In his latest earnings call on Wednesday Bill Ackman discussed the reasons why Pershing Square is selling its stake in Berkshire Hathaway. Here’s an excerpt from the call:
With that when why don’t we talk about Berkshire? And Ryan, why don’t you update our investors on investment in Berkshire from inception and our decision to exit recently.
Sure. And may be to start with kind of taking in terms of how we thought about exiting and then rewinding well our initial thesis was, I think, we look at today’s environment just think about the high level of volatility and sort of as you talked about earlier in the call the dispersion of how stocks have performed this year. We think it’s a very different environment and we made the investment Berkshire a year ago. We continue to think Berkshire will be a strong investment over the longer term. But we also think the current environment means there may be more than typical opportunities for us to see very high returning investments. And so we wanted to make sure we had more cash to be able to move nimbly if those investments present themselves.
If you look back a year ago when we made our investment Berkshire, we really laid out a thesis that was threefold. The first is that the company has a high-quality portfolio of businesses across the insurance and industrial space and that the market had not appreciated that. Second that these businesses particularly the larger ones had a pretty meaningful opportunity to improve the profit margins relative to the levels that peers had operated at. And third, the Berkshire had a large cash position and we thought over time it would be able to achieve attractive returns by investing that cash and share repurchases marketable securities, transactions and business acquisitions. And since we made our investment in Berkshire, we think that the high-quality nature of its portfolio is really shown through. We also think it’s done a good job expanding operating margins particularly at its largest industrial asset, the Burlington Northern Railroad.
For example, if you look at the insurance business, float was able to grow to $130 billion which has grown 5% last year and it’s really incredible at the scale the Berkshire is dealing with. And at the same time they achieve that float at a negative cost which continues to be sort of industry-leading and just really unimaginable and then Burlington Northern, the operating ratio improved by 200 basis points. So I think really kind of our first and second thesis, those points have played out in relatively short order. We look at the third, the capital allocation, Berkshire did repurchase $5 billion worth of stock over the last year but in spite of that their cash is actually grown and they now have $20 billion more when we made the investment and that now approximates about a third of the company’s market value.
So we still remain optimistic that over time Berkshire will deploy its cash attractively, but we also think in the near term the most likely outcome where Berkshire would deploy the cash would be in an outcome in which there would be a number of very high returning opportunities that we could also invest in, which is why we thought it would be good to have the cash in case that opportunity were to present itself.
I think the other point I would make is the one advantage we have versus Berkshire, it’s just relative scale. Berkshire has the problem, if you will, of deploying one $130 billion of capital or some fraction of that number is still a very large number relative to the — it could be available in buying one equity at a time whereas by virtue of our much, much smaller size, today we have $10 billion of capital to invest. We can be much more nimble and so our view was generally we should take advantage of that nimbleness, preserve some extra liquidity in the event that prices get more attractive again.
You can read a transcript of the entire earnings call here: Pershing Square Holdings, Ltd. Q1 2020 Results – Earnings Call Transcript.
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