LONDON–(BUSINESS WIRE)–Pershing Square Holdings, Ltd. (LN:PSH) (NA:PSH) today released the following communication to investors:

Dear Pershing Square Investor,

On December 29, 2017, we announced that Pershing Square had entered into an agreement in principle, subject to court approval, to settle two class action lawsuits concerning the attempted acquisition of Allergan by Pershing Square and Valeant. The Pershing Square funds’ share of the settlement is $193.75 million. After considering all of the facts in consultation with counsel and based upon the parties’ work with a leading mediator over the prior 18 months, we believe it was in the best interest of the funds to enter into this settlement in order to resolve the litigation.

GAAP/IFRS accounting has strict rules which relate to when we are permitted to recognize litigation-related reserves. At year-end 2016, in consultation with our auditors and counsel, we booked a reserve totaling $75 million across all of the Pershing Square funds. At year-end 2017, also with our auditors’ and counsel’s advice, the funds booked an additional reserve totaling $118.75 million, which when added to the $75 million reserve taken at the end of 2016 represents the full amount of the funds’ share of the settlement. Substantially all of the legal fees related to the Allergan matter have been covered by insurance.

Typically, Pershing Square’s investment-related expenses are incurred before or during the pendency of an investment. As such, our accounting for performance is inherently conservative, as our expenses are normally incurred earlier, while most of the profits on which incentive fees are charged are typically realized later in light of our long-term holding period for investments. Because Pershing Square employees are the largest investors in the funds, we bear the largest amount of expenses, such as these settlement expenses, when they are incurred.

As a result of the required accounting for the settlement, Allergan-related settlement expenses have been recognized two and three years later than when the related incentive fees on the Allergan investment were paid in 2014. If our performance had been positive in the years following the Allergan gains, investors would have received the benefit of a reduced incentive fee in 2016 and 2017 as a result of these reserves. Because the funds are below their high water marks, however, investors did not get the benefit of a reduced incentive fee in 2016 or 2017. Instead, investors received the benefit of an increased high water mark, which reduces future incentive fees payable to the investment manager.

Under the terms of our fund documents, the full settlement amount would have been borne by the funds as an expense related to the Allergan investment. In light of the above facts, however, we believe that following the incentive fee and expense allocation methodologies specified under our fund documents in this situation would leave investors in a less than ideal position. As such, we believe a different approach, albeit one not contemplated by the funds’ documents, is appropriate.

Assuming the settlement is finalized by the Court, in order to address this issue, we will be reducing future management fees for all of the Pershing Square funds which incurred this litigation expense by a total of $32.2 million, which represents the amount that incentive fees would have been reduced had this expense been incurred in 2014 contemporaneously with the Allergan gains. This fee reduction will be realized in eight equal installments over the next eight quarters beginning with the management fee payable on April 1, 2018. The reduced fees will be allocated among the funds based upon the amount of settlement reserves previously recognized by the respective funds at year-end 2016 and year-end 2017. For example, as Pershing Square Holdings incurred 44.6% of the settlement reserves, its management fees over the next eight quarters will be reduced by a total of $14.4 million. Similarly, the other funds’ shares of the fee reduction will be proportional to their share of the settlement.

This reduction in management fees is not simply a timing benefit for investors as the existing year-end 2017 high water marks (which already reflect the full settlement expense) will remain unchanged, and incentive fees will not be paid until the full amount of the settlement and other losses have been fully recovered.

We very much value our long-term partnership with you and look forward to seeing you at our upcoming investor meeting later this month.

Please contact the investor relations team at [email protected] or myself if you have any questions.

Sincerely,

William A. Ackman

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.