为什么 $PSUS 应享有相对 NAV 的溢价、$PS 应享有更高估值倍数｜Marlton 的 James Elbaor

James, how’s it going?

It’s going great, Andrew. Good to see you again.

I’m really excited for the conversation we’re going to have today. Before we get started, a reminder: nothing on this podcast is investing advice. There’s a full disclaimer in the show notes and at the very end of the podcast as well.

James, the company we’re going to talk about today is kind of two companies, but it’s the Pershing Square complex. They just IPO’d PSUS, which is the closed-end fund, and they just IPO’d alongside that PS, which is the Pershing management company overall. I’ll just pause there. We can talk about either piece of those, but you are the expert when it comes to the Pershing complex, so I’ll pause there and ask: What is the Pershing complex, and why are they so interesting right now?

When we first did the podcast with you, we discussed Pershing Square Holdings, which is a closed-end fund. It’s technically a U.K. investment trust that trades in London. I think what I want to mention about that investment, because I looked back, is that if you had invested in September 2022, when we did the podcast, from there to where we are now, it has compounded at a rate greater than the S&P 500, with the exception of the last 2 months into this year, where we’ve seen a pullback. So instead, you’re matching the S&P 500. You also had a free option on the fact that they could redomicile that business.

That closed-end fund sits out there. That discount is still trading in the mid-20s, so we still think that’s a great compounder and that it’s doing a fantastic job. But I did want to bring that up because I’m quite proud that, if people did listen to that, they did okay. But to each his own.

That’s all you hope for, right? They did well. I guess you can hope for better, but it is nice to be able to say, “Okay,” instead of, “There have certainly been some cases where, if people listened to that, they got their shirts ripped off and they’re looking under a bridge.”

Getting 19% annualized, I think, is fantastic. It’s funny when you say, “Hey, you did along the lines of the S&P 500,” and then you’re like, “Oh, the S&P has compounded at 20% per year for the past 3.5 years.” If you match that, it’s so easy to say, “Oh, you matched that.” It’s like, “Dude, 20% per year for 3 years is kind of legendary, right?” Anybody would take that.

I’m not saying that about Pershing in particular. I’m just saying, as managers, you’re ultimately benchmarked to indices. Sometimes it’s like, “Man, I’m just matching indices.” Then you step back and you’re like, “Well, the indices are running like 15% every year.” Yes, it’s a huge tailwind, but if you have any cash or any underexposure, if you’re more conservative than that—

Anyway, those are just the ramblings of somebody who watches the indexes go up every day.

No, all good. Let’s talk about where we are this year. This is already one of the largest financial launches in years. When Pershing IPO’d, they were talking about it being the 6th-largest IPO of the past decade and among the 20 largest IPOs in U.S. history at this point.

It’s 2 times larger. Pershing Square, at $5 billion, is 2 times larger than the current largest U.S. equity closed-end fund. Well, you can’t say that anymore because it is the U.S. equity closed-end fund. It is the largest.

I feel like the market is looking at this and treating it like a closed-end fund, but to me, Andrew, the scale, the structure, and just generally the franchise quality are unlike anything that you really see in the general retail market that these closed-end funds typically traffic in.

I think what investors are going to start to see that they aren’t seeing right now is that this is not going to be treated like a closed-end fund product from an asset manager. Rather, this is going to be treated much more like a holding company, just in the wrapper of a ’40 Act fund.

You’re going to see quarterly earnings calls, significantly greater reporting, and much greater corporate access to Bill and the team. I think it’s quite exciting in that respect.

You’re talking about PSUS right now, which is the closed-end fund. For people who tuned in for PS, we are going to talk about that in a minute.

But let me gently push back on what you just said. I want to push back in 2 ways. You say, “Hey, this is going to get treated like a holding company,” and we can talk about holding companies versus closed-end funds in a second. But my first pushback would be: I know a lot of holding companies— IAC, all of the Liberty complex, Cannae, and multiple others. All of them have varying degrees of different management teams, different management structures, incentive fees, and whatever else. But none of them trade at a premium, right?

So when you say, “Hey, I think PSUS is going to be a holding company versus a closed-end fund,” I’m not sure if it’s actually going to take full control of businesses or not. I can’t remember if Bill meant that—I just reviewed the first roadshow. He wasn’t talking about that, but maybe that would be the step from a closed-end fund to a holding company.

Even if I gave you that it’s going to be treated like a holding company, not a closed-end fund, every holding company trades at a discount. PIMCO is trading at about a 15% discount right now. That’s on the high end of holding companies. So my first question would be: if you get what you wish for, what’s the next step after that? Would it really trade at a premium?

Just to level-set for those who are unfamiliar with Marlton, we’re an investment firm. We focus on U.S. closed-end funds, U.K. investment trusts, and structurally discounted securities.

If I can toot your horn, you’ve done great work. I know the Pershing discussion we had was great work. I know you were instrumental in the Third Point London situation and the thing that became Mount Logan. I can’t say I was deep in the weeds on that deal, but I think it was going to be quite poor, and you guys were instrumental in pushing back and getting a lot more economics for shareholders. So you guys really specialize in this stuff.

Briefly about Logan Ridge and Mount Logan: when we were the activists there, shareholders received 110% of NAV in that deal. Much more typical deals are NAV-for-NAV deals, so you very rarely see a premium. We did push for that.

We do like the BC Partners people, run by Ted Goldthorpe and his team there, and we don’t have a real view on Mount Logan today. But I do think shareholders who were in Logan Ridge and then went into the merged entity, receiving 110% of NAV, was certainly fair. We would have liked more, but it was still fair.

You can take a look at Robinhood’s latest venture fund, which came out and is trading at a large premium now, too. I track all the big movers every day, and the other day I was like, “What is this?” RVI, the Robinhood Ventures Fund, was the best-performing stock in the entire market.

There are times when these entities do and will trade at premiums to NAV. Generally, they trade at discounts to NAV. I like to think of discounts very similarly to multiples. There will always be some type of compression on the multiple, or a multiple may not fully reflect the true economics of the business or the earnings power that you think the business is going to recognize.

I think the same thing happens with discounts. These trade at structural discounts. The issue is, how do we allocate capital? How does underlying NAV grow? You can think about the discount as if it is a multiple in that way: a greater discount is cheaper, while a smaller discount is more expensive, with more risk that you’re not going to see the underlying growth that you think you’re going to see in NAV. So that’s how we think about it.

That makes total sense. But let me push on that. I hear you on the greater and smaller discount, but again, you said, “Hey, I think PSUS is going to be treated like a holding company, not a closed-end fund.” Even if I agree with that, I would just come back to the fact that a 15% to 20% discount is not atypical for a holding company, especially one that is externally advised, right? A 2% management fee is what they’re paying.

So why do you think this will trade at a premium when, even if I grant you it’s a holding company, almost every holding company trades at a discount?

I would look at just generalized performance. We think this is going to trade much closer, on a base case, to a 9% discount, which is the peer average within U.S. equity closed-end funds.

Frankly, if you’re—I'm not trying to be a big cheerleader here—but I really believe that it should be much closer to a 4% discount, which is where Gabelli’s closed-end fund is trading right now. Gabelli’s closed-end fund is about a $2 billion closed-end fund, trades at a 4% discount to NAV, and has underperformed the S&P 500 since inception. Bill has outperformed.

I think maybe it’s a function of time, letting the market see this. You have to remember, PSUS still hasn’t even reported NAV. So we’re not even sure what’s in the portfolio yet. We’re not even sure what NAV is. I think there are a lot of catalysts to unfold there: what’s in the portfolio and how the portfolio has performed.

Once we get into a cadence of regular reporting, that discount is not going to be sitting at 17%. I just fundamentally don’t see it that way.

So what you’re saying is that, because their website has the weekly NAV, they’ve got $48.71 as the NAV right now, but we don’t know what’s in it. We don’t know what they’ve bought. I’ll bet it’s certainly going to mirror what Pershing Square Holdings in London has, but we don’t know how they’ve deployed the capital, how much is cash versus deployed, and all that type of stuff.

That’s right.

Yeah. Okay. Let me ask you—just quickly, let me go there. I mentioned PSH. PSUS is trading at a 17% discount to NAV. PSH, if I just pull up my little Bloomberg NAV thing, is now trading at a 32% discount to NAV.

I’m sure if I said either-or, you might say, “Hey, why make me choose between both?” But why would someone consider PSH? This isn’t investment advice, of course, but when you’re weighing the two against each other, what is the upside and downside? I think there’s that question, and we can also talk about the management fee, performance fee, and all that sort of stuff. But why one versus the other?

I would say, in the most practical way, there is an investor base that just cannot invest in PSH, which is trading in London, but can invest in PSUS because of where they’re domiciled and their tax considerations. Similarly, for example, Texas Teachers filed a disclosure regarding PSUS. They could not invest in PSH in London. They’re just not permitted to under their mandate.

Separately, you now have a whole investor base that can invest in PSUS. You have a much more European-centric investor base that can invest in Pershing Square Holdings in London. Pershing Square Holdings in London does pay a performance incentive, which you do not see in PSUS, but it has a significantly longer track record, in addition to a lot more flexibility to make investments that are more esoteric—something the 40 Act is much tighter on.

I think—you can correct me if I’m wrong. Yeah, let me just recap that real quick, Andrew. If you want—if I hate to make a reference like this—free-base Bill, if you want pure Bill and team, Pershing Square Holdings in London has significantly more of those characteristics.

PSUS is much more of a traditional 40 Act fund, but that will be different. You’re talking about a team that never does things the way they’ve always been done. They don’t follow the path that’s always been followed before them. They’re very much trailblazers and very much iconoclasts in that way.

I anticipate and feel that PSUS will be different from typical closed-end funds because that’s just the history of that team. But there are real-world 40 Act constraints there, so it will be slightly more constrained than the way PSH in London trades. Because of that, in Pershing Square Holdings in London, you’re going to pay the performance incentive there.

I’m going to come back to Pershing Square Holdings in London in a second, but I do want to ask you a question on the 40 Act. A big pitch that Bill has been making for the past several years for Pershing is, “Hey, you don’t just get our stock-picking skills and our concentrated holdings of the best businesses that we can find at reasonable prices and all this stuff. You get our hedge book.”

Bill made one of the best trades of all time. I mean, it’s funny when you say he made one of the best trades of all time. If you stop there, you would say, “Oh, which one of his trades are you talking about? Are you talking about GGP in bankruptcy?” But the one I was actually referring to was the COVID trade, right? The COVID hedging trade, where he says, “Hey, we made basically 100 times our capital on that.”

Then he makes the inflation trade in late 2020 through early 2022, where he makes 10 times his money. A big pitch for Pershing recently has been, “Hey, we’re not only going to get our stock-picking skills; we actually have a demonstrated track record. We’ve got those two, plus we’ve got the hedges we did during the GFC, which was like a 20-bagger.”

We’re saying that the next time there’s a big macro event, there’s a decent chance we’re going to see it ahead of time, hedge it, and make multiples of our money, right? Can they do that in the 40 Act fund, the PSUS fund?

Traditional closed-end funds do not do that type of activity. But I fully anticipate that there will be a creative way that Bill and the team will allow that vehicle to make trades like that.

I would just circle back, because otherwise I’m going to have to pontificate as to how they could go ahead and do that, and I don’t have the time to do that right here. But what I would say is, just to reiterate what you said, because I think it’s worth saying: we’re less than 30 days into trading.

We both agree, and I think most people would agree, that some of the greatest trades put on of all time are in this vehicle, and it’s trading at a 17% discount to NAV. I would then take a look at other vehicles, like IAC. Barry Diller is a fantastic, great capital allocator, but it also trades at a perpetual discount to NAV.

You’re consistently trying to allocate capital in the best possible way to create shareholder value. I think you’re in the super-early innings at a very wide discount on Pershing Square USA.

It’s funny: when I’ve talked to people about Ackman’s track record over, let’s just say, the past 10 years, a lot of them have said something along the lines of, “Oh, if you take out the COVID hedges, it doesn’t look as good.”

Look, I’m of two minds. I’m like, “Okay, I hear you. One trade.” But at the same time, we live in a scoreboard world, and he called his shot. I don’t know the numbers exactly off the top of my head, but if you said, “Hey, over the past 10 years he’s outperformed the S&P 500 with that, and without it he—I mean, he got a 100-bagger. So without it, okay, he’s in line with the S&P 500.” We live in a slugging-percentage world. You can’t take that out.

I don’t think it’s fair. I wouldn’t say it’s a silly argument. I understand the argument, but I do think it’s a little silly. People make the investments that they make.

If you go ahead and say, “Well, then I guess you have to take out General Growth,” I think you then have to go ahead and take out the fact that he created SPARC, or launched the largest SPAC of all time in Pershing Square Tontine.

You can cherry-pick, but someone’s history is their history in its entirety, and I think you have to look at it in its entirety.

If I can take a hit of my hypothetical bong and put us in a college dorm room for a second, while I agree with you, the reason I think about it is that there was one person I was talking to in late 2020. They were like, “You know what my best stock idea is? GameStop. I think this is a killer company. Earnings are going to go through the roof.” All this type of stuff.

Every piece of their thesis that they laid out was comically wrong. But GameStop had this massive short squeeze and all of this type of stuff. So, I don’t know if they held onto their position or not. It wasn’t someone I really talked to a lot, but if they had a track record and had held it, their track record would put everyone else’s track record to shame.

Wouldn’t everyone be like, “Well, yeah, but you were literally the monkey that landed on a lottery ticket”? I just keep that in my head all the time. I’m not saying that—but it is such an extreme hypothetical example. It illustrates the point very nicely.

Anything else on that after hitting that hypothetical bong, or do you want to—I'll dive back into PSH if you want to, unless you want to talk about anything there.

No, I think we’re good, but let’s talk about PSH, because PSH is actually really, really quite interesting. So, PSH, if I can just ask you about that real quick: That trades in London at a 33% discount, and I believe they have a little bit of leverage, which PSUS is good for. 40 Act companies can have leverage, but they obviously don’t have leverage yet. You can tell me if they’re going to have leverage or not.

If I just said, “Hey, strip aside—especially the mandate piece of it—PSH versus PSUS, which do you think is more attractive?”

Right now, I would say PSUS. We anticipate that PSUS will run slightly levered. For us, in the immediate term, given the comps for PSUS and where PSUS should trade at a 9% discount, and the fact that they’re just deploying capital now, I think that makes PSUS significantly more attractive than PSH.

We like PSH. We were in PSH. Full disclosure, we’re not in PSH at the moment. We are in PSUS, obviously. But for those who are in PSH, you have a bunch of positive catalysts happening there. The discount, at 30% plus, is historically wider than being at 25%, so we expect that could probably come in.

As PSUS and other assets outside of PSH grow, you’re going to get a fee rebate that grows at PSH, which is hugely accretive to those shareholders there. I think there are plenty of positive attributes there.

I also think that, realistically, what we have discovered from our time in London—and we do spend quite a bit of time there because of our UK investment trust exposure—is that the investor base in London does not really see or understand Bill in the way that American investors, both retail and institutional, see and understand Bill. Trying to pitch to the big allocators in London who invest in UK investment trusts, that pitch is much more difficult to get people comfortable with this American investor here in this UK part of the world than it is to get American investors comfortable with who Bill Ackman is.

I’m just laughing because the stereotypical British manager allocating capital wants to allocate to well-dressed, well-spoken, silver-haired managers. Bill—check, check, check—hits every one of those boxes. I understand that’s a stereotype. I’m laughing; I’m not trying to make fun, but Bill checks the boxes so hard. It’s just kind of funny. I guess American versus British.

Let me ask about the Pershing portfolio right now. The reason you’re in Pershing and you think it will trade at a premium over time, and Bill thinks it will trade at a premium and all this sort of stuff, is that they’re arguing Pershing is going to outperform. People will pay for that performance. Especially once you start putting non-recourse leverage onto something that’s generating alpha, my God, the sky’s the limit if that is true. The trick is always whether that is true and whether it’s leverable.

If I look at the Pershing portfolio right now—and I’m trying to find where I saved this, but I can’t find the fact sheet—they have great businesses, but Google, Amazon, and Meta are 3 of the positions, right? Those are 3 of the largest positions in the S&P 500. Those are 3 of the largest companies in the world. When you look at those, you might say, “Hey, great, he’s allocating to these great businesses, but how are you going to generate alpha if you’re essentially matching that?”

Essentially, we see that as, first, they’re great businesses, as you said. Second, on a multiple basis, many of them are trading at multiples below the S&P 500. One practical implication is that you could say, or you could argue, Bill’s going to hug the index, and why should I pay 2% of a management fee to Bill when I can get an ETF with an almost negligible fee?

What I think you’re going to get is a portfolio of securities that probably hugs—or mostly hugs—major components of the index, in addition to these smaller investments that have significant embedded upside. An example would be SPARC. Any type of a SPARC forward purchase agreement—I think they’re going to be incredibly creative as to these different types of securities that will be in there that may be valued at cost or undervalued when you actually put a real market value on them.

That’s going to be a function of them being either a Level 2 or Level 3 security. But I think there is going to become, over time, a real view that these are much more of a sum-of-the-parts story and that the NAV may be understating the embedded growth that you’re seeing in there.

In addition to the fact that if this closed-end fund, which we anticipate will have a distribution rate and pay a dividend, you have that as well. So, there are a couple of different ways that I think this is going to play out well for shareholders.

Can they get Level 2 assets into a 40 Act, into PSUS, which is a closed-end fund—a 40 Act company? I suppose there’s a creative way to do it, but something like SPARC, or, as we had mentioned with holding companies buying a whole company, doesn’t seem like it would fit in there.

No, there are—well, okay, so I think there are a couple of different things. One, can the security be embedded into the 40 Act? Yes. Can they absorb a private company into PSUS, the closed-end fund?

One thing that I have learned, and I think it hasn’t been said enough by media or others, is that for the Pershing Square team, where there is a will, there is a way. So, I would never say never that they can’t do something, because they consistently show people that they can. Do I think it’s likely? I think it’s unlikely, but I would never say never.

That makes sense. I want to talk a little bit about the thing I’m, to be honest, more interested in, which is PS, the Pershing management company that was publicly traded alongside this. But I just want to make sure before I move on to that pasture: Is there anything else on PSUS or PSH, or anything we should be mentioning or people should be thinking about?

No, but I would say, to lead into that, you’ve got PSUS. PSUS is the fund. And then you have PS, the business. That’s where you have really the business side and the franchise side of this.

PS is publicly traded now. It is the Pershing management company. This is the thing that owns and collects all the management fees and performance fees and everything from all the Pershing funds. And interestingly, all the Pershing funds—not just the ones that exist now, but those that he launches going forward out of Pershing Square.

Obviously, that is the appeal, right? The potential for this to become an asset gatherer. I think he mentions the potential to launch an absolute-return fund, the potential to launch a private-equity fund, all this sort of stuff.

When you’re buying PS, when you’re buying the management company, you’re buying the management-fee streams, you’re buying the economics of the permanent-capital vehicles that they may hold on the balance sheet, and you’re investing in any future fund launches. You’re investing in the growth of the AUM on the management platform. You’re investing at the top of the tier.

They launched, and they were very nice to equity holders. They launched with a clean, “We’re going to have 400 million shares outstanding no matter what happens with this launch,” right? So, there are 400 million shares outstanding. As we’re talking, it’s trading for about $42.50 per share, so the market cap is $17 billion.

How do you look at the valuation and everything? I’ve got upsides and downsides to talk about, but how do you just look at the valuation and the value of the PS manager there?

Okay, so we see this as trading—this is just our view. I’m just pulling up our own model here.

Because I think it might help people. For us, our projection on adjusted fee-related earnings—again, this is our projection; this is all internal to us—is that we see them doing anywhere between $550 million and $590 million in fee-related earnings. So that puts us at approximately 30 times fee-related earnings.

Pause you there. You said $550 million, so I'm just going to choose that number. They have a slide in their deck—slide 31 of their roadshow—that shows FRE for 2025 is $300 million. Then you layer on top of that what they get from PSH, what they get from HHH, and anything else they do. Could you just walk me through the bridge from their $300 million trailing-before-PSH, before-HHH number to your $550 million number?

Sure. Let me tell you the fee-paying AUM numbers that we're using, so that it can be helpful for others building their own models. For us, we have Pershing Square Holdings at $21.2 billion. We have Pershing Square LP at $1 billion. We have Pershing Square International at about $500 million. We have Howard Hughes at about $5.4 billion, and then we have Pershing Square USA at year-end closer to $6 billion. That takes us to a total of $34 billion.

That's not counting the fact that the Financial Times—which has not been commented on, so we really don't know—mentioned that there may be a launch of Pershing Square Asymmetric, which would be a more global macro hedge fund for his larger hedged bets. There's no credit for any AUM growth there. All that takes you to $34.1 billion, and then we're applying a run-rate fee-related earnings yield of about 1.8%. That takes us to $597 million.

I am kicking myself because the IPO and PS—this was right in my alley. It was like, hey, weird IPO structure: some people might want PSUS and get the PSH shares, and some people might want PSH. I was following it, and I had a bid in for 20 times my fee-related earnings. My fee-related earnings were just a little bit lower than yours, but it was the difference between me having a bid right when it IPO'd filled and not filled. The stock is about a double since it IPO'd. If I had just model-checked my numbers with you, maybe I would have gotten filled on something that doubled.

Maybe what's helpful, Andrew, is just to talk about the comps for a second, because it does come down to what the multiple is, right?

Yeah, that's where I was going to drive, so please, let's talk about the multiple and the comps. I do have some gentle pushback I'll give as well.

Please do, because we'd love to hear it. When we're looking at the comps, if you take Apollo, that's trading at 30-plus. You've got Ares in the very high 20s. Then you have KKR, Blackstone, TPG, Carlyle, Blue Owl, and, if you want to add Grosvenor in there, which is at a very low multiple, you could add Grosvenor as a comp as well. In general, these comps are trading at an average of around 27 times next 12 months.

Pershing Square has something very specific about it that is not like these others. Almost all of these other asset managers have made a bet on their businesses specifically on private credit and the growth of private credit, in addition to these businesses being more liquid capital businesses and traditional LP funds. You're consistently adding new products and new funds. You have a very heavy business development team that's constantly replacing capital and then trying to grow generalized capital as well.

On the Pershing Square side, you're looking at $34 billion of permanent capital—capital that cannot leave—and a head count of 50. Carlyle's head count is over 2,200 employees. So where do we see more growth?

They've compounded capital at roughly 20% annualized over the last, let's say, 5 years, for argument's sake. That means, by definition, if they continue to do that for the next 3 years, AUM will be over $60 billion. There is significant operating leverage in this business. We don't see this team going from 50 to 2,000 when they're managing $60 billion or even $90 billion. We see this team staying pretty stable, maybe incrementally adding an employee or 2 a year. You're looking at getting to $90 billion, and the employee count is going to be below 75 people.

Great overview. You really hit the nail on the head with why I was so interested in it. Goddamn, I'm just kicking myself. I was too conservative on it. These are literally permanent features. With PSH, I don't think there's anything you can do to say, "Look at PSUS. Good luck. It's a $5 billion closed-end fund manager, in my opinion." These are permanent, so you can apply a huge multiple to them. It's fascinating.

But let me give some gentle pushback. Number 1: HHH is absolutely permanent there. I think my first pushback would be, hey, even if it's above 30 and it's as permanent as I'm saying, that's great, but you do still need to grow the business, right? KKR and all these guys are still locked in. They have the private credit issues, but these are, as they used to say, "Nobody ever got fired for buying IBM." No CIO ever got fired for saying, "Hey, we're investing in KKR's funds." These guys are just levered growth on financial assets, right?

If I look across the board—HHH, PSH, PSUS—everything's trading at a discount to NAV. It's going to be hard for Pershing Square to grow. Pershing Square's argument is that if they get 1 big launch, it's a step-change function for them because they're so small, but it's hard to see the growth there just because everything trades at a discount. So if you say, "Hey, this is over 30 times and the numbers are better," I'd say, "Yeah, but everything else has a much cleaner path to growth." I'll pause there, and I do have a few more things I want to talk about.

I was sitting at lunch recently with somebody that you and I both know, a former head of venture investing at a very large—

Not large enough anymore, but I know who you're talking about, and I'll shout out if he's listening.

The question came up. He said, "Why in the world, James, are you excited about this launch? This is never going to launch. Pershing Square Holdings in London is trading at a 30% discount to NAV. Nobody's going to do this."

Not only did they do it, it's the largest closed-end fund launch in history at $5 billion. I would not, again, want to bet against or discount what this team is capable of doing.

I hate to be this kind of person who draws comparisons here, but I really believe that they have shown that Bill is essentially the Elon Musk of finance. When he wants to do something, he will do it, and it will get done. Practically speaking, people say, "How can you launch another vehicle? You now have multiple vehicles trading at discounts to NAV."

Look at SPARC. We think that SPARC could come out and do a deal very similar to Howard Hughes, where they take a private company public and end up managing the business—or managing the capital-allocation component of the business—and feeding off the gross AUM there. I think that's something this team could do. I don't know if they would, but it's certainly something they should consider if they haven't considered it already.

There are many creative ways. I say it this way: You and I both have invested in firms that have financial engineers at the helm. One thing I've noticed about my experience investing in the Pershing Square complex is that the team structures deals where, if shareholders do well, Bill just does a little bit better. If shareholders do poorly, Bill does just as poorly. It's a great alignment of incentives.

It's not like other structures we've seen, where it's heads I win, tails I win, and shareholders lose. This is very much a very strong alignment of interest in PSUS, by the way, which I still think you haven't necessarily missed. You could buy some today. If you're looking at PSUS, 6% of the shares have essentially been floated out there. You've got 2% that are actually freely tradable and 6% outstanding. That puts you at over 80% of that business. Over 85% of that business is owned by Bill and that team. Talk about an alignment of interest. Who is more aligned in seeing that business succeed?

Let me ask you another alignment-of-interest question. There are 2 interesting questions to pull on here, because I can certainly hear you there. I'm not a huge fan of how they structured HHH—we can talk about that in a second—but I do think you're onto something there. HHH was permanently discounted, all this sort of stuff, and it's hard as a shareholder. I mean, he has a lot of cash in, and he's really not going to make much money on it unless HHH stock goes up substantially. Though, you know, I hate having—

The high-water mark, by the way, compounds?

Yeah. Well, people could have said that the Howard Hughes board did a good negotiation here. That high-water mark compounds with inflation, but go on.

On PSUS, I have 2 things. First, there's the 6% float. Right now, let's just use the number 30: that's a 3.3% cash yield before taxes on the fee-related earnings, right? There is going to be cash flow, and it's hopefully going to be growing as net—

What does capital allocation at PS itself look like over time? Because they’ve got this tiny float and it’s an asset-light company, so there’s going to be a lot of cash flowing in. What do they do? Are they going to start investing in these deals? Are we going to see dividends? How are they going to make money here?

That’s a really good question. Share buybacks are probably off the table by definition. We think there’s going to be a very large payout ratio, so I think a lot of this cash is going to get paid out as a dividend.

We’re modeling an 80% payout ratio, with 20% being held for continued balance-sheet investments that you’ve seen previously, like anchoring SPARC, anchoring PSUS, and doing Howard Hughes. We think there are going to continue to be balance-sheet investments, but we fully anticipate that this is going to be paid out as a dividend.

Let me explain why. If you look at G&A and employee compensation, you’re not seeing a huge line item here where salaries are coming out. Really, the Pershing Square team is getting paid from the dividends they’re going to receive from the management company, just like they normally would in a private scenario. The shareholders also own 85% of it, and you’re going to get this share of the performance incentive. Anything greater than the first 5% of return is going to compensate the entire team.

So what you’re really going to see from an asset manager—if you look at the other comps, look at Blue Owl, look at KKR—is a significantly cleaner income statement that is much easier to model and much easier to rely on to generate forward fee-related earnings. That deserves a higher multiple. But go ahead.

No, I’m glad you got on this because this is something I was looking at pretty closely. They’ve got a slide 31 where they’ve got FRE, and it’s management fees and then preferred performance fees, and that’s what they counted as their fee revenue. At first, it’s like, nobody throws performance fees into FRE, but these are preferred performance fees.

Can you just dive a little deeper and explain one more time—you kind of highlighted it—but what are the preferred performance fees? Then I’ll have a follow-up question.

Sure. So you have an incentive fee in a hedge fund. If you perform, you get paid at the end of the year on realized and unrealized gains in a hedge fund structure. The performance incentive is really coming from the PSH side of the London-listed vehicle, where you will get a performance incentive on unrealized gains.

If Pershing Square performs 5%, all the performance incentive is going to the PS shareholders. If Pershing Square performs 10%, you’re getting that split essentially 50/50.

Mhm. Yep. So management—Bill and all of them—obviously, they will get paid. They own 85%, 90%, whatever percent of PS, so they get paid if that goes up. But they also get paid if PS has a banner year. They’re at a high-water mark; they go up 100%, they clip 20% performance fees, whatever that is. They’ll take the vast majority of that incentive fee.

Yes, but also, to talk about how this is a wonderfully virtuous circle, I understand the headline number, and I understand the criticism because I’ve heard this.

There was no criticism there for me.

Yes, you go ahead and have this banner year where all of a sudden you’re up 100%, you double AUM, and this massive performance incentive fee goes to pay the team. You’ve also doubled permanent-capital AUM that cannot leave, and now in the next year, in the out-years, you’re going to see fee-related-earnings revenue coming to you based on the doubling of AUM and all the value accretion to the shares that you’ve seen there.

I want to be clear: there was no criticism for me there. I was just making sure I illustrated it properly. I mean, I guess you could make the criticism that if you give an incentive where all the management fees go to one thing, and then all of the incentive fees go to the people who are actually running it, you’re kind of incentivizing them to—if they see something that might be a single and something that might be a grand slam or a strikeout—you’re incentivizing them to go for the grand slam every time.

If all of your money comes from the incentive fee, you make the same amount of money whether you’re below the high-water mark at plus 5% or negative 95%. But if you’re negative 95% or plus 400%, you’ll get paid on the plus 400%. The pushback there would be to make it fair for you. They own so much of this management company, they’re not going to do that, but that would be the criticism.

That’s what I was going to say. If they owned very little of the management company, then they would be fully incentivized to go ahead and hit massive home runs because that’s where their compensation is. However, because they own over 85% of the management company, you have a complete balance of incentives here.

What I would say is that under the current structure, as it looks right now, it’s not at all dissimilar to how Pershing Square was operating privately and compensating employees privately for the previous 5 years. If you liked the previous 5 years and said, “Gosh, I would really love to own that management company,” which is what we thought, you are now going to continue to see that for the next 5 years.

The other pushback I hear—we described everything on the FRE number—is that the AUM here is what it’s going to be about. I should be able to do this off the FRE number we just talked about, but it’s going to be about $34 billion. You can correct me if I’m wrong.

About $34 billion.

The other pushback I’ll get on PS is, “Hey, you have an asset manager that is now trading at 50% of AUM.” PS is $17 billion, and they manage $34 billion. There is no asset manager that comes anywhere close to that valuation. How would you respond to that kind of pushback?

I would respond to that pushback by saying this is permanent capital that cannot leave. Just so that we’re on the right definition here, because everyone seems to define this a little differently and you have to look in the footnotes to see how this is defined: KKR and Blackstone have permanent capital if they have it for 6-plus years. So essentially, the timing between roughly our last conversation and now—that’s permanent capital. I don’t think that’s really permanent capital. This is functionally, truly permanent capital.

It’s not necessarily about gathering capital and saying out loud that Pershing Square has $100 billion of permanent capital, or $100 billion of capital generally, of assets under management. I think what’s more important here, and why you should look at fee-related earnings as a multiple of fee-related earnings, is that this capital is permanent. It cannot leave. It will continue to compound.

You could make an argument that this really is a sum-of-the-parts story. But putting that aside, I would say really looking at this as fee-related earnings is the way to look at it. I don’t want to talk about competitors or other asset managers, but there are other asset managers out there. They have AUM; it is not permanent. They may call it permanent, but it’s like 6-year capital. Once that capital leaves, it leaves.

Another argument that should be made, which I think is somewhat underappreciated, is that the headcount is 50 people. You have 2,200 employees at Carlyle. If that AUM at Carlyle, as an example—nothing against Carlyle—but if that AUM starts to leave, how quickly are you firing employees? What are the costs to reducing that headcount and creating synergies? There are real friction costs there. There are real issues.

So I think looking at this as a percentage of assets under management really is not capturing the margins and the earnings power Pershing Square is going to have here. I think, if anything, this is going to be like the Visa of asset managers. People are going to be really pleasantly surprised as they continue to see this over the years that this is really a compounding machine. And, as you said, it generates significant cash.

Look, I came into this conversation at the price it’s trading at. I think people would hear that I had a lot of interest, although I think I’m really getting convinced here.

Let me ask you—oh, might as well address it: key-man risk. Bill is about 60, I believe. Great investors tend to have a nice track record of living a long time. Buffett is in his early 90s, and Munger was almost 100, I believe. But there’s nothing that guarantees that.

Bill is much fitter than Buffett. Buffett’s over there chugging Cherry Cokes, and Bill is about to make a $3 billion investment into Kraft Heinz or whatever, or into Mondelez.

And his investment team takes it as a good sign that the man eats 2 Oreos. And, by the way, I’m a little skeptical. If you can stop at 2 Oreos, I’m a little skeptical of him in general.

I’m rambling, but quickly on key-man risk: a lot of the assets are locked up, but what you worry about actually is kind of what’s happening in Malone, right? The key man dies or steps back as he ages, and then the underlings take over. And the underlings, because they don’t own as much stock, their incentives—the incentive issues I was talking about earlier—really morph because they don’t have that huge management control. So, how do you think about key-man risk and succession? Hopefully, it’s a problem we don’t have for 15 or 25 years. Let’s let AI take us to 45 years, but how do you think about that going forward?

For those that listened, I think I understand the point. Because Bill is this iconoclast and has cemented himself as a legendary investor, I get that. What I think is somewhat underappreciated is how long Ryan Israel’s tenure has been there and is, and the type of leadership that he has taken under him. He is now technically the chief investment officer there.

For those that didn’t listen, when Pershing Square Holdings in London—this is pre-IPO—had their annual meeting, that was 2 hours of just Ryan Israel speaking. So, Bill can be there for personal reasons, and he was on Zoom for Q&A, but Ryan Israel led that meeting from start to finish and understood that book backwards and forwards, as a chief investment officer should.

To go back to maybe my generation of the Miami Heat, LeBron, and Dwyane Wade, I would say that Ryan is like D-Wade to Bill’s LeBron. They complement one another. It’s not just Bill.

Dude, I laughed in my heart, mainly because D-Wade to LeBron—I mean, they were great. They won 2 titles together. They probably should have won 3, but one of the issues there was, especially because LeBron hadn’t developed his 3-pointer, they were so great, but it was not necessarily a 1-plus-1-equals-3 situation. So, I’m not sure.

And Dwyane Wade retired, while LeBron’s still there. Dwyane Wade retired 7 years ago.

Yes, I just remember that run when he went to the Heat and just how great that team was.

The bigger point that I’m trying to make here is that, to use another saying, it takes a village. It takes a team. That team has significant tenure. I would say, without wasting time here, go back and look at the presentation. You can see the tenure of that team.

Ben Hakim, who’s on that team, has been there a very long time and is instrumental in all things IPO-related, and Howard Hughes in PSH. That team has a very, very deep bench and performs. And so, I would say there was a key-man risk with Bill, and I think that has been significantly mitigated.

Now, if we were to lose Bill, it would be material, but I think that people would be pleasantly surprised. One of the great things about PSH is that if Bill were to get hit, as he says, by the proverbial pie truck, none of the capital can leave. And so, you’re now looking at the next generation that is stepping in and managing the $34-plus billion that maybe would hopefully be closer to $100 or $200 billion at that point, moving the ball forward and growing this franchise.

Did he say pie truck instead of bus?

Yes. I mean, at least say ice cream truck, man.

Yeah, that’s a good one. You know, one other thing, just when you compare to other managers, another issue you have—and you don’t have this so much at KKR, though the short sellers would tell you this—is PSH’s book is almost entirely liquid marks, right? Very liquid marks. Like I mentioned Meta. You can go look at Meta. You could do—I have done it before—you can go to the daily NAV of PSH, and they own a lot of the stock, so maybe they couldn’t realize it in a day, but they could hypothetically realize it within 3 days or 5 days.

You look at KKR, you are really trusting a lot of those marks, not just on what they own on the balance sheet, but their marks on their funds, right? And it’s not unheard of for a fund to say, “Hey, everything’s going great. This fund’s worth $100 million.” Oh, yeah, we sold all the assets for $2 million. And I’m not accusing KKR, but we’ve seen this in the private credit space.

So, another nice thing here is you can have very, very high confidence in the NAV, at least right now. Not to say that won’t change going forward, but 2 more questions and then—damn, I’m really having fun—but we started a little late, so we might have to wrap it up.

Hey, just on capital allocation: you think probably—I’m going to put words in your mouth—probably in the near term, the management fees in the capital allocation are mainly going to seed funds, as they did PSUS, and as they did getting the Howard Hughes investment. But probably in the medium term, which I’ll define as 2 to 4 years, this becomes a dividend payer. Is that kind of how you think about it?

Yeah, I would say we believe that they will grow balance-sheet cash. But we do think that in the medium term, there will be a very large payout ratio. And I would say that’s our current view. Let’s wait until their first earnings call, because I fully expect that question number 1 is, “What is the capital allocation policy?” And I fully expect that the company will give guidance at that point.

Mm-hmm. Okay, that makes total sense. And then question number 2: I think a big question for this to really work—10% a year, as I mentioned earlier, would help—but they’re going to have to launch new funds. What do you think the new-fund launch schedule is? Obviously, we don’t know, but what do you think the highest-priority target is, and when do you think they’ll make headway on that?

So, I actually would push back just a little bit. I would say for this to really work, you have to underwrite that they’re going to continue to compound at 15-plus percent a year. If they do that alone, that certainly supports the current valuation that you’re seeing at around 30 times.

So, if you want to say, “Okay, but I need even faster growth,” then I would argue it needs to be over 30 because of the permanent-capital nature. But I think that SPARC is coming next. I think this team just went through, again, one of the 6 largest IPOs in the past decade and the 20th-largest IPO in U.S. history. Let them breathe, and I think SPARC is coming next.

And, by the way, just to let other people on this call know, look at SPARC. Go look at the SPARC filings. The SPARC filings are public. We track it; we continue to track it. Look at the legal fees. The legal fees at SPARC, on a quarter-over-quarter basis, went from something negligible, around $50,000 to $100,000, to well over $1 million in a 30- to 90-day period, so in a quarter.

You know, I pay lawyers as much as anybody else does in fees to know that they’re working on something.

Well, don’t we know what they’re working on?

Yeah, we know what they’ve offered with Universal Music Group and how they’ve structured that with SPARC. It is publicly disclosed. I think it was asked on a CNBC interview whether Universal Music Group and/or Vincent Bolloré had responded at all, and I think Bill’s comment specifically was, “We would not have released that if we hadn’t spoken with the French,” I think was his term, or with Universal Music Group.

So, whether or not that does come to pass, we shall see, but I do think that it goes to show that that arrow in the quiver is probably what’s next to come.

Okay, that makes total sense. That makes total sense. Man, I’m kicking myself because, as I said, if I had just hit up the master and had you brush up my FRE number, I had you do it.

I’ll just leave it with this, and I’ll leave everybody with this before we go, because I know that we’re at time. If anybody fast-forwards to the end, they should see this.

This is, again, roughly trading around 30 times fee-related earnings. Apollo is roughly trading at around 30 times fee-related earnings. Who’s going to grow AUM faster? If Apollo adds, let’s say, another $10 billion fund—which is not permanent, by the way—a 10-year-life fund, like 10-year, 5-year deployment, 5-year harvest, maybe 2 2-year extensions or 3 1-year extensions, that does not move the needle.

You add another $2 billion fund or $3 billion fund, you’ve now increased AUM by 10%. Again, I think the 30 multiple is just really undervaluing the growth that you’re going to see here.

You know, this is in the filings too, right? Like, “Hey, compare us to our peers.” If we raise a $5 billion or $10 billion fund, it blows up our AUM versus our peers. It’s around there. They need to raise multiples of those every year just to sustain them.

Definitely, but I’ll give one last pushback. PSH is trading at a discount to NAV right now. PSUS is trading at a discount to whatever the—it’s hard to say NAV—but it’s trading at a discount to NAV.

He just shook a lot of hands and kissed a lot of babies to get PSUS off the ground with $5 billion, and the target was $10 billion, right? So, I think the one probably fair pushback would be, hey, without a big win in the near term, it seems kind of tapped out on the fundraising side, right? Right now, I doubt they’re going to launch another $5 billion to $10 billion fund raise.

Maybe it’s smart to change that.

I would say we’re tapped out on the offering that was PSUS. But I think there’s certainly demand. I think there’s certainly demand for a Pershing Square asymmetric offering. I know that we’re going to invest in that offering. We have to see it, but I think our inclination is to invest in that offering.

With that said, I would say you say that, and a lot of people say, “$10 billion was the target, and he only raised $5 billion.” I’m putting heavy air quotes around “only raising $5 billion.”

Okay, he only raised the largest closed-end fund of all time at $5 billion. If he had raised $10 billion, it would be double the largest fund. So, putting things into context here is somewhat important: he had to really struggle to get to $5 billion. I think anybody would have to struggle to get to $5 billion. It is the largest closed-end fund of all time and 2 times larger than its closest peer.

While maybe $10 billion was what we were hoping for, realistically, I think $5 billion was fantastic. $5 billion is a great outcome.

Yeah. Look, this has been super helpful. I’ll be honest: I think you’re right. I’m not crazy skeptical of PSH, but I was skeptical of the price. As you start doing all the math that you laid out so clearly and think about the optionality, there were some places where I disagree with you.

The place I’d probably push back hardest is where you said, “Hey, this needs to compound at 15% per year from here to work.” I honestly don’t think so. Obviously, both of our numbers are without any future asset raises. If PSH and PSUS do S&P 500-like numbers underneath, I think PS is going to start to look very interesting very quickly.

Well, yes, because it should deserve at least an S&P 500 multiple at that point, which is roughly around—what?—20 to 25 times.

Ooh. This has been awesome, James. Any last thoughts or anything you want to hit?

No, I always love chatting with you, Andrew, so it was great to talk. This is great.

And again, just the stuff you got on closed-end funds correct. James, I’ll have you back on soon to talk. There are plenty of other closed-end funds out there. We’ll talk soon.