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Special report: What if Elvis ran a hedge fund?
NEW YORK |
NEW YORK (Reuters) - On a rainy day in late September, Newark Mayor Cory Booker set up a temporary outpost in a somewhat unlikely setting -- the midtown Manhattan offices of hedge fund manager William Ackman.
For much of the afternoon, Booker and some of his aides were huddled in a conference room at Ackman's Pershing Square Capital Management. Snacking on sandwiches, they mulled options for raising tens of millions of dollars in private funds for the troubled schools in New Jersey's largest city.
Booker started the day on NBC's "Today" show with New Jersey Governor Chris Christie and Facebook co-founder Mark Zuckerberg, whose $100 million donation to the Newark public schools has sparked a broader conversation about the health of the nation's education system.
But the real action didn't begin until a few hours later. After their TV appearance Booker, Christie and Zuckerberg, along with their bodyguards, hustled into Ackman's 42nd floor office to thank him for his own $25 million donation.
The 44-year-old hedge fund manager, who is a longtime political backer and friend of Booker's, did more than sign a big check. He spun his enormous Rolodex and set up a meeting for the trio to take their idea to other hedge fund luminaries including Julian Robertson and George Soros' son Jonathan.
It is too soon to say whether his effort to bring Wall Street closer to the gritty streets of Newark will bear fruit. But his behind-the-scenes role illustrates the much larger stage the outspoken Ackman is trying to play on these days.
In some respects, Ackman fancies himself as a younger, more urbane East Coast version of Warren Buffett, the legendary investor whose wide appeal in part stems from his folksy Midwestern persona. Ackman has expressed admiration for Buffett and attended some of the Oracle of Omaha's annual meetings.
To critics, however, he is more akin to a loudmouth corporate raider from some Oliver Stone movie, whose main motivation is enriching himself and his investors. Clearly, some of the companies on the receiving end of his invective have been less than charmed by the experience.
Love him or hate him, Ackman remains one of the hedge fund industry's most closely watched managers. Unlike most of his counterparts, who tend to be tight-lipped and secretive, he mostly operates in the open -- and is anything but reticent about sharing his thoughts. For instance, just days after disclosing that his fund has become the biggest single stockholder in J.C. Penney, he's already talking about the hidden value of the mall retailer's real estate.
ELVIS IN PINSTRIPES
With about $7 billion in assets under management, Ackman's Pershing Square ranks as one of the largest and most successful so-called activist hedge funds -- investment vehicles that agitate for structural changes at companies with stocks that are seen as being undervalued. Most similar activist funds manage about half the money Pershing Square has invested.
Over the years, as he has pushed for overhaul at companies ranging from fast food chain Wendy's to retailer Target, Ackman has built up a following on Wall Street and in Washington. To many, he may be best known for his long bitter fight with MBIA -- a multi-year bet against the big bond insurer that supporters describe as a sign of Ackman's tenacity and critics deride as an example of his need to be in the limelight.
Ackman, who recently sat down for an interview with Reuters, brushes aside the criticism. He says being in the spotlight is often essential to his investing strategy, which usually involves taking concentrated bets either in or against a company's stock. This isn't passive investing and requires a fair degree of noise to pull off.
"Given the nature of what we do, we can't stay out of the headlines," Ackman said. "But what I tell people is that we have the risk of being in the headlines but we do not have headline risk. We will not embarrass you, but we will be in the newspapers."
All those headlines lead people to form strong opinions about Ackman. Ask investors or other hedge fund managers what they think of him and you're likely to get simple descriptive phrases like: self-confident, highly-intelligent, brash and arrogant.
And to some degree, he is all of these things. At this week's Value Investing Congress in New York, where hundreds of investors paid thousands of dollars to get investing tips, Ackman was the main attraction. He was greeted by attendees like a rock star -- the investing world's version of Elvis, the glitzy Las Vegas version. Aspiring hedge fund managers stormed him after he was finished speaking, seeking autographs and pictures. Blushing, Ackman mumbled "this is embarrassing," but he obliged just the same.
His lengthy and detailed investor presentations are a hot item -- often posted on the Wall Street gossip blog Dealbreaker.com within hours of their release to investors. The reports are a popular download from the website.
In person, Ackman cuts a striking figure, standing at 6' 3" tall with a shock of grey hair. But it is the stature of his fund's performance which is what most draws investors to him. Since its inception in 2004, Pershing Square has registered a 24 percent annual return, while the average fund has returned just 5.7 percent, according to Hedge Fund Research.
Indeed, in the last few years, Ackman has supplanted Carl Icahn, Nelson Peltz and Kirk Kerkorian -- all veteran corporate raiders -- as the trader who most sends shivers through corporate boardrooms. While these aging managers are still rattling cages, it is Ackman who grabs most of the attention these days.
Just consider the recent swirl of activity involving Ackman and Pershing Square. This summer, he launched a bold and so far unsuccessful bid to gain control of Manhattan's huge Stuyvesant Town apartment complex by buying some of its distressed debt for pennies on the dollar.
Last week he was named chairman of Howard Hughes Corp. one of two companies slated to emerge from the bankruptcy of General Growth Properties, the operator of dozens of shopping malls and other commercial real estate properties around the United States.
About two years ago, Ackman started buying General Growth's stock and debt on the cheap after he and his team of analysts examined poorly performing real estate investment trusts, or REITs. It has proved to be a particularly lucrative bet: Pershing Square's $200 million investment in General Growth is now estimated to be worth about $1.5 billion.
Todd Petzel, chief investment officer with Offit Capital Advisors a $5 billion money manager that has long invested client money with Pershing Square, said General Growth "may rank as Ackman's best trade ever."
And then there are the two most recent additions to Pershing Square's portfolio: retail giant J.C. Penney and consumer goods manufacturer Fortune Brands.
Last week Ackman unveiled a 16.5 percent stake in Penney, which has many stores in malls operated by General Growth, and an 11 percent stake in Fortune Brand -- the distributor of Titelist golf balls, Jim Beam whiskey and faucet manufacturer Moen.
In little more than eight weeks, the New York-based hedge fund manager became the largest investor in Plano, Texas-based J.C. Penney and Deerfield, Illinois-based Fortune Brands without anyone noticing.
Together, the two stocks now comprise about $2 billion of Pershing's net asset value and Ackman has put management at both companies on notice that he wants to come and talk.
FRIEND OR FOE
"Part of his playbook is that he is an activist but he is not a vulture," said Mohnish Pabrai, who runs Pabrai Investment Funds and often crosses paths with Ackman at industry conferences.
Pabrai said Ackman's initial approach is to come to a company's management and say he wants to be their partner and not an old-fashioned raider looking to score a quick buck and then move on.
Of course, corporate directors often don't see activists like Ackman as investors simply wanting to extend a helping hand. Several people in the hedge fund industry who know Ackman but did not want to be identified said the manager can get antsy when a corporation he is trying to cajole does not follow his suggestions or pushes back.
But for stockholders in a company that Ackman sets his sights on, the arrival of Pershing Square on the scene is often seen as something to celebrate.
"When I talk to other investors and they talk about who is good at activist investing, undoubtedly Bill Ackman and Pershing Square come up," said Damien Park, managing partner of Hedge Fund Solutions, a consulting firm that advises investors and companies on how to deal with activist investors.
"On the whole, Pershing Square is highly regarded for its ability to spot undervalued companies and for its resolve in trying to bring about change."
Despite that resolve, Pershing Square is enjoying only modest success so far this year. The fund is up about 6 percent compared with the average hedge fund's 4.6 percent gain. Then again, the Standard & Poor's 500 is up 4.3 percent and investors don't have to pay hedge fund industry's standard 2 percent management fee and 20 percent performance fee to bet on an index fund.
Ackman prefers not to discuss nitty gritty issues like his fund's performance or fees. But he does seem to relish the fact that his fund has a loyal flock following it. Listening to him talk, it is almost as if he views Pershing Square's investments in beaten down companies as another form of good works -- much like his charitable giving.
"We have made a lot of money for the average investor," said Ackman. "People watch our filings closely."
Case in point: shares of Fortune Brands are up 7 percent since Pershing Square disclosed its investment stake on October 8.
MISSING THE TARGET
Still, Ackman also has suffered several significant setbacks. Pershing Square gambled and lost on Borders, wrongly betting the troubled chain of bookstores would flourish.
In 2007 Ackman launched an unusual single-stock fund, ultimately investing $2 billion in Target call options and other derivatives. Ackman tried to push Target to sell its credit card business as well as sell the property under its stores and create a real estate investment trust. Target's management balked and rejected much of Ackman's plan, so he then launched an unsuccessful $10 million proxy fight to gain a foothold on the retailer's board.
The much-hyped Target-only fund nearly blew up in the process and has since been closed. The trade took a personal toll on Ackman. The exhausted fund manager teared up as he addressed shareholders at Target's annual meeting in 2009, people there recalled.
But maybe Ackman's biggest failure was the first hedge fund he set up, in 1992, with his Harvard Business School classmate David Berkowitz. The pair were forced to shutter and begin liquidating Gotham Partners in 2002 because the then $300 million hedge fund had made a bad investment in a golf course venture and incurred negative publicity from an investigation by federal and state regulators. The investigation went nowhere and regulators found there was no substance to the charge that Gotham used research reports to influence the price of stocks the hedge fund owned.
Still, after the Gotham experience, the two friends decided to go their own separate ways. For Ackman, his second act was Pershing Square, which he launched with just $10 million in capital. Even in an industry where repeat performances are common, Ackman has roared back with the kind of success that even his most ardent fans couldn't have predicted.
Today, Ackman doesn't like to talk about Gotham. People who know Ackman said the main investing lesson he learned from Gotham was to avoid sinking big sums of money into illiquid and speculative assets.
"He has convinced people that he has learned and I think it is genuine in this case," said Michael Hennessy, co-founder of hedge fund investment firm Morgan Creek Capital Management, which does not currently have money with Ackman.
Then again, the early strategy behind the J.C. Penney trade looks a bit like Target 2.0. While Ackman has yet to lay out his plans, he clearly is eyeing it as real estate trade -- a common theme in many of his investments.
In fact, there are signs Penney may be gearing up for a fight. The retailer has hired Goldman Sachs Group as an adviser as it prepares to take on Ackman, according to Women's Wear Daily in a report this week confirmed by a source familiar with the situation.
Pershing's success has enabled Ackman to expand his investor base beyond the wealthy individuals and family offices who were with him in the fund's early years. For instance, the New Jersey and New Mexico state pension funds have invested with Pershing Square, largely on the recommendation of alternative investment consulting firm Cliffwater LLC.
FRENCH SOAP AND EJECTOR SEATS
Pershing's sleek midtown offices, located in a building just up the street from Carnegie Hall, reflect that success. The fund's offices boast dramatic views of Central Park. One conference room is decorated with a jet fighter's ejection seat -- an ever present reminder that investors always have the option to abandon a bet. In the office restrooms, soap dispensers are filled with L'Occitane, a luxury French brand.
Ackman, who grew-up in the leafy suburban New York town of Chappaqua, began his post-college life working at a real estate investment firm co-founded by his father Lawrence. All these years later, he now has all the personal trappings of a highly compensated hedge fund manager. Ackman and his wife Karen spent $26 million on an apartment in the Beresford, a landmark New York City co-op on Central Park West, where Citigroup CEO Vikram Pandit also lives.
Yet for all of his success, Pershing Square remains a fairly small operation. Including Ackman, there are just seven people in its main investing team of analysts and traders. In total the fund employs fewer than 40 people.
Most of the investment decisions begin and end with Ackman, although the fund does rely on outside consulting firms to augment its stock and company research. For instance, the hedge fund pays fees to expert networking firm Gerson Lehrman Group to sometimes line up meetings with people familiar with some of the company's Pershing Square is targeting.
Ackman also relies on Pershing Square's advisory board, which includes noted Harvard Business School professor Michael Porter, to help him get meetings with corporate executives.
In a 2006 due diligence questionnaire prepared for prospective investors, Pershing Square described its approach to stock picking this way: "Often the best ideas will come from a bottom-up review of a company, its history and its industry, and a reinterpretation of facts and events that other analysts have not previously done."
Ackman said often the decision to invest in a company comes after months of research and reading corporate filings. But he said some investment ideas can come together rather quickly.
For instance, he said Pershing Square made a big and ultimately successful investment in Wachovia in fall 2008 in only a matter of days. Ackman said he started thinking about buying shares in Wachovia when he got a news alert that Citigroup was making a bid to acquire the then North Carolina-based lender.
He said he got the news alert while eating breakfast alone at the Brooklyn Diner, located on the ground floor of his office building. Ackman raced upstairs and his analyst began scouring through Wachovia regulatory files to learn more about the company. It was then he discovered Wachovia was worth a lot more than the bargain basement price Citi was seeking to pay.
Pershing Square began buying all the shares of Wachovia it could get its hands on. Soon after, the hedge fund was rewarded when Wells Fargo came in with a superior bid for the struggling bank.
The well-timed Wachovia trade turned a potentially disastrous 2008 for Pershing Square into one that was only moderately bad. The flagship fund declined 12 percent that year, much less than the average 19 percent loss posted by most other funds during the height of the financial crisis.
"You have to give Ackman credit for this, he does read the documents," said Janet Tavakoli, a Chicago-based structured finance consultant, who was impressed by the work Ackman did analyzing MBIA's exposure to securities backed by subprime mortgages. "He has an aptitude for finding, 'Where is Waldo?'"
But, as with any manager, especially one who has had a good deal of success, some investors do worry about Ackman falling in love with his own brilliance.
For example, when making his investment in Borders, a decision Ackman now concedes was a mistake, people close to the manager recall him saying that part of the trade was motivated by his love of reading and books. Pabrai, the value investor who is generally a fan of Ackman, said that kind of thinking can be problematic.
"Bill does very thorough work and drills deep, but there can also be blind spots," Pabrai said.
That said, Ackman's vision at Pershing Square has for the most part been crystal clear. Indeed, Booker, the mayor of Newark, said one of the things he admires about Ackman is that he "sticks to his guns" when he has the facts to support him. Booker, who first met Ackman nearly a decade ago, said he saw Ackman's "mettle" during the long drawn out battle with bond insurer MBIA, when many thought the hedge fund manager was tilting at windmills.
"He was getting attacked and vilified but he was right about (MBIA)," said Booker, a rising star in Democratic politics, who was recently elected to a second term as mayor.
Booker said Ackman's tenacity will be helpful in lining up other private donors to the city's schools.
"He has helped us ripen the fruit and hopefully we can pick it soon," said Booker. "I know Bill is ambitious in his desire to use his money wisely and he wants to leverage it to make as dramatic of a change as possible."
Yes friends, Elvis is in the building.
(Reported by Svea Herbst-Bayliss and Matthew Goldstein; Editing by Jim Impoco and Claudia Parsons)
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