If at first you don’t succeed, start another fund

By Liana B. Baker

NEW YORK (BestGrowthStock) – For William Ackman his $7 billion Pershing Square Capital Management is something of a mulligan — a second chance that he made work.

The first hedge fund Ackman managed, the now defunct Gotham Partners, ran aground some eight years ago, in large part because of an ill-fated investment in golf courses.

Not much remains of Ackman’s first foray into hedge funds. The former Hershey, Pennsylvania, headquarters of Gotham Golf Corp, the investment that would be Gotham Partners’ undoing, is now home to Cocoa Couture, a clothing store that bills itself as “the sweetest dress shop in Central Pennsylvania.”

The building sat empty for a few years while Ackman and his former business partner David Berkowitz wound down Gotham Partners by selling off assets to repay investors.

For Ackman, who had grown Gotham Partners from $3 million to $300 million in less than a decade, taking the fund apart was a “terrible, difficult embarrassment,” says Ackman’s friend and former Gotham Partners investor, Whitney Tilson, who now manages his own investment fund T2 Partners.

Ackman and Berkowitz, who were classmates at Harvard Business School, started Gotham Partners in 1992. Early on the fund did well, often posting double-digit returns.

But then the managers made the fateful mistake of buying a controlling stake in a money-losing golf course operator. Ackman and Berkowitz rebranded the company Gotham Golf and it began piling up debt in order to acquire additional courses.


To get out from all that crushing debt, Ackman decided to engineer a merger between Gotham Golf and a cash-rich real estate company he also had a controlling stake in. The idea behind the merger was to use the cash on First Union Real Estate Equity & Mortgage Investments’ balance sheet to bail out the struggling golf business and repay the debts.

But in 2002, a New York judge ruled against the merger and in favor of First Union’s minority shareholders who argued they were getting the short-end of the stick. The judge sided with those shareholders who would have gotten little or no cash from the deal.

With the merger on ice and Gotham Golf on the brink, investors started asking for their money back from Gotham Partners.

Ackman then faced what Tilson calls a “a confluence of difficult things that all happened at once.”

While Ackman was moving to close down Gotham Partners, state and federal regulators began looking into allegations that the hedge fund used research reports to influence the price of stocks it owned. The investigation went nowhere. But at the time it was another black eye for Ackman.

Ultimately, an appellate court overturned the judge’s ruling blocking Gotham Golf’s merger with First Union. But it was too late.

“It was very instructive in many ways,” says Tilson. “(Ackman) learned lessons from this.”

He said Ackman’s Pershing Square steers clear of illiquid and speculative investments.

Back in Hershey, a huge golf net still sits behind the dress shop on East Chocolate Avenue, abandoned by its former tenants. The store’s general manager Joshua Johnson says he left it standing because it would have been too costly to take down.

In the summer, Johnson puts out golf clubs so customers waiting to have their clothes fitted can hit balls into the net. In some ways it seems, Gotham Golf still lingers on.

(Reporting by Liana B. Baker; Editing by Matthew Goldstein, Jim Impoco and Claudia Parsons)

If at first you don’t succeed, start another fund