Star investor Bill Ackman provides an update on his SPAC (special purpose acquisition company) Pershing Square Tontine Holdings (NYSE:PSTH). He’s confident of doing “something that people will like”. There’s also a portfolio update and a run through of what attributes a stock must have to make it into the Pershing Square portfolio.
Lee Wild, head of equity strategy, interactive investor: Hello. Today I have with me Bill Ackman, one of the world’s best-known investors and the man behind hedge fund, Pershing Square Holdings (LSE:PSH), now a FTSE 100 company. Now hello, Bill, thanks for joining me.
Bill Ackman, founder and chief executive Pershing Square Holdings: Sure, thanks for having me.
Lee Wild: Since we last spoke, Pershing Square Holdings has become a FTSE 100 company. Now you told me FTSE 100 inclusion was probably the most significant potential catalyst for Pershing Square. Well, the share are up around 16% in the past five months. First, what’s life like among the UK blue chips, and what’s the next significant catalyst for the shares?
Bill Ackman: Sure. So the discount [to net asset value (NAV)] narrowed quite nicely from the mid 30s to now 24%, I still find it extraordinarily wide. I think the next catalyst that people are waiting for for us is an announcement of a transaction for our SPAC, right. This will be a large investment for Pershing, lot of focus on that entity.
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For those not familiar with Pershing Square Tontine Holdings (NYSE:PSTH), this is a US-listed SPAC, four billion dollars of capital from outside investors, a billion dollar minimum commitment for us, and we’re targeting a large-cap, super high-quality, durable growth company. And I just think that transaction, if and when it happens, and again we have a lot of confidence, we’re going to do something people like, I think will be notable and it will create a lot of value for Pershing Square Holdings, because all of the sponsor economics are actually owned by PSH and the two smaller, private Pershing funds.
I think it also sets us up to replicate that structure again, and that’s an embedded piece of value that I don’t think – it’s really not reflected in our NAV our ability to set up these kinds of entities and create valuable sponsor economics for our shareholders. But I think, as I’ve said, the proof is in the pudding, meaning we have to deliver on what we said we were going to do, and I’m confident we’ll do that.
Lee Wild: Sure. I’d just say, for the UK viewers, a SPAC is a Special Purpose Acquisition Company, much like the equivalent to a UK cash shell, we might call them over here. Your portfolio is made up of just 10 stocks, and last year you used extra cash to top up existing investments, such as restaurant brand, Lowe's, Hilton and Berkshire Hathaway . Now what’s the strategy in 2021, are you deliberately looking for new investments, are there any stocks or sectors that particularly excite you at the moment?
Bill Ackman: So we actually sold Starbucks, you know, a month or so ago, and we replaced it with a new investment we haven’t yet disclosed. You’ll see the beginnings of disclosure of that probably with a filing we’ll make in mid-May, and it’s investment that meets all of our criteria, you know, super high quality, durable growth company, simple, predictable free cash flow business.
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So we’re always looking for great businesses we can own and we’re willing to give up an existing position to replace it with something we think will earn a more attractive return over time. Starbucks is a great company, management’s done a great job, we purchased the stock in the mid-50s, we sold it at approximately double the price a year later, and the price we sold Starbucks, we thought of it as probably a 10-11% long term internal rate of return, and we replaced it with an investment that we think has something approximating a 20% long-term IRR [internal rate of return. It’s used to estimate the profitability of potential investments]. So we’ll make those kinds of changes always, we’re always willing to do that, but I think our most significant next investment will be an announcement of the SPAC transaction.
Lee Wild: Right, OK. So that disclosure and the SPAC, watch this space.
Bill Ackman: Yeah.
Lee Wild: OK. Now you mentioned some of them in that question, in that answer, so what attributes must a stock have to make it into the Pershing Square portfolio, which is a pretty exclusive selection of stocks?
Bill Ackman: It’s got to be a business that we can predict what the business will look like over a very long period of time. You know, if you believe that the value of financial asset is the present value of the cash you can take out of the business over its life, in order to build that discounted cash flow model you’ve got to put in little numbers in the cells, if you will.
You’ve got to have a view on how revenues are going to grow, you’re going to have to have a view on what operating margins are going to be over time, and in order to get there it has to be a business that has very defensible characteristics, it can’t be a business where a couple of students quit university and a year later they’ve built a disrupting sort of technology, so we’re looking for these very, very what we call ‘durable businesses’. You know, Warren Buffett uses the term ‘business with a moat around it’, that’s what we’re looking for here, a business that we have a very, very high degree of confidence, is going to continue to take share, continue to have attractive margins, and will do well over a very long period of time. So those are I think the most important criteria, and then beyond that it’s price, we want to buy that business at a price which offers us a very attractive return over time.
Lee Wild: So the Pershing Square stock trades at around a 25% discount to net asset value. Now that’s less than when we last spoke before Christmas, but it is still clearly something you find strange. What are your current thoughts on that, Bill?
Bill Ackman: I think it’s just a matter of time. You know, when we went public initially the discount was in the several percentage point range. We unfortunately, a year or so later, began a very challenging period for the firm, we lost some investors. It takes time to bring them back, you know, we’ve had three really pretty fantastic consecutive years, working on delivering a fourth, and I think just with consistency.
I think in the annual report I compared us – you know, one of the measures, one of the most important measures of a business is the returns it earns on the capital it employs, right; so, for example, on ROE [return on equity] calculation. I said, “Look, if you looked at the ROE of Pershing Square Holdings, it’s been in the almost 40% range for the last three years, and the FTSE 100 as a whole is about 8%. And FTSE 100 as a whole I think trades in the mid-one and a half-ish times book value and it includes a lot of business that I would say are not the highest quality businesses in the world, a lot of degrees of cyclicality, you know, some banks that earn very low returns on capital. And we are about the cheapest stock relative to book value of any company in the index, despite having one of the highest returns in capital of any company in the index, and I just think it takes time.
We’re a bit of an unusual animal, you know, and as a result it takes time for people to understand the story, but I think time is the friend of the great business and time I think leads to recognition of our business quality, and I think we’re 1,100 basis points better on the discount I hope the next time we have a conversation, or eleven and a half. I’ll come talk to you every time we bring the discount in, 1,100 basis points.
Lee Wild: Bill Ackman at Pershing Square Holdings, thanks very much for joining me today.
Bill Ackman: Thank you so much, appreciate it.
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