During a recent interview with Forbes, Bill Ackman’s discussed his investment philosophy which revolves around identifying businesses that function as “growth royalties” or “annuities”—companies that generate durable, predictable cash flows with minimal capital investment. As he explains, “The value of a financial asset is the present value of the cash it generates over its life.”
This foundational principle drives his focus on businesses that can endure and grow indefinitely, requiring investors to “predict those cash flows” with confidence. Ackman’s approach is highly selective, as he notes, “There aren’t that many of them. So that’s why we own such few companies.”
The essence of Ackman’s strategy lies in finding businesses that operate like toll roads, collecting a fee for their role in facilitating transactions or delivering demand without bearing the burden of capital expenditure.
He cites examples like asset management, where “you can get paid a fee off a base of assets of other people’s money.” Similarly, he highlights franchise models such as Tim Hortons, where the parent company earns “a royalty on every coffee and donuts” sold by franchisees who shoulder the capital costs.
Universal Music and Hilton fit this mold, too, as they collect royalties on music consumption and hotel stays while others finance the infrastructure.
Ackman’s framework extends to modern platform businesses like Uber, which might not immediately strike investors as traditional annuities. Yet, he argues, “Uber is precisely that, right? They don’t pay for the cars and they don’t do the driving, right? They have a system, they’ve got a platform, they’ve got a user interface, and they aggregate all that demand, and then they get a royalty, let’s call it 20% of the ride in exchange for delivering the demand.” This model, if sustainable, represents “an amazing business” because it combines scalability with minimal capital intensity.
The critical challenge, as Ackman acknowledges, is determining which of these royalties will endure. “The key is predicting which of these royalties will endure. And that’s a more complicated question.”
This uncertainty explains his disciplined approach to portfolio concentration. “One or two if we’re lucky. Yes. But that’s enough.” For Ackman, patience and selectivity are paramount.
His perspective highlights – the best businesses often operate behind the scenes, collecting small, recurring fees while others do the heavy lifting. Whether it’s a coffee chain, a music label, or a ride-hailing platform, the common thread is a durable competitive advantage that allows for perpetual cash generation.
You can watch part of the interview here:
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