Inside Ackman’s $4 Billion Gamble

Bill Ackman in 2016
Photo by Bryan Bedder/Getty Images for The New York Times
William D. Cohan
June 16, 2021

For years, Bill Ackman wanted to be considered the Warren Buffett of his generation. On the face of it, the comparison seemed absurd. Buffett, after all, was the avuncular and frugal midwestern investing oracle whose portfolio reflected blue-chip totems of Rockwellian Americana—Coca-Cola, Geico, Kraft Heinz, Bank of America, GE, Goldman Sachs and, for a time, the Graham family’s Washington Post. Ackman, for his part, was a bombastic New Yorker famous in the public imagination for chest-thumping feuds with fellow heavyweight hedge fund peers like Dan Loeb and Carl Icahn.

Nevertheless, over the years, Ackman insisted on the Buffett analogy. In a 2016 deposition, he said he structured Pershing Square Capital, the hedge fund he founded in 2004, to be “similar to Berkshire Hathaway in terms of approach.” On a podcast last year, Ackman gushed that a major part of his investing education came from “reading everything Buffett’s written,” before recounting at length Buffett’s visit to Harvard Business School, Ackman’s alma mater, years earlier.

I’ve spoken to Ackman a number of times over the past decade, including during the two nadirs of his otherwise ascendant career, and at every point the conversation has returned to Buffett. The first time we discussed his Berkshire-sized ambitions was in 2013, shortly after Ackman found himself in a pitched battle with Icahn and Loeb over the fate of Herbalife, the publicly traded vitamin supplement company that Ackman believed was a fraud. Ackman bet more than a billion dollars of his own and his investors’ money that Herbalife stock would go to zero. (Our conversation came immediately after his famous brawl with Icahn on CNBC, which many consider among the greatest moments in business television history.) Of course, Icahn and Loeb got the better of Ackman on that one. They made gobs of money on Herbalife while Ackman lost nearly $1 billion.

Buffett was still Ackman’s north star when we spoke again, in October 2016, after he had perfected his $4 billion loss in Valeant, a pharmaceutical company in which Pershing Square Capital had bought a stake before it imploded. Ackman was on the ropes: Investors were fleeing Pershing Square and there was plenty of talk on Wall Street about how he might have to close up shop. But when I called Ackman for a story I was writing, which ran under the headline “Is Bill Ackman Toast?,” he told me that my previous reporting had “misunderstood” him. “I’m a confident person,” he explained. “But I’m also a purely economically rational person and I still have the same ambitions I had when I spoke to you years ago, which is I do want to have one of the best records ever in the investment industry, like Mr. Buffett. This is obviously a setback, but Buffett’s got a 50-year track record. I’ve got a 12-year track record. I’ve got 38 years to catch him.”

Now, at 55 years old and with a new wife and daughter, Ackman may finally have achieved his ambition. He’s nowhere near Buffett when it comes to his personal wealth—Forbes pins Ackman’s net worth at around $3 billion; Buffett is topping out at around $107 billion these days—but Buffett has 45 years of compounding on him, and Ackman has had a helluva run in the last three years. The net performance of Pershing Square Holdings Ltd., the publicly traded investment fund that mirrors the performance of Pershing Square Capital, was up 70.2 percent in 2020, after an increase of 58.1 percent in 2019. Ackman, who is up another 10 percent so far this year, now manages around $17.6 billion in assets.

Ackman’s 2020 performance also includes perhaps the greatest trade of all time. In March, as the pandemic was slowly but surely engulfing the globe, Ackman turned a $27 million premium to buy credit default swaps—essentially betting that interest rates would spike and the credit markets would start to freeze up as the the Covid-19 crisis became fully appreciated—into a profit of $2.6 billion in three weeks … and then into profit of around another $1 billion when he plowed some of his windfall back into the stock market as the Federal Reserve agreed to bail out the bond market, sending both bonds and equities to the dizzying heights they enjoy today. On an internal rate of return basis, which accounts for the time value of money, it was a world-historical feat of financial alchemy.

But it’s perhaps his most recent deal, concocted involving his $4 billion SPAC, Pershing Square Tontine Holdings, the largest SPAC in the Great SPAC Craze of 2020 and the first quarter of 2021, that may have cemented him in the pantheon of legendary investors.

In July 2020, Ackman raised $4 billion for Pershing Square Tontine Holdings to buy a meaningful minority stake in another huge company. According to a source close to the situation, he had hoped to convince Mike Bloomberg to sell him a big stake in his privately held Bloomberg L.P. and then convince the former New York City mayor and erstwhile presidential candidate to take his company public by merging it into Tontine Holdings. (Bloomberg’s people have previously told me this ain’t happening.) But that obviously went nowhere. It’s also been reported that Ackman was also interested in AirBnb and Stripe, the large payment processing company, but nothing materialized either with two of the largest private unicorns in existence. (AirBnB eventually went public in November.)

When Ackman created Tontine Holdings, he was intent on refining the more grotesque and self-indulgent aspects of SPACs. Ackman declined to take, for a minuscule sum, 20 percent of the Tontine Holdings equity for himself. He eliminated all compensation for the sponsor. He also made some changes to the warrant structure to encourage warrant holders to stay in, and whittled the fees typically paid to the SPAC underwriters from 5.5 percent to 1.9 percent. He also included a slew of minority underwriters—predominantly Black, Hispanic, and women-owned firms—and gave them $18 million in fees for their work.

But the one thing Ackman could not change about SPACs was the time clock. One of the strict rules of SPACs is that sponsors have two years to find a private company to merge with and take public. Even though Tontine Holdings had not yet reached its first birthday, Ackman was feeling the relentless pressure of doing a deal from the investors who had ponied up the $4 billion. So when one of Ackman’s Tontine board members introduced him last fall to Vivendi, the majority owner of Universal Music Group, Ackman began to run the numbers. UMG, of course, is the largest music business in the world, with nearly $9 billion in annual revenue. Conversations accelerated in recent months and Ackman quickly cut a deal—a final announcement is said to be forthcoming next week—that allows Tontine to use its $4 billion to buy a 10 percent stake in Universal Music, at what Ackman believes is an attractive $42 billion valuation. According to the person familiar with the situation, Ackman believes he’s buying an amazing business at a discounted price, given that Vivendi is expected to distribute its 80 percent stake in Universal to Vivendi shareholders, making Universal a public company. He even thinks Universal may be the best business in his entire portfolio. Time will tell. His SPAC allowed him to buy into the private Universal—something he is not allowed to do with Pershing Square, which can only invest in public companies.

But then things with Ackman and his SPAC get interesting—and complicated. As part of the Universal deal, Ackman is investing another $1.6 billion into Tontine. Some $100 million of that $1.6 billion will be invested in Universal, along with the other $4 billion, giving Tontine a 10 percent stake, which will then be spun off to Tontine’s shareholders once Universal is public. Ackman is calling the remaining assets a Mini Me Pershing Square Tontine, a shell of a company listed on the New York Stock Exchange with $1.5 billion in cash to spend on pretty much anything he wants to buy, without facing the two-year clock. He also has an option to invest another $1.4 billion into the shell company if it’s needed at the time he wants to do a deal. Most of the time pressure is off. (The NYSE doesn’t love corporate shells stuffed with cash sitting on the exchange forever.)

Finally, Ackman created a special purpose acquisition rights company, which he’s calling a SPARC (his wife didn’t like the name SPAR). This is the third and most creative leg of the new Ackman stool. The SPARC will give each Tontine investor who signs up for the Universal deal a tradeable right to buy into the SPARC. But no money will be put into the SPARC until Ackman has found the private whale he is looking for—he still has his eye on Bloomberg—and until the SEC has approved the registration statement for the new deal. He thinks the SPARC will have around $6.5 billion to use to buy another company when all is said and done, and on whatever time frame he wants.

Ackman’s SPARC, in other words, is the anti-SPAC. There are no warrants. There are no redemption rights. There is no need for additional capital from other institutional investors. There will be no underwriting fees, saving the SPARC hundreds of millions of dollars. Investors don’t have to tie up their money upfront and Ackman doesn’t have a gun to his head to make a deal. He hopes his SPARC will change the SPAC game.

Buffett doesn’t like SPACs, for what it’s worth, and he said so quite colorfully at his annual investor meeting in May. Somewhat ironically, Ackman doesn’t seem to like SPACs either, and that’s why he believes his latest concoction makes him more like Buffett than ever. He no longer has to run around like a maniac trying to find a company to buy before the SPAC clock runs out. Instead, like Buffett, he can wait for the phone to ring from companies wanting to sell themselves. He thinks every Wall Street banker will figure out that he’s got the cash sitting around waiting to be invested, and companies will flock to his doorstep, like they do with Buffett when they want to sell to a long-term investor.

One note of caution, in the meantime. Investors are still wary about all this: Since word leaked in early June about Ackman’s Universal deal, the Tontine stock is down about 10 percent, although it is still trading above its IPO price from July 2020. Ackman thinks investors are wrong and Tontine will soon be worth much, much more. But if Buffet has taught him anything, it’s that investing is all about the long game.