financial instruments and 0.94% of
other assets and liabilities that are outside the scope of IFRS 13
as of the year ended 2017. The level of underlying investments had
no impact in the level used for the investment held by the Company.
See fair value measurement discussion in Note 2 for the Company's
valuation policy related to investments in affiliated entities.
5 Net assets attributable to management shareholders are
classified as Level 3 and are valued based on their net asset value
which approximates carrying value. In assessing the appropriateness
of net asset value as a basis for fair value, consideration is
given to the need for adjustments so that net asset value based on
a variety of factors including liquidity and the timeliness and
availability of accurate financial information. No such adjustments
were deemed necessary. The movements for the year are disclosed in
the statement of changes in net assets attributable to management
shareholders.
The Company's cash and cash equivalents and short-term
receivables and payables are recorded at carrying value which
approximates fair value. The fair value of the Bonds is classified
as Level 1 and the carrying value of the Bonds is discussed further
in Note 18.
Some of the Company's investments in Level 1 securities
represent a significant 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 their fair value. Many factors
affect the price that could be realized for large investments. The
Investment Manager believes that it is difficult to accurately
estimate the potential discount or premium to the quoted market
prices that the Company would receive or realize if investments
that represent a significant proportion of the Company's portfolio
were sold or covered.
Transfers Between Levels
Transfers between levels during the period are determined and
deemed to have occurred at each financial statement reporting date.
There were no transfers between Level 1 and Level 2 fair value
measurements, and one transfer out of Level 3 (as discussed below)
fair value measurements of material significance since the last
financial statement reporting date.
Level 3 Reconciliation
The following table summarizes the change in the carrying
amounts associated with Level 3 investments for the years ended
2017 and 2016.
Warrants
Balance at December 31, 2015 $ 45,561,789
Total gains and losses in profit or loss (901,521 )
Balance at December 31, 2016 $ 44,660,268
Transfer* (49,193,147 )
Total gains and losses in profit or loss 4,532,879
Balance at December 31, 2017 $ -
Total unrealized gains and losses $ (901,521 )
for the year included in
profit or loss for assets held at December 31, 2016
* During the year ended December 31, 2017, the transfer from
Level 3 to Level 1 related to the cashless conversion of warrants
of The Howard Hughes Corporation to common stock shares.
All gains and losses from Level 3 securities during the year are
recognized in net gain/(loss) on financial assets and financial
liabilities at fair value through profit or loss in the statement
of comprehensive income.
Quantitative Information of Significant Unobservable Inputs -
Level 3
The table below summarizes quantitative information about the
unobservable inputs used in the fair value measurement and the
valuation processes used by the Company for Level 3 securities for
the year ended 2016. The Company did not hold Level 3 investments
as of December 31, 2017.
Financial YearEnded Fair Value Valuation Unobservable Inputs(1)
Asset Techniques Input
Warrants 2016 $ 44,660,268 Black-Scholes Volatility 49%
pricing
model
(1) Refer to footnote 3 on page 56 for details regarding level 3
valuation techniques.
Sensitivity Analysis to Significant Changes in Unobservable
Inputs with Level 3 Hierarchy
The significant unobservable inputs used in the fair value
measurement categorized within Level 3 of the fair value hierarchy
together with a quantitative sensitivity analysis are shown as
follows:
Financial YearEnded Unobservable Sensitivity Effect onFair Value
Asset Input Used *
Warrants 2016 Volatility +2 $ 74,138
Warrants 2016 Volatility -2 $ (66,999)
*The sensitivity analysis refers to the volatility unit added
and deducted from the input and the effect this has on the fair
value.
8. DERIVATIVE CONTRACTS
In the normal course of business, the Company enters into
derivative contracts for investment purposes. Typically, derivative
contracts serve as components of the Company's investment
strategies and are utilized primarily to structure the portfolio to
match economically the investment objectives of the Company. 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 the risks associated with its investing activities as part of
its overall risk management policy.
The Company's derivative trading activities are primarily the
purchase and sale of OTC and listed options, equity forwards,
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
financial position. Changes in fair value are reflected 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 asset. 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 financial position. The
ultimate gain or loss depends upon the prices of the underlying
asset(s) on settlement date.
Credit Default Swaps
A credit default swap contract represents an agreement that one
party, the protection buyer, pays a fixed fee, the premium, in
return for a payment by the other party, the protection seller,
contingent upon a specified credit event relating to an underlying
reference obligation. While there is no credit event, the
protection buyer pays the protection seller a quarterly fixed
premium. If a specified credit event occurs, there is an exchange
of cash flows and/or securities designed so that the net payment to
the protection buyer reflects the loss incurred by holders of the
referenced obligation in the event of its default. The ISDA
agreement establishes the nature of the credit event and such
events may include bankruptcy and failure to meet payment
obligations when due.
Options
Options are contractual agreements that convey the right, but
not the obligation, for the purchaser either to buy or sell a
specific amount of a financial instrument at a fixed price, either
at a fixed future date or at any time within a specified
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
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 financial instrument underlying the
written option. The exercise of an option written by the Company
could result in the Company buying or selling a financial
instrument at a price higher or lower than the current market
value, respectively. The maximum payout for written put options is
limited to the number of contracts written and the related strike
prices, and the maximum payout for written call options (which
could be unlimited) is contingent upon the market price of the
underlying security at the date of a payout event. At December 31,
2017, the Company had no written options. At December 31, 2016, the
Company had a maximum payout amount of $254,480,220 relating to
written equity put option contracts. The maximum payout amount
could be offset by the subsequent sale of the financial instrument
obtained via the exercise of the option. The fair value of these
positions as of December 31, 2016 was ($190,734,223).
Equity Forwards
An equity forward 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.
Currency Options
Currency options operate as described under Options above with
the underlying asset being a notional amount of a currency that
will be bought or sold in the future for a specified amount of
another currency (the strike price).
Currency Forwards
A foreign currency forward contract is a commitment to purchase
or sell a foreign 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 foreign portfolio
holdings.
The following table shows the fair values of derivative
financial instruments recorded as assets or liabilities as of
December 31, 2017 and December 31, 2016, together with their
notional amounts (or shares, when applicable). The notional amount,
which is recorded on a gross basis, is the amount of a derivative's
underlying asset, reference rate or index, and is the basis upon
which changes in the value of derivatives are measured. The
notional amounts and shares indicate the volume outstanding at the
reporting dates and are indicative of neither the market risk nor
the credit risk.
2017 2016
Fair Value Notional/Shares Fair Value Notional/Shares
Derivatives
primarily
held
for
trading
purposes
Assets
Equity $ 686,227,695 29,330,970 # $ 819,635,713 46,541,690 #
options
purchased
Index 401,528 53,537 ^ - -
options
purchased
Total 57,694,708 35,199,930 # 140,234,925 54,263,258 #
return
swaps
Warrants - - 44,660,268 688,138 #
Total $ 744,323,931 $ 1,004,530,906
Assets
Liabilities
Equity $ - - $ 190,734,223 4,241,337 #
options
written
Total 5,451,422 17,031,076 # - -
return
swaps
Total $ 5,451,422 $ 190,734,223
Liabilities
Derivatives
primarily
held for
risk
management
purposes
Assets
Currency $ 130,909 $ 266,615,000 ± $ 12,302,780 $ 393,533,000 ±
call/put
options
purchased
Foreign - - 5,329,195 $ 292,125,154 ±
currency
forward
contracts
Total $ 130,909 $ 17,631,975
Assets
Liabilities
Foreign $ 740,892 $ 324,154,006 ± - -
currency
forward
contracts
± - represents notional value (in USD) # - represents number of
underlying equity shares ^ - represents number of contracts
The table below summarizes gains or losses from the Company's
derivative trading activities for December 31, 2017 and December
31, 2016 included in net gain/(loss) on financial assets and
financial liabilities.
Derivatives for Year Ended 2017 Year Ended 2016
Trading Activities Net Gain/(Loss) Net Gain/(Loss)
Credit Default Swaps $ - $ (41,881)
Currency Call/Put Options (13,049,037) (73,747,050)
Equity Forwards (12,799,496) (20,186,341)
Equity Options 45,451,271 (175,518,160)
Foreign Currency Forward Contracts (21,168,161) (36,018,424)
Index Options (5,631,370) -
Total Return Swaps 56,771,295 139,156,590
Warrants (2,421,324) (901,521)
Total Net Gain/(Loss) $ 47,153,178 $ (167,256,787)
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 financial position. The disclosures are
required for all recognized financial instruments that could be
offset in accordance with IAS 32 Financial Instruments Presentation
. The disclosures also apply to recognized financial 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 financial position as a result of counterparty netting.
Collateral pledged represents the amounts by which derivative
assets and liabilities could have been further offset for financial
presentation purposes if the Company did not include collateral
amounts in due from brokers in the statement of financial
position.
As ofDecember (1) Gross Amounts Net Amounts Offsetting Permitted (2) Net Amount
31, 2017 Gross Amounts Offset in the Presented in the Under ISDA Netting Cash Collateral
Statement of Statement of Agreements Pledged/(Received)
Financial Position Financial Position
Derivative Assets $ 744,454,840 $ - $ 744,454,840 $ (5,451,422) $ (734,284,358) $ 4,719,060
Total $ 744,454,840 $ - $ 744,454,840 $ (5,451,422) $ (734,284,358) $ 4,719,060
Derivative $ (5,451,422) $ - $ (5,451,422) $ 5,451,422 $ - $ -
Liabilities
Total $ (5,451,422) $ - $ (5,451,422) $ 5,451,422 $ - $ -
As ofDecember (1) Gross Amounts Net Amounts Offsetting Permitted (3) Net Amount
31, 2016 Gross Amounts Offset in the Presented in the Under ISDA Netting Cash Collateral
Statement of Statement of Agreements Pledged/(Received)
Financial Position Financial Position
Derivative Assets $ 780,791,498 $ - $ 780,791,498 $ (190,734,223) $ (590,057,275) $ -
Total $ 780,791,498 $ - $ 780,791,498 $ (190,734,223) $ (590,057,275) $ -
Derivative $ (190,734,223) $ - $ (190,734,223) $ 190,734,223 $ - $ -
Liabilities
Total $ (190,734,223) $ - $ (190,734,223) $ 190,734,223 $ - $ -
(1) The gross amounts include derivative assets and liabilities
which the Company has entered into with an ISDA counterparty and
are collateralized. (2) In addition, the Company has also received
collateral of approximately $38.3 million and posted collateral of
approximately $489.2 million (net of pending settlements) that is
unable to be reflected in the table above due to disclosure
requirements. Included within the collateral available for offset
shown above are amounts offset against balances due from/to brokers
as disclosed in Note 13. (3) In addition, the Company has also
received collateral of approximately $12.9 million and posted
collateral of approximately $511.9 million (net of pending
settlements) that is unable to be reflected in the table above due
to disclosure requirements. Included within the collateral
available for offset shown above are amounts offset against
balances due from/to brokers as disclosed in Note 13.
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 financial
position.
2017 2016
Trade and other receivables
Dividends receivable $ 12,048,233 $ 8,121,916
Interest and other receivables 6,472,060 3,618,368
$ 18,520,293 $ 11,740,284
2017 2016
Trade and other payables
Interest payable $ 199,851 $ 502,732
Legal reserve (see Note 14) 86,396,342 29,176,480
Other payables 4,524,942 2,634,267
$ 91,121,135 $ 32,313,479
10. CASH AND CASH EQUIVALENTS
The following is a breakdown of the Company's cash and cash
equivalents as stated in the statement of financial position.
2017 2016
Cash at banks $ 116,832 $ 86,604
U.S. Treasury money market fund 1,081,986,042 2,076,075,092
$ 1,082,102,874 $ 2,076,161,696
As of December 31, 2017, money market fund investments in
Goldman Sachs Financial Square Treasury Instruments Fund, JPMorgan
100% U.S. Treasury Securities Money Market Fund and BlackRock
Liquidity Funds Treasury Trust Fund exceeded 5% of net assets
attributable to all shareholders with fair values of $549,929,632,
$266,362,549 and $265,693,861, respectively.
11. SHARE CAPITAL
Authorized and Issued Capital
The Board of the Company is authorized to issue an unlimited
number of shares, and such other shares, classes of shares or
series as determined by the Board. All of the Company's share
classes participate pro rata in the profits and losses of the
Company based upon the share class's ownership of the Company at
the time of such allocation. In 2017, the Company amended its
Articles of Incorporation in accordance with LSE listing rules
which required the incorporation of 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 2017 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) 24,012,854 Public Shares (being
equivalent to 10% of the Public Shares in issue as at the latest
practicable date prior to the date of publication of the 2017
Notice of Annual General Meeting) and 850,079 Management Shares
(being equivalent to 10% of the Management Shares in issue as at
the latest practicable date prior to the date of publication of the
2017 Notice of 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 at this year's AGM.
The Company currently has outstanding the Public Shares, the
Special Voting Share and the Management Shares.
In connection with the listing of the Public Shares on the LSE,
the Company exchanged the Class B Shares held by PS Holdings
Independent Voting Company Limited ("VoteCo"), a limited liability
company with the sole objective to vote in the best interest of the
Company's shareholders as a whole, for a Special Voting Share. The
Special Voting Share at all times carries 50.1% of the aggregate
voting power in the Company (except for certain specific matters
described below ("Specified Matters") on which it may not vote).
The investment Manager has no affiliation with VoteCo. VoteCo is
wholly owned by a trust established for the benefit of one or more
charitable organizations.
The Investment Manager waived the management fee and/or the
performance fee with respect to Management Shares, which were
issued to certain shareholders, including certain members,
partners, officers, managers, employees or affiliates of the
Investment Manager or certain other shareholders.
Lock-up
Mr. Ackman and other members of the management team and officers
of the Investment Manager have each agreed with the Company to a
lock-up of ten years commencing from October 1, 2014, of their
aggregate Management Shares held at that time, less amounts (i)
attributable to any sales required to pay taxes on income generated
by the Company; (ii) required to be sold due to regulatory
constraints, including, without limitation, sales required due to
ownership limits; or (iii) attributable to sales following
separation of employment from the Investment Manager. Under the
terms of the lock-up arrangement, shares subject to lock up may
from time to time be transferred to affiliates, provided that the
transferee agrees to be subject to the remaining lock-up period.
Additional Public Shares purchased in the market and converted to
Management Shares (if approved by shareholders) will not be subject
to the foregoing lock-up.
As of December 31, 2017 and December 31, 2016, the total
Management Shares outstanding were 8,500,796 with a value of
$156,268,350 (2016: $161,137,460).
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.
Voting Rights
The holders of Public Shares have the right to receive notice
of, attend and vote at general meetings of the Company.
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 in issue. 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.
Specified Matters
In order to comply with the LSE listing rules, the Company was
required to make certain revisions to its shareholder voting
structure. The LSE listing rules require that only holders of the
Public Shares should be permitted to vote on certain Specified
Matters.
As a result of such changes, while the Special Voting Share
carries, in the aggregate, such number of votes as is equal to
50.1% of the total voting power of the Company (subject to some
limited exceptions regarding matters for which a different rule is
stated in the Articles of Incorporation or pursuant to applicable
law), the Special Voting share may not vote on Specified Matters.
In addition, while the Public Shares and Management Shares carry
voting rights such that the aggregate number of issued Public
Shares and Management Shares together carry 49.9% of the total
voting power of the Company (subject to some limited exceptions
regarding matters for which a different rule is stated in the
Articles of Incorporation or pursuant to applicable law) the
Management Shares may not vote on Specified Matters.
Each of the Specified Matters is set forth in the LSE listing
rules. Please refer to Part 6 of the 2017 Notice of Annual General
Meeting for a list of the Specified Matters, current as of the date
of the Notice.
Distributions
The Board may at any time declare and pay dividends (or interim
dividends) based upon the financial 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. No dividends have been declared
or paid for the years ended 2017 and 2016.
Capital Management
The Company's capital currently consists of Public Shares which
are listed on Euronext Amsterdam and the LSE, Management Shares
which can be converted into Public Shares, and the Special Voting
Share. The proceeds from the Bonds which were issued on June 26,
2015 and are listed on the Irish Stock Exchange are being used to
make investments in accordance with the Company's investment
policy.
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 specified
circumstances). On April 25, 2017, the Company held its annual
general meeting at which shareholders authorized the Company to
engage in share buybacks up to a maximum of 14.99% of the Public
Shares in issue in an effort to assist in narrowing the discount to
NAV at which the Public Shares traded. On May 2, 2017, the Company
commenced its share buyback program whereby its buyback agent,
Jefferies International Limited, began to repurchase Public Shares
subject to certain limitations. During the year ended December 31,
2017, the Company repurchased 5,411,736 Public Shares for a total
of $76,330,492 (an average cost of $14.10 per share). Any
repurchased Public Shares are subsequently retired.
Also, as discussed on page 61, the Investment Manager has also
imposed a ten-year lock-up on certain holders of Management Shares,
subject to certain exceptions. This lock-up does not affect the
capital resources available to the Company.
The Public Shares, Management Shares and Class B Shares /
Special Voting Share transactions for the years ended December 31,
2017 and December 31, 2016 were as follows:
Management Public Shares Class B Special Voting
Shares Shares Share
Shares as of 8,500,796 240,128,546 5,000,000,000 -
December
31, 2016
Issuance of - - - -
Shares
Share Buybacks - (5,411,736) - -
Conversion Out - - (5,000,000,000) -
Conversion In - - - 1 -
Shares as of 8,500,796 234,716,810 - 1
December
31, 2017
Management Public Shares Class B Shares
Shares
Shares as of December 31, 2015 8,500,796 240,128,546 5,000,000,000
Issuance of Shares - - -
Shares as of December 31, 2016 8,500,796 240,128,546 5,000,000,000
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.
Interest Income 2017 2016
Cash $ 157,926 $ 21,209
Due from brokers on collateral posted 982,667 603,412
$ 1,140,593 $ 624,621
Interest Expense 2017 2016
Short market rebate fees $ 4,985,280 $ 7,366,549
Bond interest expense 54,823,788 54,696,150
Amortization of bond issue costs 2,051,043 2,047,992
incurred as finance costs
Interest expense on securities 472,210 258,156
sold, not yet purchased
Amortization of premiums on securities (266,064) (148,575)
sold, not yet purchased
Due to brokers on collateral received 2,600,862 591,275
Cash 401 1,054
$ 64,667,520 $ 64,812,601
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 defines 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 financial 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 specific
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 (along with the other PSCM-managed
funds') portfolio as compared to most other hedge funds is that it
does not generally use margin leverage in its investment
strategy.
At times, the Investment Manager has also invested in other
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 the Risk Management section within the Report of the
Directors for further information regarding principal risks faced
by the Company (which are explicitly incorporated by reference into
these Notes to Financial Statements).
Market Risk
Market risk is the risk that the fair value or future cash flows
of financial instruments will fluctuate 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 specified 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 financial
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, 2017 is presented in the Condensed Schedule of
Investments on pages 73 to 74 (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 flows or the fair values of
financial instruments. Generally, most financial 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's investment in cash and cash equivalents has
limited exposure to interest rate risk because the duration of
these investments is less than 90 days. As of December 31, 2017 and
December 31, 2016 cash and cash equivalents equalled $1,082,102,874
and $2,076,161,696, respectively. The Bonds have no interest rate
risk as the interest rate is fixed and they are carried at
amortized cost.
Currency Risk
The Company invests in financial 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 flows of that portion of the Company's financial assets or
liabilities denominated in currencies other than USD.
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. The Company primarily utilizes forward exchange
contracts and currency options to hedge foreign currency
denominated investments. 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 73 to 74 (which is explicitly incorporated by reference into
these Notes to Financial Statements) for additional details of the
Company's financial assets and liabilities.
The following tables show the currencies to which the Company
had significant direct exposure at December 31, 2017 and December
31, 2016 on its financial assets and financial liabilities. The
analysis calculates the effect of a reasonably possible movement of
the currency rate against USD on equity and on profit or loss with
all other variables held constant.
Currency (2017) Net Foreign Change inCurrency Rate Effect on Net AssetsAttributable toall Shareholdersand on Profit/(Loss) for the Year
Currency
Exposure
CAD $ 561,380,312 +4% $ 25,239,674
EUR $ 130,908 -2% $ 277,013
EUR $ 130,908 +2% $ (98,914)
Currency (2016) Net Foreign Change in Effect on Net AssetsAttributable toall Shareholdersand on Profit/(Loss) for the Year
Currency Currency Rate
Exposure
CAD $ 639,512,522 +7% $ 36,016,234
EUR $ 12,302,780 -5% $ 14,815,114
EUR $ 12,302,780 +5% $ (9,259,078)
An equivalent decrease in each of the aforementioned currencies
against USD, except for EUR, would have resulted in an equivalent
but opposite impact.
Equity Price Risk
As explained in the Company's Prospectus, the Company's
portfolio is highly concentrated, and may invest a significant
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 mid-to-large cap North American companies. Because
the portfolio is highly concentrated and primarily invested in
public equities (or derivative instruments referenced to public
equities), a significant risk to the portfolio is fluctuations in
equity prices. Refer to the 2017 Key Highlights and Investment
Manager's Report on pages 6 to 18 for quantitative and qualitative
discussion of the Company's portfolio and the Condensed Schedule of
Investments on pages 73 to 74 (each of which is explicitly
incorporated by reference into these Notes to Financial Statements)
for additional details of the Company's financial assets and
financial liabilities.
The following table indicates management's best estimate of 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 AssetsAttributable toall Shareholders
Change in Equity Price (2017)
+9% +10%
-9% -10%
% Change in Net AssetsAttributable toall Shareholders
Change in Equity Price (2016)
+8% +9%
-8% -9%
The following table analyzes the Company's concentration of
equity price risk in the Company's equity portfolio by geographical
distribution (based on counterparties' place of primary listing or,
if not listed, place of domicile).
2017 2016
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:
2017 2016
Restaurant 33% 41%
Business Services 26% -
Consumer Products (Long Exposure) 18% 27%
Real Estate Development and Operating 8% 8%
Financial Services 6% 12%
Consumer Products (Short Exposure) 5% -12%
Industrials/Chemicals 4% 26%
Healthcare - -2%
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 the degree of
illiquidity.
The following tables summarize the liquidity profile of the
Company's financial assets and financial liabilities, cash and cash
equivalents (including due to/from broker) and trade receivables
and payables based on undiscounted cash flows:
As of December Less than 1 Month 1 to 3 Months 3 to 6 Months 6 to 12 Months Over 1 Year Total
31, 2017
Assets
Cash and cash $ 1,082,102,874 $ - $ - $ - $ - $ 1,082,102,874
equivalents
Due from 710,597,200 - - - - 710,597,200
brokers
Trade and other 18,520,293 - - - - 18,520,293
receivables
Financial
assets
at fair value
through profit
or loss:
Investments in 1,256,829,640 970,258,925 704,973,766 201,088,652 7,664,520 3,140,815,503
securities
Derivative 308,222,699 339,701,429 74,804,925 21,096,200 629,587 744,454,840
financial
instruments
Total assets $ 3,376,272,706 $ 1,309,960,354 $ 779,778,691 $ 222,184,852 $ 8,294,107 $ 5,696,490,710
Liabilities
Due to brokers $ 340,795,000 $ - $ - $ - $ - $ 340,795,000
Trade and other 91,121,135 - - - - 91,121,135
payables
Bonds 27,500,000 - - 27,500,000 1,220,000,000 1,275,000,000
Financial
liabilities
at fair value
through profit
or loss:
Securities - - - - - -
sold, not
yet purchased
Derivative 1,679,373 1,305,544 1,756,546 1,450,851 - 6,192,314
financial
instruments
Total 28,950,851 1,220,000,000
liabilities 461,095,508 1,305,544 1,756,546 1,713,108,449
excluding
net
assets
attributable
to management
shareholders
Net - 14,665,384 - - 141,602,966 156,268,350
assets
attributable
to
management
shareholders
Total $ 461,095,508 $ 15,970,928 $ 1,756,546 $ 28,950,851 $ 1,361,602,966 $ 1,869,376,799
liabilities
As of December Less than 1 Month 1 to 3 Months 3 to 6 Months 6 to 12 Months Over 1 Year Total
31, 2016
Assets
Cash and cash $ 2,076,161,696 $ - $ - $ - $ - $ 2,076,161,696
equivalents
Due from 542,850,061 - - - - 542,850,061
brokers
Trade and other 11,740,284 - - - - 11,740,284
receivables
Financial
assets
at fair value
through profit
or loss:
Investments in 1,154,837,050 833,969,385 518,477,918 73,071,908 56,410,912 2,636,767,173
securities
Derivative 437,149,176 534,021,978 19,791,862 13,460,397 17,739,468 1,022,162,881
financial
instruments
Total assets $ 4,222,738,267 $ 1,367,991,363 $ 538,269,780 $ 86,532,305 $ 74,150,380 $ 6,289,682,095
Liabilities
Due to brokers $ 150,995,192 $ - $ - $ - $ - $ 150,995,192
Trade and other 32,313,479 - - - - 32,313,479
payables
Bonds 27,500,000 - - 27,500,000 1,275,000,000 1,330,000,000
Financial
liabilities
at fair value
through profit
or loss:
Securities 123,231,697 240,861,954 21,220,623 - - 385,314,274
sold, not
yet purchased
Derivative 190,734,223 - - - - 190,734,223
financial
instruments
Total 27,500,000 1,275,000,000
liabilities 524,774,591 240,861,954 21,220,623 2,089,357,168
excluding
net
assets
attributable
to management
shareholders
Net - 12,942,713 - - 148,194,747 161,137,460
assets
attributable
to
management
shareholders
Total $ 524,774,591 $ 253,804,667 $ 21,220,623 $ 27,500,000 $ 1,423,194,747 $ 2,250,494,628
liabilities
Although a majority of the Company's portfolio comprises liquid,
large-capitalization securities, there may be contractual or
regulatory restrictions on trading, or "trading windows" imposed
with respect to certain issuers for which a member of the
Investment Manager holds a board seat 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 of the
portfolio as such securities may be liquidated pursuant to, for
example, an automatic purchase/sale plan or via a block trade. 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 financial
instrument will fail to discharge an obligation or commitment that
is entered into with the Company, resulting in a financial loss to
the Company. It arises principally from derivative financial
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 negotiates its ISDA
agreements to include bilateral collateral agreements and, in
certain cases, tri-party agreements where collateral is held by a
third party custodian. 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. Treasuries 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 (along
with the other PSCM-managed funds') exposure 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 73 to 74 (which is explicitly incorporated by reference into
these Notes to Financial Statements) for additional details of the
Company's financial assets and financial liabilities.
After taking into effect the offsetting permitted under IAS 32,
the Company views its credit exposure to be $455,627,478 and
$498,971,659 at December 31, 2017 and December 31, 2016,
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
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, 2017
and December 31, 2016, the Company held no credit default swap
contracts.
The Company maintains its cash and cash equivalents position at
major financial institutions. At times, cash balances may exceed
federally insured limits and, as such, the Company has credit risk
associated with such financial institutions. The cash and cash
equivalents balances are reflected in the statement of financial
position. At December 31, 2017 and December 31, 2016, cash was
primarily invested in a U.S. Treasury money market fund with daily
liquidity as disclosed in Note 10.
The Company's prime brokers are required to provide custody for
the Company's securities and never lend out the Company's
securities in excess of 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 significant 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 (2017: $1,082,102,874, 2016: $2,076,161,696), due from
brokers (2017: $710,597,200, 2016: $542,850,061) and financial
assets portfolio (2017: $3,885,270,343, 2016: $3,658,930,054) based
on the underlying custodians' and counterparties' credit
rating.
2017 2016
AAA 19% 33%
A 81% 67%
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 financial
position.
Due from brokers 2017 2016
Cash held at prime brokers $ 657,035,563 $ 486,959,736
Gross ISDA collateral posted 678,665,245 511,002,848
Netting of collateral allowable (625,103,608) (455,112,523)
under ISDA agreements
$ 710,597,200 $ 542,850,061
Due to brokers 2017 2016
Gross ISDA collateral received $ (772,623,608) $ (602,952,523)
Pending settlements (193,275,000) (3,155,192)
Netting of collateral allowable 625,103,608 455,112,523
under ISDA agreements
$ (340,795,000) $ (150,995,192)
14. COMMITMENTS AND CONTINGENCIES
PSH, PSCM, PS Fund 1, LLC and other related parties (the
"Pershing Square Parties") and Valeant Pharmaceuticals
International, Inc. and other related parties (the "Valeant
Parties") are defendants in two class action lawsuits entitled In
Re Allergan, Inc. Proxy Violation Securities Litigation, Case No.
8:14-cv-2001- DOC ("Stock Class Action"), and In re Allergan, Inc.
Proxy Violation Derivatives Litigation, Case No. 2:17-cv-04776 DOC
("Derivatives Class Action"), both pending in the U.S. District
Court for the Central District of California, relating to the
investment by the Pershing Square Parties in Allergan, Inc.
("Allergan"). The court files in the cases are available to the
public. In each case, plaintiffs allege the defendants violated
federal securities laws in their trading in Allergan common shares
and related derivatives. The defendants believe they have
meritorious defenses to plaintiffs' claims. Under the court's
schedule, a trial in the Stock Class Action, if needed, was to
commence on February 26, 2018.
In consultation with counsel, a $75 million reserve was taken at
December 31, 2016 for the potential settlement of the Stock Class
Action and allocated proportionately across the Company and three
affiliated entities managed by the Investment Manager (the "Core
Funds"), based on their adjusted net asset values. During the year
ended December 31, 2016, the Company was allocated $29,176,480 for
this reserve which is included in trade and other payables in the
statement of financial position.
The defendants and plaintiffs in the Stock Class Action each
filed motions for summary judgment on July 10, 2017, arguing that
the case could be resolved in their respective favors based on the
undisputed factual record. The motions were heard in December 2017,
and the Court indicated tentatively that it would rule in favor of
Plaintiffs on certain matters.
On December 28, 2017, in consultation with counsel and with the
assistance of mediators who are expert in securities class actions,
the Pershing Square Parties and the Valeant Parties entered into
settlements in principle with the plaintiffs in the Stock Class
Action and the Derivatives Class Action to resolve both matters for
a total payment of $290 million ($250 million for the Stock Class
Action and $40 million for the Derivatives Class Action), of which
the Pershing Square Parties are to bear $193.75 million and the
Valeant Parties are to bear $96.25 million. Of the incremental
$118.75 million reserve accrued during the year ended December 31,
2017, the Company was allocated $57,219,862 bringing the total
amount payable by the Company to $86,396,342 which is included in
trade and other payables in the statement of financial
position.
On January 16, 2018, the District Court in California held a
hearing to discuss the fairness of the proposed settlement and
during the hearing indicated that the settlement appears to be fair
and reasonable to all parties in light of the risks and burdens
involved if they were to pursue both cases through trials and
appeals. Since then, the parties have exchanged and agreed upon
stipulations of settlement and notices to class members in the
respective cases, which are still subject to court approval. On
March 5, 2018, the Court held a hearing on the parties' motion for
preliminary approval, which the Court granted. A hearing on final
approval of the settlement, following notice of its terms given to
class members, has been scheduled for May 30, 2018. The full
settlement approval process, including an opportunity for class
members potentially to object to the settlements or (in the case of
the Derivatives Class Action only) to opt out of the settlement, is
expected to take until approximately August 2018 to be
completed.
Other than above and as disclosed in Note 8, there were no other
commitments or contingencies as of December 31, 2017 and December
31, 2016.
15. INVESTMENT MANAGEMENT AGREEMENT -- FEES, PERFORMANCE FEES
AND TERMINATION
The Investment Manager receives management fees and performance
fees 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, 2017 and 2016, the Investment
Manager earned management fees from the Company of $63,211,761 and
$63,143,490, respectively.
Performance Fee
Generally, the Investment Manager receives an annual performance
fee in an amount equal to 16% of the net profits attributable to
the fee-paying shares of the Company (the "16% performance fee")
minus the Additional Reduction (defined below). Such annual
performance fee is defined as the "Variable Performance Fee" in the
IMA. The Variable Performance Fee cannot 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
(defined 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 equalled $120 million in the
aggregate at the time of the IPO. As of December 31, 2017 and
December 31, 2016, after giving effect to the offset of the
Potential Reduction Amount in the year ended December 31, 2014, the
Potential Offset Amount was approximately $100.8 million.
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.
For the years ended December 31, 2017 and 2016, the Investment
Manager did not earn any performance fee from the Company.
Since the Company had no net profits and thus no 16% performance
fee accrued for the years ended December 31, 2017 and 2016, but the
Potential Reduction Amount was $2.9 million and $2.9 million,
respectively, in those years, those amounts will be carried forward
to calculate the Additional Reduction and reduce any Variable
Performance Fee in future years, subject to any offset by the
Potential Offset Amount.
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 crystallisation
event, which will result in the Variable Performance Fee described
above being payable.
16. RELATED PARTY DISCLOSURES
The relationship between the Company and the Investment Manager
and the fees earned are disclosed in Note 15. In addition, the
Investment Manager and related parties to the Investment Manager
hold Management Shares, the rights of which are disclosed in Note
11.
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, any deferred compensation payable to the
Investment Manager to the extent such deferred compensation is
determined by reference to the performance of such entity, 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 bond offering as further discussed below
in Note 18). Rebalancing transactions involve either the Company
purchasing securities or other financial instruments held by one or
more affiliated entities or selling securities or other financial
instruments to one or more affiliated entities. These 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.
For the period from July 24, 2017 to December 31, 2017, the
Company held an investment in PS VI as discussed in Note 3. As of
December 31, 2017, the Company's capital balance in PS VI is
$256,820,746 and represents an ownership in PS VI of 36.43%. The
Company's investment in PS VI is included in investments in
securities in the statement of financial position.
For the period from January 1, 2016 to November 10, 2016, the
Company held an investment in PS V, International, Ltd. ("PS V").
PS V was an affiliated investment fund managed by the Investment
Manager and its investment objective was to create significant
capital appreciation by investing in stock of Air Products and
Chemicals, Inc. ("Air Products"). On October 3, 2016, PS V
distributed in-kind 314,158 common stock shares of Versum
Materials, Inc., which was received in a spinoff from Air Products,
with a fair value of $8,796,424 and unrealized appreciation of
$3,067,994 to the Company. On November 10, 2016, by way of a
compulsory redemption, PS V distributed in-kind 624,588 common
stock shares of Air Products with a fair value of $85,705,965 and
unrealized appreciation of $25,031,622 to the Company. These
in-kind distributions represented the Company's proportionate
amount of Air Products and Versum Materials, Inc. common stock
shares. Additionally, the Company received $949,642 which
represented the Company's proportionate amount of the net assets
and liabilities of PS V. After the compulsory redemption, the
Company no longer held an investment in PS V.
The Investment Manager had determined that the investment in PS
V was 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 investment in PS V and is not
charged a management fee or performance fee in relation to its
investment in PS VI.
All realized and unrealized gains and losses from the
investments in PS VI and PS V were reflected in the statement of
comprehensive income for the years ended 2017 and 2016,
respectively. See Note 7 for the discussion on the fair value
measurement.
For the year ended December 31, 2017, the Company's independent
Directors' fees in relation to their services for the Company were
$298,630 of which none were payable as of December 31, 2017. For
the year ended December 31, 2016, the independent Directors' fees
in relation to their services for the Company were $304,322 of
which none were payable as of December 31, 2016.
In the normal course of business, the Company and its affiliates
make concentrated investments in portfolio companies where the
aggregate beneficial 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.
At December 31, 2017, the Company and its affiliates had
beneficial ownership in excess of 10% of the outstanding common
equity securities of Chipotle Mexican Grill, Inc., Platform
Specialty Products Corporation, Restaurant Brands International
Inc. and The Howard Hughes Corporation. At December 31, 2016 the
Company and its affiliates had beneficial ownership in excess of
10% of the outstanding common equity securities of Nomad Foods
Limited, Platform Specialty Products Corporation, Restaurant Brands
International Inc. and The Howard Hughes Corporation.
William A. Ackman is the chairman of the board of The Howard
Hughes Corporation. Ali Namvar, a former member of PSCM's
investment team, is a board member of Chipotle Mexican Grill, Inc.
Ryan Israel, a member of PSCM's investment team, is a board member
of Platform Specialty Products Corporation. Stephen Fraidin, vice
chairman of PSCM, and William A. Ackman joined the board of Valeant
Pharmaceuticals International, Inc. effective March 9, 2016 and
March 21, 2016, respectively; neither stood for re-election and
neither serve as board members effective as of May 2, 2017. Brian
Welch, a member of PSCM's investment team, was a board member of
Nomad Foods Limited until August 24, 2017.
17. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") is calculated by
dividing the profit/(loss) for the year attributable to the Public
Shares, the Special Voting Share and Class B Shares (as applicable
for 2016 and 2017) over the weighted average number of Public
Shares, the Special Voting Share and Class B Shares outstanding,
respectively. In accordance with IFRS, the weighted average shares
outstanding calculated for the Public Shares and the Special Voting
Share were 238,676,380 and 1, respectively for the year ended
December 31, 2017, and the weighted average shares outstanding
calculated for the Public Shares and Class B Shares were
240,128,546 and 5,000,000,000, respectively, for the year ended
December 31, 2016.
As discussed in Note 1, all Class B Shares were exchanged for 1
Special Voting Share on May 2, 2017. Therefore, the profit/(loss)
of the Class B Shares for the period from January 1, 2017 to May 1,
2017, plus the profit/(loss) of the Special Voting Share from May
2, 2017 to December 31, 2017, was divided over 1 Special Voting
Share as presented on the statement of comprehensive income to show
one EPS as a whole for the year ended December 31, 2017.
As presented in "Supplemental U.S. GAAP Disclosures-Financial
Highlights", the share buyback program provided accretion to the
Public Shares of $0.08 which is reflected in EPS determination.
18. BONDS
On June 26, 2015, the Company issued at par $1 billion in Senior
Notes at 5.5% due 2022. The Bonds will mature at par on July 15,
2022 and pay a fixed rate interest coupon of 5.5% per annum, which
is paid semi-annually. The Bonds are listed on the Irish Stock
Exchange. The proceeds from the offering were in U.S. Dollars and
were used to make investments or hold assets in accordance with the
Company's investment policy.
The Company has the option to redeem all or some of the Bonds
prior to June 15, 2022, at a redemption price equal to the greater
of (1) 100% of the principal amount of the 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 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. If the Company redeems all or some of the
Bonds on or after June 15, 2022, the redemption price will equal
100% of the principal amount of the Bonds to be redeemed plus
accrued and unpaid interest.
The fair value of the Bonds as of December 31, 2017 and December
31, 2016, based upon market value at that time, was $1,042,500,000
and $995,000,000, respectively. In accordance with IAS 39, the
Bonds' carrying value as of December 31, 2017 and December 31,
2016, in the amount of $1,015,427,736 and $1,013,552,905,
respectively, on the statement of financial position is
representative of amortized cost and the transaction costs of the
Bonds issued in the amount of $14,502,332 that were capitalized and
are to be amortized over the life of the Bonds using the effective
interest method.
2017
At December 31, 2016: $ 1,013,552,905
Finance costs for the year 56,874,831
Bond coupon payment during the year (55,000,000)
At December 31, 2017 $ 1,015,427,736
Finance costs for the year:
Bond interest expense $ 54,823,788
Amortization of Bond issue costs 2,051,043
incurred as finance costs
Interest expense $ 56,874,831
2016
At December 31, 2015: $ 1,014,688,599
Write-off of Bond issue costs 22,940
Finance costs for the year 56,744,142
Bond coupon payment during the year (57,902,776)
At December 31, 2016 $ 1,013,552,905
Finance costs for the year:
Bond interest expense $ 54,696,150
Amortization of Bond issue costs 2,047,992
incurred as finance costs
Interest expense $ 56,744,142
19. EVENTS AFTER THE REPORTING PERIOD
As discussed in the Chairman's statement, the Company has
proposed to conduct a Company Tender for $300 million subject to
applicable shareholder approvals which will be sought at the April
24, 2018 AGM. Following completion of the Company Tender and
depending on market conditions and other considerations, the
Company may decide to utilise the remaining amount of the share
buyback authority to acquire Public Shares in the market.
The Investment Manager will reduce the management fees paid by
the Pershing Square funds which incurred litigation expenses in
connection with the settlement of the Allergan Stock Class Action
and Derivative Class Action for eight consecutive quarters
beginning with the management fee payable on April 1, 2018 by a
total of $32.2 million. This amount accounts for the amount that
incentive fees would have been reduced had Allergan-related
settlement expenses been incurred in 2014 contemporaneously with
gains from the Allergan investment. The reduced fees will be
allocated among the Core Funds based upon the amount of settlement
reserves previously recognized by the Core Funds at the year ended
2016 and the year ended 2017. The Company will be allocated $14.4
million of this reduction.
On February 12, 2018, Jonathan Kestenbaum retired as a
non-executive Director of the Company. Jonathan Kestenbaum had
served as an independent non-executive Director of the Company
since 2014. The Nomination Committee has proposed that the Board
submit two candidates for shareholder approval as non-executive
Directors of the Company at the upcoming AGM as discussed in the
Corporate Governance Report.
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
Shares Description/Name Fair Value Percentage ofNet AssetsAttributable toall Shareholders(1)
Investments in Securities
Equity Securities
Common Stock
Canada:
Restaurant:
14,263,243 Restaurant Brands International Inc. $ 876,904,180 20.67 %
140,873 Restaurant Brands International Limited Partnership 8,630,138 0.20
Total Canada (cost $507,779,295) 885,534,318 20.87
United States:
Business Services:
3,832,106 Automatic Data Processing, Inc. 449,084,502 10.58
Chemicals 171,224,993 4.04
Consumer Products:
7,200,229 Mondelez International, Inc. 308,169,801 7.26
Other 195,665,657 4.61
Financial Services 207,627,228 4.89
Real Estate Development and Operating:
2,067,490 The Howard Hughes Corporation 271,399,412 6.40
Restaurant:
1,329,537 Chipotle Mexican Grill, Inc. 384,276,079 9.06
Total United States (cost $2,139,260,953) 1,987,447,672 46.84
Total Common Stock (cost $2,647,040,248) 2,872,981,990 67.71
Preferred Stock
United States:
Financial Services (cost $10,812,276) 11,012,767 0.26
Total Equity Securities (cost $2,657,852,524) 2,883,994,757 67.97
Investment in Affiliated Entity
United States:
Pershing Square VI International, L.P.:
1,009,174 Automatic Data Processing, Inc., Common Stock 118,265,101 2.79
2,447,111 Automatic Data Processing, Inc., Equity Call Options 136,147,787 3.21
Purchased, $55.50 - $87.93, 01/15/2021
Other assets and liabilities 2,407,858 0.05
Total United States (cost $255,600,000) 256,820,746 6.05
Total Investment in Affiliated 256,820,746 6.05
Entity (cost $225,600,000)
Total Investments in Securities $ 3,140,815,503 74.02 %
(cost $2,913,452,524)
(1) Net assets attributable to all shareholders are comprised of
the equity balances of the Public Shares and the Special Voting
Share as well as the net assets attributable to Management Shares.
As of December 31, 2017, the net assets attributable to all
shareholders was $4,242,954,525.
Shares Description/Name Fair Value Percentage ofNet AssetsAttributable toall Shareholders(1)
Derivative Contracts
Currency Call/Put Options Purchased
Various Currency Put Options, U.S. Dollar $ 130,909 0.00 %
Call Options (cost $877,163)
Equity Options Purchased
Cayman Islands:
Consumer Products (cost $127,372,260) 174,663,891 4.12
United States:
Business Services:
5,391,734 Automatic Data Processing, Inc., 253,047,022 5.96
Call Option, $76.06, 06/23/2020
1,102,097 Automatic Data Processing, Inc., 65,984,537 1.56
Call Option, $63.00, 01/15/2021
Consumer Products:
15,000,000 Mondelez International, Inc., Call 192,532,245 4.54
Option, $30.00, 01/26/2018
Total United States (cost $444,403,323) 511,563,804 12.06
Total Equity Options Purchased (cost $571,775,583) 686,227,695 16.18
Foreign Currency Forward Contracts
Currencies (740,892) (0.02)
Index Options Purchased
United States:
Volatility Call Options (cost $1,258,120) 401,528 0.01
Total Return Swap Contracts, long exposure
United States:
Consumer Products:
7,006,417 Mondelez International, Inc. (487,538) (0.01)
Financial Services 30,437,246 0.72
Real Estate Development and Operating:
3,467,149 The Howard Hughes Corporation 22,293,578 0.52
Total Return Swap Contracts, long exposure 52,243,286 1.23
Total Derivative Contracts (cost $573,910,866) $ 738,262,526 17.40 %
(1) Net assets attributable to all shareholders are comprised of
the equity balances of the Public Shares and the Special Voting
Share as well as the net assets attributable to Management Shares.
As of December 31, 2017, the net assets attributable to all
shareholders was $4,242,954,525.
FINANCIAL HIGHLIGHTS
For the year ended 2017 Public Shares
Per share operating performance
Beginning net asset value at January 1, 2017 $ 18.14
Change in net assets resulting from operations:
Net investment loss (0.61 )
Net loss from investments and derivatives (0.20 )
Accretion from share buyback 0.08
Net change in net assets resulting from operations (0.73 )
Ending net asset value at December 31, 2017 $ 17.41
Total return prior to performance fees (4.01 )%
Performance fees 0.00
Total return after performance fees (4.01 )%
Ratios to average net assets
Expenses before performance fees 4.59 %
Performance fees 0.00
Expenses after performance fees 4.59 %
Net investment income/(loss) (3.43 )%
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
profile 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.
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 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, 2017 is shown below.
Gross method: $6,221,887,234 Commitment method:
$7,629,814,773
The Company generally does not expect to use a significant
amount of margin financing. 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
does not use such derivatives to obtain leverage, but rather to
manage regulatory, tax, legal or other issues. However, depending
on the investment strategies employed by the Company and specific
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, financial 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 benefit 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 satisfied. 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 core 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 benefit 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. Remuneration:
For the Year Fixed Variable Total Number
Ended Remuneration Remuneration of
2017(1) Beneficiaries
Total $ 96,133,692 $ 3,395,000 $ 99,528,692 77
remuneration
paid to
the entire
staff
of PSCM
Total $ 90,303,606 $ 1,940,000 $ 92,243,606 39
remuneration
of those
staff
of PSCM who
are fully
or partly
involved
in the
activities
of
the Company
The 93.94 % 57.14 % 92.68 % 39 out
proportion of 77
of the total
remuneration
of the
staff of
PSCM
attributable
to
the
Company(2)
Aggregate $ 80,778,269 $ 850,000 $ 81,628,269 16
remuneration
paid
to
senior
management
and members
of
staff of
PSCM
whose
actions
have
a material
impact
on the risk
profile
of
the Company
(1) does not include certain remuneration paid in 2017 by
Pershing Square International, Ltd. in respect of deferred
incentive fees earned by PSCM between fiscal years 2005 and
2008.
(2) i.e., the proportion of the total remuneration of the staff
of PSCM who are fully or partly involved in the activities of the
Company.
6. The Bonds are subject to the following transfer
restrictions:
(a) Each holder of the Bonds is required to be either (a) a
qualified institutional buyer ("QIB") as defined in Rule 144A under
the U.S. Securities Act of 1933, as amended (the "Securities Act")
who is also a qualified purchaser ("QP") as defined 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/QP or a non-U.S. person to sell its Bonds.
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, 2017
is accurate and complete.
/s/ Michael Gonnella
By: Michael Gonnella Chief Financial Officer
Pershing Square Capital Management, L.P. Commodity Pool
Operator
Pershing Square Holdings, Ltd. Commodity Pool
MEDIA CONTACTMaitland Seda Ambartsumian/Sam Turvey, +44 20 7379
5151 Media-pershingsquareholdings@maitland.co.uk
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(END) Dow Jones Newswires
March 26, 2018 02:00 ET (06:00 GMT)
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