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How Bill Ackman Turned a Lost Proxy Battle Into $1.2 Billion – And Earned His First Performance Fees in Years

Pershing Square cashed out of its ADP investment, guaranteeing big gains.

When Pershing Square CEO Bill Ackman sold out of his investment in ADP last month, he crystalized his first performance fee in years.

No matter what happens in the market — or the rest of its portfolio — Pershing Square will be pocketing a $60 million performance fee this year from the co-investment fund he raised to invest in ADP, according to Institutional Investor’s calculations. It will be the first year since 2014 that the firm is guaranteed to earn a performance fee.

Pershing Square, which announced the exit from ADP on Monday, also pocketed $1.2 billion in stock gains on the two-year investment, which was held in both the co-investment vehicle and Pershing Square’s hedge funds, according to an individual familiar with the matter. 

The ADP gains were hard won, and a testament to Ackman’s conviction as an activist investor, said Ken Squire, the founder of 13DMonitor, which tracks activist investments.

When Ackman took an 8.3 percent activist stake in ADP two years ago, the human resources software company and its allies went on the warpath immediately. ADP CEO Carlos Rodriguez said Ackman reminded him of a “spoiled brat,” and hedge fund manager Leon Cooperman called Ackman “foolish” for targeting such a beloved company.

ADP’s media campaign against Ackman, whose reputation was still smarting from his wrongheaded investment in tarnished drug company Valeant Pharmaceuticals, took its toll. By November of 2017, Ackman had lost his proxy campaign to install three new directors, including himself. 

But in the end, all the turmoil did not matter. He and Rodriguez reconciled over a four-hour dinner at Marea on Central Park South. And soon changes ADP management made in response to the issues raised by Ackman during the proxy battle caused the stock to soar, turning the investment into a big winner for Ackman.

“He lost the proxy fight, and stayed active behind the scenes,” says Squire, explaining how Ackman’s conviction separates him from “a lot of people who call themselves activists.”

Squire says he thinks Ackman “would have started another proxy fight if he needed to.”

The ADP gains in the main hedge funds will contribute to Pershing Square’s efforts in hitting its high-water mark — but they can’t guarantee it. (All the funds except publicly traded Pershing Square Holdings have already hit that milestone, but they still have to hold onto the gains until year end to earn the fee.) 

That’s not the case for about $321 million of that profit that accrued to the co-investment vehicle Ackman had launched to invest solely in ADP. That fund gained 49.7 percent, or 22.1 percent annualized over the two years of the fund’s existence, it disclosed in a letter to those investors.

“At the time of our exit, almost exactly two years from the inception of [Pershing Square VI], ADP’s stock price had increased to $167 per share,” Ackman wrote those investors Monday. The Standard & Poor’s 500 stock index had gained only 25 percent during the same time, he said. The purchase price for that fund was $114.76 per share, including the cost of options.

That fund also provided some much-needed incentive fees for Pershing Square. Pershing Square VI required the ADP investment to meet a hurdle rate of 10 percent before investors would have to pay a 20 percent incentive fee — considered high by co-investment standards. 

The $500 million original investment was worth $821.8 million at the end of July, according to Pershing Square. That would translate into about $60 million in performance fees for Pershing Square. 

In his initial presentation, made in August of 2017, Ackman argued that margins could improve in each of ADP’s business segments, which would lead earnings per share and the stock price to double from current levels in less than four years. By June of 2021, he estimated the stock could rise to $221 to $225.

Ackman didn’t wait to see if that would materialize and sold out of ADP and returned capital to those investors earlier than anticipated. In his letter, he said “believed an exit now would allow us to maximize the risk-adjusted returns for PSVI investors.”

The exit also allows Ackman to charge the incentive fees.

The timing was fortuitous, as the stock market began reeling during the first few days of August.

Last year, ADP accounted for 5.5 percentage points of returns for Pershing Square Holdings, the second-biggest contributor after Chipotle. This year, it slipped to third by March 19, for 3.5 percent. In part, that’s because Pershing Square’s main funds began selling down the stake in ADP — much of it purchased through derivatives — last summer.  At the end of the second quarter, ADP shares accounted for 10 percent of Pershing Square’s portfolio.

Meanwhile, in another investment, Ackman seems to have decided not to fight what observers say privately appeared to be a losing battle. 

In its press release Monday, Pershing Square also said that it had sold out of United Technologies, whose recently announced decision to merge with Raytheon he opposed. On June 9, Ackman wrote a letter to United Technologies urging it to cancel the deal. Pershing Square said it sold its shares on June 10.

Pershing Square also said it had a new, undisclosed investment that represents 12 percent of its fund’s net asset value.

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