“One of the best hedge fund trades of all time” 

According to Investopedia, Bill Ackman’s investment in General Growth Properties will go down as “one of the best hedge fund trades of all time”, turning $60 million into an astonishing $1.2 billion.  

General Growth Properties (GGP) was a renowned mall operator in America. At their core, they were a real estate company relying on debt and mortgages to expand and survive.  The management was aggressive with its credit, utilising an extraordinary number of short-term loans to fund new malls, and using those malls as collateral to borrow even more money. When the devastating financial crisis of 2008 hit, it was an uphill battle for the company to refinance loans lenders were unwilling to replace. A debt of approximately $27 billion was haunting shareholders, and, thus, GGP’s share price quickly dropped 20 times in value: it plunged from $60 to $0.34, rendering the stocks almost worthless. Default seemed inevitable, and GGP’s governing board of directors were getting ready for the dreaded Chapter 7 bankruptcy, where all stock is wiped out, and assets liquidated to pay off debt.

Yet, this dying company appeared, to an opportunist named Bill Ackman, as a potential source of unexploited wealth. Ackman disagreed that the company’s bankruptcy was inevitable, since the malls’ net operating income had been increasing every year; the only obstacle was their inability to refinance the debt they were in, suggesting that the market, rather than GGP’s model, put them in this situation.

Bill Ackman was an adherent of an investment strategy known as ‘activist investing’, which involves finding a company with a great business model that requires some sort of, preferably minor, change to unlock the value buried beneath the falling stock. Ackman possesses one of the key traits of a successful activist investor: he does not exclusively hunt for cheap companies that trade below their intrinsic value with a Graham style approach but requires there to be a solid moat protecting the company.   

To get GGP back on track, Ackman claimed that it would be better if the company were to file for bankruptcy under the conditions of Chapter 11. The key difference between Chapter 11 and a standard bankruptcy is that shareholders would retain their shares, and together they could restructure the company’s debt. GGP accepted his idea, and the company filed for a Chapter 11 bankruptcy. They successfully persuaded a judge to grant them the right to do so by proving that their assets were worth more than their liabilities before the crisis, and demonstrating that this would still be the case once the crisis was over. Thus, the company’s core value was not in doubt, it only needed time to realise it. GGP went on to restructure its debt by extending the maturity dates of their loans, allowing the company maintain ownership of its real estate, and shareholders to maintain ownership of their stocks. After the restructuring, the stock price rose from $0.30 to $1, and today GGP continues to operate. Indeed, they have increased their net profit margins, and paid off most of their existing debt.  

What can retail investors learn from this? 

1. Ackman had a meticulous understanding of real estate, having worked for his father’s company, which supplied mortgages to real estate developers and investors. Therefore, his lateral idea to file for bankruptcy under the conditions of chapter 11 stemmed from his thorough understanding of real estate and methods of managing excessive amounts of debt.  
2. The best ideas are those nobody else believes in. When Ackman announced his intention to acquire a stake in a company about to file for bankruptcy, many of his clients were warned him that he would lose his money. Yet, Ackman nevertheless chose to invest $60 million, confident in his understanding of investments.
3. Quality, Quality, Quality! Whilst the retail investor does not have the capability to sway management, they can pick out companies which have historically generated consistent cash flows, good management and an underlying competitive advantage.