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Dear Pershing Square IV Investor: A few further thoughts and an update on PSIV: In my effort to get last week’s letter out promptly, I neglected to apologize. I am deeply disappointed by PSIV’s dreadful performance and I apologize profusely for the fund’s results to date. Over the last few days, we have spoken to both investors who wish to redeem and others who intend to contribute additional capital. We expect to be able to redeem any and all investors who choose to exit in March, in full and in cash. We will provide more details on the timing of distributions shortly. I have spent the last few days thinking about what we can do beyond strong progress on Target and PSIV to somehow compensate you for PSIV losses to date. Approximately 90% of the investors in PSIV are also investors in the main Pershing Square funds. Substantially all of the overlapping investors have a larger investment in the main Pershing Square funds than in PSIV. For those PSIV investors who are investors in the main Pershing Square funds, we will raise the high water mark, thereby waiving future incentive fees on your main Pershing Square fund capital account(s) and any additions to your capital account(s) until such time as you have recouped your PSIV losses. By way of example, if you invested $10 million in PSIV and have lost $9 million of your capital, your high water mark on your main Pershing Square fund capital account(s) will go up by $9 million and you will not pay any incentive fees until you have recouped your entire $9 million PSIV loss. This commitment applies even in the event you remain an investor in PSIV and your PSIV investment increases in value. If you remain an investor in PSIV and your capital account declines further in value, you will receive an additional credit toward your high water mark in the main Pershing Square funds.
For the 10% of the investors that are not investors in the main Pershing Square funds, we offer you the following: We will raise the high water mark on any future investment you make in any Pershing Square fund or co-investment vehicle we subsequently offer so you will not pay any incentive fees until you have recouped your PSIV losses. Our willingness to offer those investors not currently in the main Pershing Square funds a fee waiver is, of course, of little value if they make no future Pershing Square investment. To their credit, some of these investors, who are for the most part other hedge funds (that comprised approximately $1.3 billion of the original $2 billion of fund capital), have told me that they previously hedged a substantial portion, or in some cases 100% or more, of their exposure to Target through PSIV. Hopefully, this has helped to mitigate their PSIV losses in the event we are never able to recompense them. Bottom line, PSIV has been one of the greatest disappointments of my career to date. That said, we continue to believe that we will ultimately be successful in our investment in Target. I am likely now the largest individual investor in Target through my interests in the various Pershing Square funds including my personal commitment of an additional $25 million of capital to PSIV. I and the rest of the Pershing Square team will work hard to achieve a successful outcome for all of us. On the pages which follow, we have attempted to answer investors’ most commonly asked questions. Please call me if you have any additional questions. Sincerely,
William A. Ackman
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Commonly Asked questions about PSIV Will you be able to meet all redemptions in cash? Yes, we expect to be able to meet all redemptions in full and in cash. Does an investor need to withdraw from PSIV in order to recognize a tax loss on his/her initial investment? A sale and repurchase of options which are sufficiently different from the options previously owned by the fund is a tax realization event. As such, an investor will get the benefit of tax loss recognition whether or not that investor withdraws from PSIV. Please consult your own tax advisors regarding your particular tax treatment. If an investor wishes to add capital to or exit PSIV, when would the transactions take place? We expect to make distributions of 95% of withdrawing capital in March with the balance after the completion of audited financials. Additions of capital will be accepted contemporaneously with distributions of capital. We will provide further details when they are available. When will documents be distributed? Redemption and subscription documents are currently being prepared and will be distributed as soon as they are available. Will new investors in PSIV dilute existing investors’ ownership in any way? Will PSIV impose a cap on new capital, to the extent necessary to fund redemptions by existing investors? If we receive more new commitments than withdrawals we will likely add to our Target position to minimize the potential for dilution. We do not intend to impose a cap on new capital. Your letter does not seem to address the fact that TGT’s management has publicly dismissed a real estate transaction. Does Pershing Square believe that a transaction is nonetheless a possibility? Yes. In some of our past engagements – for example with McDonald’s and Wendy’s – our initial overtures and proposals to the companies were rebuffed. Ultimately, we were successful when the power of logic prevailed or alternatively a modified version of our transaction structure was developed either by us, management, or by working together with management and its advisors to arrive
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at a compromise or a more optimal solution. While we cannot provide assurance as to any outcome, we are cautiously optimistic that we will be similarly successful at Target. In any event, we do not believe that a Target real estate transaction is necessary in order for an investor to earn an attractive return from current values through an investment in PSIV. Are the terms of the call options that PSIV now owns superior in some way to those of exchange-traded call options? Yes. The options we own provide for certain adjustments to make PSIV whole in the event the company pays a large special dividend, completes a spinoff, or makes certain other distributions. Listed options do not generally fully protect investors for certain reorganizations or special dividends. What are your intentions with respect to the ongoing structure of PSIV’s ownership of Target? We intend to structure PSIV’s investment in Target through the ownership of options, outright stock ownership, equity swaps, or a combination of any of the foregoing. We may adjust the balance of our investment in stock and/or options at any time based on our then current view of the prospects of the business, the prevailing stock price, option pricing, our assessment of the probability of Target effectuating a real estate or other restructuring, our expected values for Target, our desire to own a voting interest in the company or for other reasons What is your advice as to whether or not I should invest in PSIV? Your decision as to whether or not to invest in PSIV should be based on your assessment of the stock price performance of Target over the next two years, your confidence in Pershing Square’s ability to achieve its investment objectives, and your other investment alternatives. It is important for you to consider that many of you can choose to invest in Target common stock or options directly rather than through an investment in PSIV. If you invest in PSIV, you are relying on our judgment with respect to purchases and sales of Target-related securities, our assessment of various outcomes for the company and the stock, and the structure of PSIV’s ownership of the company, among other considerations.
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