- Reuters/ Jack Cusano
Bill Ackman, founder of the $12 billion hedge fund Pershing Square Capital, just finished a conference call in which he answered investors’ questions.
Ackman is having the worst year in his fund’s history. Pershing Square Holdings, his fund’s publicly traded vehicle, fell 25.6% in the first quarter.
At the beginning of the call, he said that it was “obviously a difficult quarter” and that investors had submitted “a lot of questions.”
Pershing Square’s biggest loser has been its investment in Valeant Pharmaceuticals. He acknowledged he had made numerous mistakes on that investment.
“I describe ‘experience’ as making mistakes and learning from them,” Ackman said during the Q&A portion of the call.
“We’ve made a number of mistakes in Valeant that’s required some soul-searching on our part … ‘Did we violate some of our investment principals?’… In fact, we believe there’s a lot of learning here. I don’t think it’s the right moment yet to share our conclusions with regard to the litany of mistakes here. There is a time for that. The first thing we are going to do is fix the problem. We’re in the midst of that.”
Ackman said he also thought there was still “enormous upside” and a chance to recover the value the fund had lost.
Shares of Valeant had been surging during the call. The stock was last trading up $4.64, or 16.15%, at $33.37 a share.
We’ve included our notes from the call below:
- Ackman said “there’s lots of stuff to discuss.” He’s received a lot of questions for the call. He added that it was “obviously a difficult quarter.”He also noted that the fund’s performance had “slightly improved” from last week’s. Those numbers will come out Wednesday night. Air Products and Chemicals, Restaurant Brands, and Canadian Pacific were the “three contributors” in the first quarter. Funds have “substantial cash positions” after two transactions. One was selling some Mondelez stock. He said they did a transaction with Air Products. Valeant contributed 1,300 to 1,600 basis points of losses for the fund. Valeant was an investment Pershing Square made in early 2015. Ackman said the hedge fund viewed it as a “passive investment.” He added that the Pershing Square had worked with Valeant in 2014 on the Allergan transaction and then “developed respect for the team” and “a really good working relationship” and “respect for the business model of the company.” He now calls Valeant a “classic Pershing Square investment.” “We are certainly responsible with the mark-to-market losses we’ve suffered … but unlike some of the press characterization, we have not been involved in the operating model.” He added that they “have not been in our normal role as an activist shareholder.” Pershing Square’s Steve Fraidin joined Valeant’s board. Ackman later joined the company’s board. The board announced that Valeant’s CEO, Mike Pearson, would be stepping down. Ackman said there were a “handful of top candidates.” He noted that a lot of candidates were available in pharma because of all the M&A activity. “The best time to be CEO is when expectations are extremely low … and Valeant certainly offers that.” Ackman then had the analysts go into detail on the other investments – Air Products, Canadian Pacific, Restaurant Brands, Zoetis, etc.
Investor Q&A with Ackman:
The issue surrounding Valeant is not that they are an outright fraudulent or unethical company but that they’ve aggressive in their execution and accounting. Would this problem have been resolved if they developed an internal product base?“The question has a premise that I don’t agree with. With respect to its $58 million, it’s more than aggressive, it’s inappropriate … We think the measure people have used to value the business, we think is a reasonable metric of the cash earnings power of the business. Really, I think the question relates to R&D.” “The narrative that this is a company that simply eliminates R&D and drives prices up is not an accurate narrative.” “I think we will be judged on what we do to protect investors. We joined the board in the last few weeks. This is now quite an active investment … We’re moving forward addressing the confidence issues -getting shareholders numbers they can rely on … improving the governance of the company and delivering results. To Michael Pearson’s credit, he’s really doing a tremendous job managing the company in the transition period.” “I think obviously a disastrous decline in value. There’s enormous upside to us if we can recover our value. If this business generates good results and we bring in an outstanding new management team, there’s opportunities to make multiples of our capital.” Have you evaluated the costs to demonstrating that you’re right on Valeant versus the benefits? Is it worth the effort?“Along the decline of Valeant, we made decisions – ‘do we sell, buy something else, redeploy the capital?’ Really rightly or wrongly, certainly, to date, wrongly, our view was at $90 per share we thought this was still a very very attractive investment to us and we thought we’d make a very attractive return. At $30, when we decided to get meaningfully involved, we also assessed is this something worth the, if you will, investor brand damage? We can restore value here very, very quickly. Again, filing the 10-K, new management … and a few quarters of results, and this stock, we think this stock can be trading at a different price. There’s more upside … certainly in the short term … than any other investment in our portfolio. We think it’s worth the time and energy.” What has PSC senior management done and what are they doing to improve the investment process?“I describe ‘experience’ as making mistakes and learning from them. We’ve made a number of mistakes in Valeant that’s required some soul searching on our part … ‘Did we violate some of our investment principals?’ … In fact, we believe there’s a lot of learning here. I don’t think it’s the right moment yet to share our conclusions with regard to the litany of mistakes here. There is a time for that. The first thing we are going to do is fix the problem. We’re in the midst of that. Once the situation is stabilized we will spend a nice chunk of the call or perhaps an annual meeting discussing the answer to that question.” “We actually had very nominal redemptions.” Has your opinion of concentrated investing changed in the past few weeks?“No, but I think the experience of Valeant reinforces our view of how important it is for the business to have a simple, predictable, cash flow generative dominant collection of characteristics. We do think many underlying businesses of Valeant meet that standard. The business itself has a degree of complexity. There’s a degree of complexity here and a degree of regulatory risk here that’s higher than a typical Pershing Square investment. And if I had to point to one, in terms of the purchase or maybe on the sizing, those considerations did not get as much of a weighting as they should have.” Was any member on Pershing’s investment team paid a bonus for 2015?The entire team owns a piece of the business … There were no incentive fee distributions last year. There were a couple members of the team that were not yet owners of the firm, we did pay bonuses to two of those members for work that they did.
The worst year
Pershing Square is having the worst year in its history. Pershing Square Holdings has fallen 25.6% in the first quarter. In 2015, Pershing Square suffered the “worst year” in its history, losing 20.5%.
Ackman’s returns this year have been dragged down mostly by Valeant’s massive decline. Ackman is the largest hedge fund shareholder, with more than 30.71 million shares, or a 9% stake.
Since Ackman disclosed a position in the first quarter of 2015, his fund’s losses on his Valeant investment are estimated at north of $2.5 billion.
Valeant’s stock got hit hard in March after the company reported fourth-quarter earnings results that fell below analysts’ expectations, and it cut its revenue forecast for the year. Just a week later, Ackman joined Valeant’s board. The board also said it would be searching for a new CEO, replacing Michael Pearson.
It’s been a tough run for Valeant, which has been sliding since late 2015 because of scrutiny in Washington, D.C., over drug-price increases and accusations from a short seller. Just last month, the company confirmed that it was part of several ongoing investigations.
This week, Valeant said its ad hoc committee has completed its internal review and found no additional issues beyond the $58 million misstatement that forced the company to delay its 10-K filing.
Ackman, a well-known activist investor, makes large, concentrated bets in a handful of companies. This year, many of his long positions have dropped, while his only short bet, Herbalife, has made gains.
Here’s a rundown of how his stock holdings have performed in the first quarter:
Valeant (VRX): -74%Platform (PAH): -32.9%Fannie Mae (FNMA): -14.63%Freddie Mac (FMCC): -17.28%Canadian Pacific (CP): +3.99%Howard Hughes (HHC):-6.42%Restaurant Brands International (QSR): +3.93%Air Products & Chemicals (APD): +10.71%Zoetis (ZTS): -7.49%Mondelez (MDLZ): -10.53%
Meanwhile, Herbalife, a multilevel marketer that sells weight-loss shakes, has climbed more than 14% in the first quarter.
Ackman has been betting against the company since 2012 on the belief that it’s operating a “pyramid scheme” that preys upon poor people. Herbalife has denied his allegations.