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Bill Ackman is one of the best hedge fund managers of this century.

Ackman's firm, Pershing Square, has outperformed the market by a substantial margin after fees since 2004. Just look at this chart:

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But when you hear the term 'hedge fund manager', you probably think of someone who buys a stock and quickly flips it for a profit.

That's not Ackman's approach.

In fact, his investment philosophy is more similar to someone who buys and operates businesses than it is to a Wall Street trader.

When asked about how his firm trades, he said:

"We’re not a trader at all. We don’t trade. We buy a stake in the business. We get actively involved in the business. We work to make the business more valuable."

I recently read through several shareholder letters to better understand his investment philosophy. Here's what I learned about his playbook:

• Focus on high-quality businesses with limited downside
• Emphasize predictable, recurring cash-flow
• Equity portfolio is made up of just 8 to 12 core holdings
• Adds only 1 to 3 new core positions per year
• On certain occasions, Pershing takes an activist position in a company that could be run better

What kind of portfolio does this strategy produce? Here are Pershing's holdings as of June 30, 2024:

• Alphabet (Google) 19.99% of the portfolio
• Hilton 18.5%
• Chipotle 17.09%
• Restaurant Brands International 16.7%
• Canadian Pacific Railway 11.16%
• Howard Hughes 11.13%
• Brookfield 2.70%
• Nike 2.17%
• Seaport Entertainment 0.62%

This makes me think of Warren Buffet's strategy at Berkshire Hathaway. Both firms focus on long-term holdings, and a concentrated portfolio.

Ackman actually calls himself a "Warren Buffett devotee" and followed Buffett's investing advice years before he started his own fund. In fact, take a look at young, relatively unknown money manager Bill Ackman seated behind Warren and Charlie at the Buffett Essays Symposium in 1996.

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Ackman and Buffett both talk about ignoring the short-term fluctuations of the stock market.

The structure of their investment vehicles allows them to operate on a long-term basis, thanks to a concept called permanent capital.

Here's how Ackman described it in his 2023 letter to shareholders;

Pershing Square is one of only a few investment managers that operates with permanent capital. In a world where our competition is beholden to annual, quarterly, monthly and even daily redemption terms, the stability of our capital base is one of our most important competitive advantages. It enables us to take the long view and to be opportunistic during market panics, a time when other investors typically need to raise capital by selling assets to meet the redemptions that inevitably come with market volatility. Permanent capital also allows us to make long-term commitments to management teams which have enabled us to recruit some of the most outstanding CEOs in the world to our portfolio companies.

Pershing is able to keep a long-term outlook by:

• Keeping leverage low - they issue high-rated bonds totaling no more than 15% to 20% of total assets.
• Managing liquidity by investing only in well-capitalized, liquid public companies.
• Using a close-ended fund structure to eliminate the risk of mass redemptions during a market panic.

One of my main takeaways from reading Ackman's letters is that the fund structure is just as important as your investment thesis. Without the structure to support a long-term strategy, Ackman wouldn't be able to execute that strategy.

While many business owners say they have a long-term outlook, they don't actually structure their business in a way that incentivizes managers and employees to think long-term.

Aligning structure with desired outcomes is critical.

Key Takeaways:

• Limit your downside risk
• Limit leverage so that you can survive economic shocks
• Make sure panic redemptions can't wipe you out
• Align the structure of your business with the desired outcomes

🔑 Three interest deals

Every week I look at hundreds of deals. I'm going to start sharing a few interesting deals with you including my notes. If you read these weekly, you will get better at identifying good deals...

Don't just skim this section. Click the links to the listing for more information and connect with the brokers if you like the deals. I don't get paid for this, but I think the best way to learn is to dig in!

Deal #1: A Boring HVAC Company

Let's start with a good old-fashioned boring business: An HVAC company in the Dallas area. The numbers:

• Asking Price $3.2 million
• Revenue $2.26 million
• Cash flow $861k
• Multiple 3.71x cash flow

What I like: Business has been around for 24 years and the current owner is selling to retire. This is the ideal setup. I want to buy a business that's been around long enough to have weathered several economic storms.

What I don't like: Listing says they do most of their business through home warranty service providers, so they may not have reliable marketing and customer acquisition methods in place. I'd want to ask questions to determine if the business is reliant on just one or two home warranty providers.

To explore: We don't know enough from the listing, but if this business has a meaningful construction-dependent piece I would immediately pass on the deal. Service businesses are more reliable, and have higher gross margins. Also, is there a team that can run the business when the owner retires? Or is the owner open to sticking around for a couple years while you learn the ropes?

​View the listing here.
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Deal #2: A fallen VC startup

One category where I've bought business is: VC-backed companies that failed to hit aggressive growth goals, and now need to be sold. If you have any peers who have raised tens of millions and are looking for an exit please reach out to me. They don't need to be profitable for us to buy them.

From the listing: This 8+ year old award-winning business began as a Silicon Valley funded startup, was acquired by an angel investor in the company and run on the side, and is now available for purchase.

The numbers:

• Asking Price $1.05 million
• Revenue $465k
• EBITDA: $265k
• Multiple 3.96x EBITDA

What I like: 2k paying users and over $1m in annual revenue implies a high-value customer (average revenue per user above $500, which is amazing for a mobile app).

What I don't like: 8 years is an eternity in tech. I'd wonder if the tech is outdated and the business relies on non-tech savvy users who are clinging on to the app. If that's the case, future growth might be impossible without a huge investment into the tech.

To explore: you'll need a full technology audit. Understand the growth levers. What is working for them today? And what's the churn. If it's very high, you may never be able to grow the business.

​View the listing here.

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Deal #3: A Trucking Business

It's rare to have a chance to buy a business that's been operating for 52 years.

A profitable trucking business founded in the Midwest in 1972 is up for sale. The figures:

• Asking Price $14.9 million
• Revenue $14.5 million
• Cash Flow: $4.9 million
• Multiple 3.04x cash flow

What I like: The age of the business is a great sign. Any company that's been around for over 50 years is doing something right and likely (hopefully) has long-established systems and well-tenured employees.

What I don't like: The financials are from 2022, but the listing is still active with no 2023 update. Did something bad happen in 2023? Or is the listing simply outdated? Those would be my very first questions.

The logistics industry can be a nightmare if you don't know it well. Very cyclical. Many segments have low margins. Highly dependent on labor. Proceed with caution.

View the listing here.

Buying a business is hard.

Which is why I've started working on a longer comprehensive email course on How to Buy a Business. It's going to be a paid service. If you're interested in learning about it when it launches, click here and drop your email to be the first to find out.

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🔑 One interesting read

Why do investment funds die?

This piece, The Death of a Venture Fund, is a detailed dive into the reasons venture funds die. But its lessons also apply to PE firms, hedge funds, and other types of firms that make investments.

Basically, funds are more incentivized to go for bigger outcomes as their assets under management figure increases. But at the same time, funds aren't incentivized to take on the wild risks that made venture a successful asset class to begin with.

More money has been flowing into Centure Capital and changing investor behavior...

​Read about it in this story

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👉💰💰💰💰💰 Yes, I LOVED IT

👉💰💰💰 It’s ok​

👉 Not great, try again​

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have a great week,

Sieva

Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.

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