Since Pershing Square Holdings went public last year, Bill Ackman used a portion of this year’s annual letter to investors to explain the large cap activist investment strategy followed by Pershing Square Capital Management (which manages PSH) and the transition from what Ackman calls Pershing Square 1.0 and Pershing Square 2.0.
“In Pershing Square 1.0, we took substantial stakes and pushed for corporate changes which we believed would create shareholder value. Our holding periods were shorter. We achieved high rates of return, but required constant recycling of capital into new ideas. The changes we advocated were more structural and corporate than managerial and operating,†Ackman writes. “In retrospect, the development of our investment in General Growth Properties Inc (NYSE:GGP) represents the inception of Pershing Square 2.0.â€
Bill Ackman: Pershing Square is value investing writ large
The approach that Ackman describes, especially for Pershing Square 1.0, will sound familiar to value investors. He looks for ‘simple, predictable free-cash-flow generative’ businesses with some sort of competitive moat and modest leverage if not extra cash on hand. He also looks for businesses without too much exposure to commodity prices, interest rates, or other macro conditions that are completely outside the company’s control. Short positions are just the opposite: high leverage, bad business models, and the need for access to capital are sure to draw a look from Pershing Square analysts.
Ackman determines valuations by estimating the present value of future cash flows to owners (eg dividends) only buys when the current price is a deep discount to what he considers to be fair value. For short positions he looks for a ‘ceiling on valuation’ that plays the same role as the margin of safety on long positions in keeping risk under control. And again in the vein of value investing, risk is defined as the chance of losing principle, not price volatility.
