Pershing Square Capital Management

Pershing Square Capital Management was founded in 2004 by William A. Ackman with an initial capital of 54 million dollars. Since its inception the fund has averaged 24% annualized returns till date. Currently, the fund has 7.78 billion dollars in assets under management in eleven positions.

After receiving his MBA from Harvard Business School in 1992, Mr. Ackman together with classmate David Berkowitz founded Gotham Partners International with an initial capital of $3 million. Mr. Ackman, prior to founding the firm, had worked for his father at Ackman Brothers & Singer Inc., a real estate business, where he earned his stripes dealing with equity and debt financing for real estate investors and developers.

Having acquired this expertise, he invested the majority of Gotham Partners’ capital in the real estate sector and the fund took off, garnering investments from the likes of Michael Steinhardt and Seth Klarman. At its peak, Gotham Partners had $500 million in assets with annual returns hovering at 40%. However, misguided investments in illiquid assets and an SEC investigation, even though the firm was exonerated, forced the enterprise into liquidation and closing its doors in 2003. Unfettered, Mr. Ackman, his indomitable spirit intact, launched Pershing Square Capital Management.

Drawing from his past successes, and failures, Mr. Ackman introduced Pershing Square Capital Management to the world as a concentrated, long-short value hedge fund. The fund uses fundamental analysis with a value orientation employing extensive research and thoroughgoing due diligence in its decision making process. It utilizes an inimitable mélange of value investing and activist approach in sifting through and identifying investments.

Mr. Ackman prefers to invest in middle-sized to large companies with low financial leverage and inhibited sensitivity to economic changes. Cheap prices do not, necessarily, translate to value creation in Mr. Ackman’s book. Furthermore, like most value investors, he uses a large margin of safety and does not deem it necessary to be fully invested if no opportunity is seen on the horizon. The firm’s portfolio is concentrated with regards to both the number of investments and the number of sectors. The bulk of Mr. Ackman’s portfolio consists of around eight to ten investments in four main sectors with sixty percent of it in consumer goods and consumer services.

Even though Mr. Ackman has been likened to Carl Icahn because of his activist investment approach, he shies away from the comparison preferring to be sided with Warren Buffett. Mr. Ackman assures his investors that his philosophy is different in that he endeavors to save companies and thus favoring the economy as a whole.

Pershing Square Capital Management’s stance and approach towards General Growth Properties is a prime example of this “beneficial” strategy. The firm invested in 2008 in the ailing commercial property behemoth and using its shareholding to stir the company’s “pot”, asking management to change its operations and cut costs, brought it out of bankruptcy and increased stock price by 77x. To read the latest on this deal read our post Simon Says … Nothing.

With the success of General Growth Properties, Mr. Ackman had found a niche –large-cap stock activism– in which there is little competition because of the small number of player who can play that game. This niche was mainly a combination of a large amount of capital and what Mr. Ackman refers to as “reputational equity”, i.e. a successful track record wielding influence with management at large corporations.

Mr. Ackman’s investment niche took a much publicized hit in 2009. His investment in the troubled retail giant, Target, ended in a colossal loss of $1.8 billion. Pershing Square IV, which was established for the sole purpose of betting on the rise of the stock of Target Corp., fell almost 90% in value forcing Mr. Ackman’s public apology: “Bottom line, PSIV has been one of the greatest disappointments of my career to date.” To make things worse, he also suffered significant loss in his dealings with Borders Group, the bankrupt bookstore chain. Some people blamed his stubborn personality for his relentless investments and towering overconfidence.

Mr. Ackman, however, had well vindicated himself in the wake of the stock market meltdown of 2008. The virulent financial environment claimed many a victim in the industry but for a handful of survivors. He was the one who had tried to forewarn the smug Wall Street analysts, rating agencies and regulators about a dangerous and fatal flaw in the mortgage system. However, the prominent financial pundits joined voices to label him a knave whose claims were fraudulent and whose malicious intent was to try to manipulate investors’ sentiment only to benefit his own short position on MBIAs. Mr. Ackman persisted and as they say the rest is history which was actually notated in the book “Confidence Game” (Wiley, 2010) by Bloomberg News reporter Christine Richard.

Not only was Mr. Ackman right but also the Attorney General’s office ended up going after MBIAs who settled for $75 million turning billions of dollars of CDOs into noxious waste. MBIA’s stock was trounced. Mr. Ackman, who had shorted MBIAs by buying credit default swaps, made billions and his Pershing Square LP ended up 22 percent. Through the whole mayhem of 2008, Pershing Square Management saw its funds under management rise from $6.7 billion in August of 2008 to $10.3 billion by year end. Furthermore, most of that growth came from superior performance rather new investor money, once again proving Mr. Ackman’s ability for successful comebacks.

QUOTES

“The investment business is about being confident enough to know that you’re right and everyone else is wrong. Yet you have to be humble enough that you recognize when you’ve made a mistake. Earlier in my career, I think I had the confidence part pretty solid. But the humbleness part I had to learn.’’

“When you go through something like the financial crisis, it makes a psychological imprint on you. It becomes hard to interpret information in a way that is positive. I’m emotionally very neutral about economic things. That’s why I can look at them objectively.”

“Volatility can be a friend of the value investor – it provides more situations where stocks significantly diverge from their intrinsic value and can allow us to turn our capital faster.”

“There are two ways to win: Appreciation to intrinsic value and appreciation from intrinsic value.”

“High quality stocks are often less sexy than low quality stocks”

“It’s not about how sales are going this month, it’s trying to understand from the people in the trenches things like how good the products are, why they have the market share they do, what’s happening to the market share and where the money is made in the system.”