In a single day, the largest investors in Valeant Pharmaceuticals International Inc. lost billions of dollars as a plunging share price halved the value of their holdings.
For Bill Ackman, it was an excruciating moment: On paper, the high-profile activist investor lost approximately $1-billion (U.S.).
In an e-mail to his investors, Mr. Ackman acknowledged that Valeant's statements and behaviour had created "enormous investor fear" that led to a "total" loss of confidence.
He vowed that his firm, Pershing Square Capital Management LP, would take a more "proactive" role at Valeant in order to "protect and maximize our investment."
Earlier this month, a Pershing Square executive joined Valeant's board. Mr. Ackman maintains that Valeant's stock price – down more than 85 per cent since its peak in August – doesn't reflect the underlying value of the business. According to a regulatory filing on March 9, Pershing Square holds a 9-per-cent stake in the firm, which represents an increase in its holdings since the start of the year.
Pershing Square wasn't the only hedge fund in a world of pain on Tuesday thanks to Valeant. Paulson & Co., the New York-based hedge fund run by John Paulson, is a major Valeant shareholder, as is ValueAct Capital of San Francisco. A spokesman for Paulson & Co. declined to comment.
Other large institutional shareholders in the company include investment managers Ruane Cuniff & Goldfarb, T. Rowe Price, and BlackRock. The biggest Canadian shareholder is Toronto-Dominion Bank, which holds a 2-per-cent share in Valeant, according to a filing from the end of 2015.
Now these investors face the eternal conundrum: Whether to stick with an investment that has caused them enormous grief in the hope of paring their losses, or whether to exit and avoid the possibility of worse damage ahead.
For Mr. Ackman, there is little chance he will abandon his investment now.
"His problem is that he staked his reputation on this," said one hedge-fund manager in New York who spoke on condition of anonymity. "He caused himself much more damage pounding the table" in support of Valeant and its management in recent months. "Now, the only way out of this is to sell the company."