By Muhammad Raheel
William Albert Ackman more commonly known as Bill Ackman (born 11 May 1966, New York) is the founder and CEO of hedge fund Pershing Square Capital Management LP. Ackman was raised in Chappaqua, NY. He received a Bachelor of Arts degree magna cum laude from Harvard College in 1988, and an MBA from Harvard Business School in 1992. He married Karen Ann Herskovitz, a landscape architect, on July 10, 1994. His father is Lawrence Ackman, the chairman of a New York real estate financing firm, Ackman-Ziff Real Estate Group.
Gotham Partners
Bill Ackman is a keen follower of financial markets and a passionate investor. In 1992, after graduating from Harvard, he along with his class mate, David Berkowitz founded Gotham partners. Before forming his own hedge fund, he had worked for his father at Ackman Brothers & Singer Inc., a real estate business, where he was responsible for arranging and structuring equity and debt financing for real estate investors and developers. He invested majority of fund’s capital in real estate sector primarily because of his expertise in real estate investments. Sadly this venture did not prove to be successful and the partners were forced to liquidate the fund due to bad debts in 2003. This was a depressing period in his career. He did not lose heart and re-entered the hedge fund industry by launching Pershing Square Capital Management in 2004. The hedge fund has averaged 24% annualized returns since its founding in 2004 until 2010.
Investment Philosophy
Pershing Square Capital Management is a long-short hedge fund which invests in select blue chip companies, based primarily on fundamentals, with a value orientation. The fund is known for conducting extensive research and thorough due diligence in selecting investments. It employs a unique blend of “value” investing and “activist” approach in identifying investments. Like most other hedge funds Pershing square has a concentrated portfolio of investments. The fund’s portfolio is concentrated with respect to both the number of investments as well as the number of sectors and industries.
Bill Ackman is often compared to Carl Icahn due to his activist investment approach. Ackman disagrees with this comparison and claims that his approach is more similar to that of Warren Buffett. He ascertains his investment philosophy is completely different and what he does is seek to save companies which ultimately benefit the economy as a whole. The turnaround of General Growth Properties (GGP) illustrates his approach. He made an investment of $60 million for a 25% stake in the troubled General Growth, one of the largest malls present, the bankruptcy of which would have further deteriorated the health of the commercial real estate sector. He was successful in driving the stock prices up and turning his $60 million investment value into $1.6 billion.
Bill Ackman is an activist investor. He buys big stakes in companies and then offers his opinions on how to improve the performance of companies and pushes for changes so that the market can realize the values of the companies. Like most of the value investors, Ackman buys stocks that are undervalued by the market and sells his stake when the market eventually assigns a fair value to the stock.
The term “Activist investor” is the modern day equivalent of so called “corporate raiders” in the 1980’s. Activist hedge funds examine public companies that are mismanaged for one reason or another. They typically go into situations where the value isn’t immediately clear and they press management to unlock that value and make changes to improve its share price. They try to profit by unlocking the hidden value by buying a substantial stake in the securities of target companies, big enough to push the management to enact certain operational or strategic changes with the intent to boost the market value of their stakes. The strategies sought by activist hedge funds are not necessarily in the long term interest of shareholders. These hedge funds also leverage shareholder power to press executives to make favorable decisions for short term profits because a corporation does not want to be viewed as one that goes against the wishes of shareholders. Typically such investors perform extensive research to identify companies which have value hidden in them.
Activist hedge funds are different than conventional mutual funds in that they own large stakes in few businesses as opposed to tiny positions in hundreds of companies. This gives them an option to engage management of these companies by their close interaction with them. Most mutual funds must be diversified so they cannot own larger than 5% of fund’s assets in one security, thus making activist strategy unique to these hedge funds.
Ackman’s Pershing Square Capital Management, employing its activist approach, has in the recent past acquired positions in Wendy’s International Inc., McDonald’s Corporation, J.C. Penney, General Growth Properties, Borders Group, Fortune Brands, Ceridian Corporation, Target Corporation, and Alexander & Baldwin pressuring the management of these companies to improve profits by selling either real estate assets or corporate divisions. The investment company in turn benefits when the asset liquidation returns capital in the form of dividends and a higher share price, whereby Pershing divests itself of its holdings at a higher share price.
Bill Ackman is amongst the very few people, who not only predicted the 2008 financial crisis but were also able to reap huge profits from the financial market crash by going short on some of the major players of the subprime industry. MBIA (Municipal Bond Insurance Agency) is one of such companies. After performing extensive research, he convinced himself that few large players in the bond insurance business, notably MBIA, did not deserve the AAA credit rating assigned to them by the rating agencies.
Consistent with his belief he launched an assault on MBIA by shorting it using credit default swap contracts. Credit default swaps (CDS’s) are credit derivative instruments, used by corporations and individuals for hedging and speculating on the credit risk of various corporate debt claims. They allow parties to buy and sell protection against a default on a security and are essentially life insurance policies on companies. The protection buyer, who is effectively short on the debt obligation, makes regular payments over the life of the contract to the protection seller, who promises to make a lump sum payment to the insurance buyer if a security defaults. The cost of buying such insurance on MBIA was very low because market seemed to have great faith in the AAA rating of MBIA and the probability of a credit event was perceived to be minimal. The Wall Street Journal, SEC, New York Times and others declared his claims as being fraudulent and accused him of manipulating the investors’ sentiment in order to boost his short position on MBIA. Ackman made millions of dollars for himself and his investors when MBIA eventually collapsed. The story of Ackman’s crusade against the bond insurers most notably MBIA was turned into a book called “Confidence Game” (Wiley, 2010) by Bloomberg News reporter Christine Richard.
Long before the collapse of MBIA, Ackman had warned investors, regulators and rating agencies of the imminent credit crisis by highlighting that business models of these giant insurance companies carried excessive risk. Initially MBIA used to insure bonds of municipalities which carried very little risk if any. Later on, through his extensive research, Ackman came to know that MBIA had got itself involved in insuring risky corporate debt. This fundamental shift in the company’s business remained unnoticed by the Wall Street. He argued that selling insurance on high risk corporate debt was way too risky than that on municipal bonds. By selling insurance on risky corporate debt securities, these insurers had over extended themselves to the detriment of investors.
Despite being a successful investor with an impressive track record, Bill Ackman has also made mistakes in his career sometimes leading to large losses. Some believe his rather stubborn personality is to blame for his relentless investments. One of his most recent and prominent investment failures was the loss of $ 1.8 billion, in 2009, from his investment in Target. Pershing Square IV was established to bet solely on the rise of the stock of Target Corporation. The fund fell nearly 90% in 2008 and Ackman publically apologized to his clients for the losses. The fund subsequently rebounded to some extent. Ackman said in a February 2009 letter to investors, “Bottom line, PSIV has been one of the greatest disappointments of my career to date.”
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.”