The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds (26 page)

When Target’s stock ultimately rose back to more than $50 per share, the investment recovered materially from the lows, although no investors would become whole other than those who put up significant capital into the Target fund at the lows. Despite the losses in the Target fund, however, many investors were very appreciative of how Pershing handled the poor investment outcome, and they remained loyal to the fund. When the Pershing main funds’ investment performed strongly 2009 and 2010, many of the Target fund investors who remained with Pershing recouped their losses through fee waivers. By treating investors fairly, Ackman kept investors happy despite an investment that he deemed “one of the greatest disappointments of my career.”

Adam Geiger, CIO of New Legacy Capital, formerly invested with Bill Ackman right after Ackman and David Berkowitz split. At that time, Geiger was global head of investments at Ivy Asset Management, a New York–based fund of hedge fund manager. Geiger allocated at least $100 million to Pershing Square’s flagship hedge fund. “We made a conscious decision not to invest in the single stock funds including those dedicated to Target and Wendy’s,” Geiger said. “It wasn’t an efficient structure; i.e., to pay fees for exposure to a single stock while also being subject to the liquidity demands of others.” The main reasons Geiger allocated to Ackman were: value-added analysis, pedigree and relationships with legendary hedge fund managers, and credibility as an activist.

Even though his highly publicized unsuccessful proxy fight and hefty initial losses on Target garnered him a lot of negative media attention and lost him some investors, it served as a catalyst to win some over, too. For one thing, it got him noticed by one New York–based $600 million fund of hedge fund manager, which allocated between $25 and $30 million to Pershing Square in 2010.

After looking at Bill Ackman for a couple of years, the FOHF, who prefers to remain anonymous, realized Ackman was picking up steam after his Target failure. The FOHF believed that Ackman’s concentrated investment style of 10 to 12 positions was sensible, and it was complementary to the other funds in which it invested. The FOHF has a penchant for investing with event-driven funds, most of which invest in the entire capital structure. It argued that even though Ackman fit the bill as an event-driven manager, what distinguished him was that he was more equity focused. While the Target special-purpose vehicle proved to be a failure, the FOHF assessed whether Ackman’s ego interfered with his approach to investing and managing risk, ultimately concluding that he had the right balance between confidence and humbleness. The FOHF argued he was a good manager who really proved himself, and effects positive change in the companies in which he invests, while working well with boards of directors. The FOHF said it expects to up its allocation to Pershing Square to the extent it has capital to add to its position.

“Bill has created the most compelling business model in the investing world,” says his friend and fellow investor Whitney Tilson. “By marrying public and private equity investing, he has created a powerful model. With quite a high percentage of investments, he is able to effect change because he buys large stakes and he is willing to engage in proxy battles, but he usually doesn’t have to. He generally has good ideas and is very persuasive.”

MBIA

Despite having to endure Spitzer and SEC regulatory investigations, Ackman did not give up on his MBIA short. He kept open a Gotham coinvestment fund that owned MBIA CDSs, and, shortly after launching Pershing Square, Ackman began to rebuild his MBIA short position through a large short-equity position and an enormous position in CDSs. For the first nearly four years of Pershing’s existence, the MBIA position was a loser. MBIA continued to counter Ackman’s public campaign, which laid out in incredible detail flaws in the company’s business model, its subprime CDO exposure, its inadequate disclosures, and its aggressive accounting practices. But by February 2008, the facts caught up to MBIA. Its shares had fallen more than 80 percent since the start of 2007. But as Ackman’s arguments proved themselves glaringly true, MBIA made yet another desperate attempt to turn the tables on Ackman.

In written testimony for a subcommittee of the House Committee on Financial Services, MBIA said that short-sellers like Ackman have worked hard to undermine market confidence in the bond insurers. Expressly targeting Ackman, MBIA wrote that the House Subcommittee on Capital Markets should work with the Securities and Exchange Commission to curtail “the unscrupulous and dangerous market manipulation activities of short sellers,” trying to undermine market confidence in MBIA to drive the company’s share price to nearly zero. But after having disputed MBIA’s AAA credit rating for more than five years, Ackman turned the tables on MBIA by getting the SEC, the New York attorney general and other regulators to investigate the company. The four-year investigation of MBIA resulted in MBIA agreeing to settle civil securities fraud with the SEC and attorney general’s office, and to pay a substantial fine.

MBIA’s share price collapse and skyrocketing CDS—CDS spreads went from 15 basis points (bps) in early 2007 to about 2,000 bps less than two years later—enabled Pershing Square to deliver strong returns to its investors in 2007, and to help mitigate losses in the portfolio in 2008.

“If we want to say that the emperor has no clothes and write a 66-page white paper about it, that’s a healthy thing for the capital markets,” says Ackman. “It’s also good for the market when Jim Chanos says, ‘Here’s why I think China’s a bubble,’ or when David Einhorn says, ‘Lehman should have to recapitalize because it’s overlevered and it’s going to go down.’ I think that stuff’s really important.”

At the end of 2008, Ackman closed out his investments in MBIA. After 6 years of battle, he made over $1.1 billion in profits, with his personal take over $140 million, a sum he publicly committed to give away to the Pershing Square Foundation.

Months later in May 2009, 18 financial institutions would file a suit against MBIA including Merrill Lynch, J. P. Morgan, Citigroup, and UBS, claiming the bond insurer transferred away assets that would be needed to cover claims on securities backed by mortgages to form a new municipal bond insurance company.

While MBIA was a fabulous investment, it would not turn out to be the most profitable investment of Ackman’s career. His early experience as a precocious young investor with the bigwigs of real estate on Rockefeller Center was about to come in very handy. He just had to take care of a few other things first.

A Dud

In March 2008, Borders put itself up for sale, and though it received an indication of interest from Barnes & Noble, it never found a buyer. As a 3 percent position, Borders was a small investment for Pershing, but Ackman did his best to save the company. “A member of our investment team joined the board, we lent the company money, hired a new CEO, put the company up for sale,” he says. But when the sale did not happen and Barnes & Noble walked away, Ackman decided to move his focus elsewhere.

When Bennett Lebow expressed interest in buying control of Borders in 2010, Pershing was delighted to have someone else invest capital and work to fix the company. Lebow was ultimately unsuccessful and Borders was forced to file for bankruptcy in 2011. In total, Pershing lost about $200 million, which amounted to a couple of percent of capital. But Ackman isn’t beating himself up about it. “We’re going to make some mistakes,” he says. “Borders was a mistake on the buy. It just didn’t meet our criteria of the kind of businesses we like to own.”

“When I first started in business, I didn’t know when it was time to move on. But I learned a lot about what I call the return-on-invested-brain-damage calculation. If the return isn’t high enough to justify the brain damage, I won’t spend the time.”

The Greatest Trade

In November 2008, five months before the company filed for bankruptcy, Ackman bought a stake in General Growth Properties, a REIT that owned 140 million square feet of shopping center real estate across the country. Pershing added to its holdings gradually over the next several months. Soon, all of the experience he had amassed beginning with his Alexander’s investment in business school, his Rockefeller Center investment, and the failed First Union deal at Gotham would come to bear on the greatest investment of Ackman’s life.

Ackman had had his eyes on the company since 1998. “When we were restructuring First Union, I sold a property to General Growth,” he says. “I met Joel Baer, who was the company’s chief investment officer, and we stayed in touch.” Ackman had followed the stock ever since and began to focus on it when the stock price dropped, in late 2008 and early 2009. It eventually plummeted from $60 to 30 cents, as the company was unable to roll over its debts in the midst of the credit crisis. It was time for Ackman to swoop in. He knew that if the company could restructure its debts through a bankruptcy, this could be one of the greatest comebacks in investment history.

Ackman thought that despite the company’s being in bankruptcy, it was potentially a good investment because its assets were worth far more than its liabilities. “Malls historically generate high stable cash flows,” Ackman explained in a news article interview with
Infovest21
, written on May 29, 2009, when he spoke at the Ira Sohn Investment Research Conference. “[GGP has] the second highest occupancy of any mall company. It has 73 Class-A Malls including high profile names. Fifty of the 200 malls create 50 percent of the NOI. The likelihood of a forced liquidation by a court is reduced because of the extreme pressure it will place on the commercial real estate market and other REITs.”

Ackman had also met Madelyn Bucksbaum, a cousin of one of the company’s founders, at a charitable event in the 1980s. After Ackman amassed a position of 25 percent of the company, he got a call from Maddie reconnecting after almost 20 years. She offered to do anything she could if he ever needed help.

After buying a stake in the company, Ackman began to lobby the management. He advised GGP that the best way to restructure the company was in bankruptcy and talked them through how it could done, providing a few examples of other companies that had done it successfully. “I tried to convince them to put me on the board, but they were represented by Goldman Sachs. And Goldman Sachs didn’t like the idea, saying, ‘No you don’t want the fox in the hen house,’” says Ackman. “I’ve got a good relationship with Goldman Sachs, but they have a business that is based on ‘defending’ companies from me. They might think it is bad for them if I join the board of a company they represent. They’re supposed to ‘protect’ companies from people like me,” he explains matter-of-factly.

While Goldman was fighting to keep Ackman off the board, Joel Baer lobbied GGP that Ackman was the right man for the job. Ultimately, the board decided to vote on his joining the board. Ackman was shocked to learn that it would be a close vote. “I can’t believe this,” he says. “Here I am, I own 25 percent of the company. I’m offering to help. Their stock is trading for pennies and they won’t let me on the board?” So he called Maddie Bucksbaum to take her up on her offer to help. She convinced her cousin, John Bucksbaum, to vote for him, and his was the deciding vote that put Ackman on the board in June 2009.

Once on the board, Ackman worked with management and the company’s advisors to restructure the debt of the company. “Brookfield was interested in doing something but they made an initial proposal to the company which was not attractive,” he said. So he went back to them with an idea for separating GGP into two companies. “Ultimately, that’s the structure that became the basis for Brookfield’s proposal,” said Ackman.

By April of 2010, GGP still needed more capital. Bruce Berkowitz, who owned $2 billion of GGP debt and had been telling Ackman that he wanted to be involved, became enraged when the Brookfield deal was announced. Ackman explained that he had designed the Brookfield deal with room for Berkowitz, as they would need much more than $2.5 billion. Ackman told him, “We need $7 billion and you can help.” Berkowitz hopped a flight from Miami while Ackman prepped Brookfield for the meeting. He said, “He’s going to come in, and I’m going to make a suggestion. We’re going talk about it. If Bruce thinks it’s fair, he’s going to agree. He’s going to shake hands. And then it’s going be done, and we don’t have to worry about it anymore.”

Despite Ackman’s confidence in Berkowitz, Brookfield was very skeptical of him from the word
go
. “He came in with Gucci loafers, casually dressed, no jacket. Just straight from Miami with his partner Charlie Fernandez,” remembers Ackman.

And the meeting proceeded exactly as Ackman had said: “Bruce Berkowitz and I sat down and discussed a potential proposed transaction. Once we had terms that Bruce was satisfied with and that I agreed to do as well, we went back into the room with Brookfield. Bruce then said, ‘Here’s what we’re prepared to do.’ We all shake hands, Bruce is gone within 35 minutes. It was the quickest deal of my life.” The Brookfield guys still didn’t know if Berkowitz could be trusted. “He just committed $2.7 billion. I told them he was real,” and Ackman was right.

In November 2010, GGP exited bankruptcy and spun off a new company called the Howard Hughes Corporation which held certain GGP assets that Ackman had identified that generated little or no cash relative to their underlying asset value. Today, Ackman chairs the Howard Hughes board.