Pershing Square invests $900m in Howard Hughes as Ackman chases Berkshire dream
The hedge fund behind Pershing Square Holdings (PSH ) has invested another $900m (£673m) into real estate business Howard Hughes as manager Bill Ackman takes a step closer to creating a ‘modern-day Berkshire Hathaway’.
The activist manager of PSH, a £10bn London-listed investment company which owns mostly North American stocks, has agreed to purchase 9m shares in Texas real estate developer Howard Hughes to support the group’s ‘strategic expansion’.
The investment will come mostly from Ackman’s Pershing Square Capital Management, the asset management firm which runs PSH.
The $100 per share paid by Pershing represents a 48% premium to Friday’s closing price for the New York-listed company, and takes Pershing Square’s stake to 46.9%.
Under the deal, Howard Hughes will pay Pershing Square a quarterly base fee of $3.75m and a management fee based on growth in its market capitalisation above the rate of inflation – an arrangement seen as a softening of fees versus the original proposal.
Pershing Square Holdings, the investment company, will maintain its around 10% position in Howard Hughes – and see management fees relating to that position proportionately waived, to avoid double charging – but will not make a fresh investment.
In a stock exchange statement in the US yesterday, Howard Hughes said the investment will allow it to become a ‘diversified holding company by acquiring controlling stakes in high-quality, durable-growth public and private operating companies’, putting into action Ackman’s plan to create a ‘modern-day Berkshire Hathaway’, which he set out in January.
Ackman wants to use Howard Hughes to mimic the blueprint of Berkshire Hathaway, which made the fortune of veteran investor Warren Buffett, who is nicknamed the ‘Sage of Omaha’ thanks to his success in creating a trillion-dollar conglomerate.
This represents a deviation from Ackman’s typical gameplan of buying minority stakes in listed companies and could, if all goes to plan, see Pershing Square tap into Howard Hughes’ substantial balance sheet and cashflows to transform it into a large financial group.
In an interview with CNBC yesterday, Ackman said it was ‘highly likely that we will build or buy an insurance company’ – echoing Berkshire’s ownership of Geico – and described Buffett as ‘one of my most important heroes, certainty in business and I would say in life’.
The news of Ackman’s plan comes after Buffett, 94, announced at the weekend that he would retire as chief executive of Berkshire Hathaway at the end of the year.
‘Superb platform’
The enlarged stake has brought with it a new title for Ackman, who is now executive chair of the Howard Hughes board of directors, while Pershing Square’s chief investment officer Ryan Israel will become Howard Hughes’ chief investment officer.
Howard Hughes’ core property business will continue to be run by the same management team.
‘As part of the transaction, the entire Pershing Square organisation will now be available to Howard Hughes to support the company’s transformation by providing investment, advisory, and other ancillary services, including corporate development, transaction execution, and capital markets assistance,’ a statement said.
‘Pershing Square will also assist Howard Hughes in identifying and hedging macro-related risks.’
Ackman said Howard Hughes had built ‘substantial value for shareholders in recent years that has largely gone unrecognised due to the high cost of capital that the market assigns to the company in light of its pure-play exposure to real estate development and community creation’.
He said the group was a ‘superb platform [for] building a faster-growing, high-returning holding company that will acquire control of companies that meet Pershing Square’s criteria for business quality and durable growth’.
Ackman has a long history with Howard Hughes, having invested in what was then shopping centre operator General Growth Properties as it went bankrupt during the 2008 financial crisis.
With Ackman as chair, the non-retail assets were spun out as Howard Hughes in 2010, with the company named after the aviation and business mogul who had originally owned the residential communities in the 1920s.
Poor performance by Howard Hughes’ shares prompted Ackman to draw up plans to take it private last year, but this was thwarted by other shareholders, leading him to create a new proposal to make it a holding company for other businesses.
He said previously that Pershing Square ‘intends to hold Howard Hughes stock forever’. It is PSH’s sixth largest holding, at 10.1% of the closed-end fund, according to the latest Deutsche Numis data.
Shares in Pershing Square were largely unmoved on the announcement and continue to trade at a wide 34% discount to net asset value (NAV). The value of the value of the portfolio has risen 12.8% over the past 12 months, while the shares are up 7.8%.
