Pershing Square Holdings' annual shareholder letter for the year ended December 31, 2024.
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Company Performance
Letter To Shareholders
To the Shareholders of Pershing Square Holdings, Ltd.:
In 2024, Pershing Square Holdings generated solid but not spectacular NAV performance of 10.2%, and a 8.3% total shareholder return because of the widening of PSH’s discount to NAV during the year, largely due, we believe, to the postponement of the Pershing Square USA, Ltd. IPO, which many PSH investors viewed as a potential catalyst for reducing the discount.
Investors who invested in Pershing Square, L.P. at its inception on January 1, 2004, and transferred their capital account to PSH at its inception on December 31, 2012 (“Day One Investors”) have grown their equity investment at a 15.9% compounded annual NAV return over the last 21 years, compared with a 10.0% return had they invested in the S&P 500 over the same period.6,7 With the magic of compounding, our 15.9% compound annual NAV return translates into a cumulative total NAV return since inception of 2,172% versus 654% for the S&P 500 over the same period.
Using PSH’s stock price return rather than per-share NAV performance, Day One Investors have earned a 14.0% compounded return, a 16-times multiple of their original investment. This lower return reflects the 30.9% discount to NAV at which PSH’s stock currently trades. Our strong preference is for PSH’s shares to trade at or around intrinsic value for which we believe PSH’s NAV per share is a conservative estimate.
How We Think About the Last 21 Years
We believe the history of Pershing Square is best understood as being comprised of three distinct periods: The first nearly 12 years of our business during which we earned a 20.9% compound return from inception on January 1, 2004 until July 2015 (the Open End Fund Era), followed by a two-plus-year period of substantial underperformance (the Challenging Period) that we have previously described in great detail (See 2021 Annual Letter p. 7), and the last seven years, which we refer to as the Permanent Capital Era.
Over the last seven years of the Permanent Capital Era, we have generated a 22.2% compound annual return. We believe that our strong results are directly related to the decision we made in 2017 to stop raising capital for our two open ended funds – Pershing Square, L.P. and Pershing Square International, Ltd. – which has had the effect of substantially stabilizing our capital base. As of January 1, 2025, PSH represents 90% of our assets under management, 27% of which is owned by affiliates of the investment manager. Our private funds, which comprise 10% of our assets under management, also have highly stable capital as affiliates of the investment manager represent 36% of their capital, with the balance held by long-term Pershing Square investors, many of whom have been limited partners since our earliest days.
The benefits of permanent capital are empirically demonstrated by our strong absolute and relative returns during the last seven years, a particularly challenging time for most equity investors as Covid, the Federal Reserve’s rapid increase in interest rates, and heightened geopolitical and macro risks led to a challenging market environment. Having the ability to invest without regard to capital flows – inflows as well as outflows – is an enormous competitive advantage in a world in which nearly all of our competitors operate with capital that can be redeemed on an annual, quarterly, monthly, or even daily basis.
Volatility is the enemy of the asset manager with short-term capital, and the friend of the investor with permanent capital. We have been able to be opportunistic when our competitors have been forced to reduce market exposure, an important contributor to our returns since inception, and a large driver of returns over the last seven years. With more than $4.1 billion of equity capital invested alongside our shareholders and other investors, the Pershing Square team is highly aligned and appropriately incentivized to achieve our goal of high long-term returns while minimizing the risk of a permanent loss of capital.
2024 in Review
In 2024, our portfolio companies’ underlying business results exceeded their stock price performance.
Stock prices are often substantially more volatile than underlying business performance. This is especially true for the companies we own, as we principally seek to invest in high-quality growth companies with low volatility business models. We endeavor to invest in companies: (1) whose business models are largely insulated from macro and geopolitical factors, (2) which do not need to continually raise equity capital to implement their business strategies, and (3) have strong balance sheets. Even a great business with a bad balance sheet is a risky proposition.
Despite their durable business qualities and strong balance sheets, our portfolio companies have experienced significant volatility in the public markets as other investors contribute to stock price volatility by buying and selling common stocks as well as index and other mutual funds due to short-term market, macro, and geopolitical factors. The combination of a seemingly unending increase in index fund ownership – which removes a large amount of stock from the public float – and the growing amount of capital managed by so-called “pod shops” – which use large amounts of leverage and have limited tolerance for volatility – accentuates stock price volatility, as the marginal buyer and seller has a disproportionate impact on short-term stock prices.
Many investors interpret stock price volatility as an important measure of underlying business performance even though it is an unreliable indicator. Our job is to understand when negative stock market signals are a harbinger of the future or are simply the effect of short-term capital flows that are unrelated to the long-term performance of the companies we own. We focus on underlying business progress rather than short-term stock prices because long-term business progress on a pershare basis is the most important driver of a company’s long-term stock price performance.
The ability to be largely indifferent to the mark-to-market movements of companies in our portfolio when they are not reflective of underlying business issues is an important competitive advantage of Pershing Square. Our ability to withstand volatility comes from our deep due diligence and understanding of the companies we own, the permanent nature of our capital, and our dispassionate, economically rational approach to investing. These elements of our strategy are important contributors to our long-term competitive advantages and investment performance.
Many of the largest hedge funds’ competitive advantages come from massive technology and infrastructure investments, largescale organizations, access to information seconds and even milliseconds before others, and extraordinary trading capabilities. None of these factors is present or relevant in our approach to investing. Importantly, we believe our competitive advantages are more durable than investment strategies that rely on these attributes.
While greater stock price volatility can affect the short-term performance we generate, it is generally an important and beneficial backdrop for our approach to investing, as market volatility occasionally leads to a high degree of undervaluation for even the largest companies. Our ability and willingness to accept a high degree of market volatility – particularly when compared to the increasing amount of capital that is managed by investors who can tolerate only a modest amount of losses – is one of our most important competitive advantages in an increasingly competitive investment environment.
As an active rather than passive investor with a long-term track record in effectuating value-creating changes at the companies we own, we can help our portfolio companies achieve the market recognition they deserve. When needed, we can offer assistance in making sure that: (1) the right management team is in place with the proper incentives, (2) capital is allocated optimally, and (3) companies present themselves to the market in a manner such that investors can best understand a company’s business qualities and long-term prospects.
Strategic Developments at Pershing Square
Over the years, I have often been asked about succession planning. For someone who expects to be in this game for many more decades, this always struck me as a premature question, but as the years went by, it became clear that this was a question that we needed to answer. Our appointments of Ryan Israel as CIO and Ben Hakim as President provided a partial, but not complete answer to the question. The combination of permanent capital, an extremely strong team with many decades of runway, and an investment strategy that has been proverbially engraved in stone are important attributes that demonstrate the enduring nature of Pershing Square.
Last year, we sold a 10% primary interest in Pershing Square Holdco, L.P., a newly formed parent entity to Pershing Square Capital Management, L.P. (PSCM), to a group of sophisticated investors including institutions, family offices, and alternative asset company founders, for $1.05 billion. We also established an independent board comprised of our new investors and independent directors. With sophisticated third-party owners and a new board, we have taken important additional steps toward our goal of making Pershing Square a perpetual life enterprise.
You might ask: Why did we raise growth capital rather than take some chips off the table? The answer is that we believe that continued growth is an important component of long-term sustainability for any organization. While we can earn a very good living managing our existing AUM, we believe that the growth and development of new investment vehicles and strategies improve the long-term health and sustainability of our business as long as the growth is thoughtfully executed.
One of our competitive advantages is our ability to manage a large amount of capital with a small investment team. This is due to the scalability of our investment approach, the permanent nature of our capital, and the desirability of working at Pershing Square, factors which have enabled us to attract and retain the best and brightest, and grow with industry-best talent whenever required.
Over the last 21 years, we have built one of the most well-known brands in the investment industry, a brand that is massively under-monetized. If a disinterested observer were to compare the Pershing Square brand and our AUM with that of other well-known alternative asset managers, one would likely conclude that we have the highest ratio of brand value to AUM of any of our competitors, a fact which did not go unnoticed by our strategic stake investors.
Since the beginning of our Permanent Capital Era seven years ago, our fee-paying asset growth has been entirely organic – investment performance less dividends, buybacks, and net capital flows has driven more than 100% of our growth. Beginning with the potential Howard Hughes Holdings (HHH) transaction and future initiatives that we have identified, we also expect to grow assets inorganically, by raising new funds and investment vehicles. We intend to do so by focusing our growth on permanent capital vehicles that don’t require substantial additional investment or organizational resources to be successful. These include companies like HHH that come with extremely capable existing management teams, and listed permanent capital vehicles in new jurisdictions that will pursue our current core investment strategy. Over time, as our business grows, we could consider other investment initiatives, but we won’t do so unless we are confident that such growth will not negatively impact, and ideally will improve, the long-term performance of our core funds.
How Does PSH Benefit by PSCM’s Growth in Fee-Paying Assets?
You might ask: “How does PSH benefit by the growth of PSCM’s AUM?” As you are likely aware, when we launched Pershing Square Holdings, we structured the incentive fee arrangement to give PSH shareholders the benefit of reduced fees by enabling it to participate in the incentive fees earned by PSCM – aka, the Fee Offset provision – subject first to our recovery of underwriting and other fees paid by PSCM in connection with PSH’s IPO. Unfortunately, less than one year after its IPO, PSH began a two-plus year period of underperformance, and we thereafter largely exited our open-end fund business, limiting the potential Fee Offset opportunity for PSH. As a result, until recently, PSH shareholders had not received any benefit from this provision.
Last year, we announced that we were waiving our right to recover the remaining IPO fees, and that we were modifying the Fee Offset provision to provide that if we launch a new fund that invests in public securities that does not pay incentive fees, we will reduce PSH’s incentive fees further by an amount equal to 20% of the management fees that we earn from that fund.
While we: (1) have not yet raised new funds, (2) have only a modest amount of fee-paying assets other than PSH, and (3) last year’s returns were relatively modest, the fee offset provision generated its first, albeit small, reduction in PSH’s incentive fees by about 2%. As our non-PSH fee-paying assets grow, PSH’s 16% incentive fee should continue to be reduced, potentially substantially over time. Our long-term goal is to eliminate PSH’s incentive fees as we grow PSCM’s fee-paying AUM from new funds and other investment vehicles.
Howard Hughes Holdings and Potential Management Fee Reductions
If we are successful in completing the HHH transaction as we have proposed, PSCM will receive management fees from HHH, and we will reduce PSH’s management fees by an amount equal to the fees we earn on the HHH shares held by PSH, dollar for dollar. While this may sound like an illusory benefit because on a ‘look-through’ basis the fee burden to PSH is unchanged, we believe that the reduced fee burden will be of substantial economic benefit to PSH shareholders.
HHH common stock has been a long-term underperformer, a fact that we believe is unlikely to change without a significant change in the company’s strategy. While HHH has made some investment and operational mistakes – in particular, the South Street Seaport development, which is now owned by a separate company with a new management team – the principal reason for HHH’s underperformance is due to the fact that the market assigns a high cost of capital to the business, a threshold level of return that HHH, as a pure-play real estate development and master planned community (“MPC”) business, has been unable to meaningfully exceed. Put simply, HHH has not been able to earn a return significantly in excess of its high cost of capital. We believe the best way to solve this problem is either to reduce HHH’s cost of capital – an effective impossibility if HHH remains a standalone company – and/or by increasing the company’s returns on assets, returns which are limited by the competitive nature and relatively low return on assets of real estate.
Real estate development, land ownership and development, and condo development, which comprise the substantial majority of HHH’s invested equity, are considered the highest-risk real estate businesses. Real estate is also a notoriously economically sensitive business which compounds the company’s cost of capital problem. While HHH has a strong management team that has executed its higher-risk business lines exceptionally well, the equity returns demanded by stock market investors for these business lines is well above that of other public companies. That is why there are few if any other companies comparable to HHH that trade in the public markets. We believe that as a pure-play standalone MPC company, HHH will not be able to overcome its high cost of equity capital.
In order to attempt to earn sufficient returns on equity, HHH has had to use a substantial amount of leverage compared to other public companies, albeit a smaller amount of leverage than private real estate developers. This higher than typical leverage for a public company and the higher-risk nature of HHH’s business make it difficult if not impossible for HHH to achieve investment grade credit ratings. As a result, HHH’s cost of debt is substantially higher than that of other better capitalized companies. In summary, we do not believe that HHH’s cost of capital problem can be solved if it remains a standalone, pure-play real estate development and MPC company.
We believe the solution to HHH’s cost of capital problem is an infusion of equity capital and a change in strategic direction to a diversified holding company that grows and diversifies by making investments in high-quality businesses that earn high returns on capital and have less economic sensitivity than HHH’s core real estate business. Pershing Square’s long-term strategy has been to acquire stakes in high-quality, durable growth companies that have underperformed their potential, which we can improve by catalyzing changes in management, governance, and strategy. With HHH, we are seeking to implement this same strategy with the addition of Pershing Square team members and our other resources rather than our typical approach of recruiting third-party management teams.
We believe that a change in HHH’s strategic direction led by the addition of PSCM’s investment team, acumen, execution capabilities, equity capital, and other resources will greatly reduce the company’s cost of capital and increase its return on investment, which will drive substantially greater long-term performance for the company, net of the incremental cost of any fees it may pay to PSCM. In other words, we believe that if HHH becomes a diversified holding company led by Pershing Square, it will substantially outperform its current potential while reducing the management fees we charge PSH, a substantial net overall performance benefit to PSH.
Because many investors screen funds based on the fees they charge rather than on their long-term performance net of fees, we believe that reduced management and incentive fees will increase investor demand for PSH. While we question this approach to choosing fund managers – it’s a bit like choosing a brain surgeon based on cost alone – it is a reality of the investment management industry as many allocators are themselves judged on the fees of the funds in which they invest.
While we do not expect the HHH-related management fee reduction to PSH to initially be particularly large (about an 11% reduction in management fees assuming the transaction is consummated on the terms we have proposed) it is a model for other potential transactions we may do in the future that can lead to further management fee reductions for PSH.13 We expect that over the long term, the growth of PSCM’s business and our fee-paying AUM will greatly inure to the benefit of PSH by reducing its incentive and management fees, which should increase demand for PSH stock, contribute to a narrowing of the discount to NAV at which PSH trades, and improve its long-term performance.
Pershing Square SPARC Holdings, Ltd. (SPARC)
We have continued to pursue a potential merger candidate for SPARC, but have yet to identify the right transaction partner. To remind you, SPARC is a new form of acquisition company that does not suffer from the structural, compensation, and other problems with other acquisition vehicles. SPARC has no underwriting fees, shareholder warrants or founder stock, nor is there a limited timeframe to identify a transaction (we have almost nine years left to execute a deal).
We believe that SPARC is the most efficient and certain way for a private business to go public, with the benefit of Pershing Square as an anchor investor and with as much as a multi-billion dollar committed investment from us, a commitment that we can make prior to the public announcement of the transaction. As a result, a company seeking to go public can have certainty about its public offering including price per share (i.e., valuation) and the minimum amount of capital that will be raised regardless of market conditions. We have received a substantial number of inbound potential SPARC transaction ideas, but none yet that meet our standards for business quality, durable growth, and sufficient scale. We welcome ideas for potential transactions and would be delighted to pay advisors, brokers or other finders for bringing us a deal that meets our criteria.
Some have questioned why the IPO market has had so few offerings of large companies despite the stock market being at near all-time highs. We believe this phenomenon is best explained by the fact that many private businesses owned by asset managers or controlled by founders are marked at last-round values or otherwise at levels in excess of where the businesses would trade as public companies. CEOs and asset managers are reluctant to take these businesses public until their trading value as public companies ‘grow into’ their current private values. In light of the small number of IPOs, investors in private equity, venture capital, and growth funds have received a limited amount of distributions from these funds. This problem is compounded by the fact that it is difficult for fund sponsors to sell a substantial amount of secondary shares in an initial IPO of a company because IPO investors view large secondary sales in IPOs negatively.
We are largely indifferent to whether companies are selling primary and/or secondary shares as SPARC and we will have the benefit of private due diligence on the company, and we can form our own assessment of business value and management capability. SPARC can also do transactions of nearly unlimited size as we can set the exercise price of our SPARs (the rights to buy stock alongside Pershing Square in a SPARC merger transaction) at a level which would enable us to raise the necessary capital for even the largest transactions. For all of the above reasons, we believe that SPARC is well positioned to take a high quality, durable growth company public when we identify the right transaction.
Hedging and Asymmetric Transactions
We did not enter into significant hedging or asymmetric transactions in 2024. We require two principal factors for such a transaction to make sense for Pershing Square. First, we must have a variant view about the near or intermediate term future, and second, we must be able to purchase an instrument which offers a sufficiently asymmetric payoff if our assessment of the future turns out to be correct. An overall substantial increase in volatility over the past year has made our approach to hedging more challenging as volatility is an important component of the pricing of most asymmetric instruments. While we have had some variant views on macro events during the year, we did not identify any meaningful opportunities to execute on these views as prices for these instruments were too high. Macro funds are generally continually fully invested, often with substantial leverage in various trades. The benefit of our more episodic approach to asymmetric and macro investing is that we are under no pressure to deploy capital. We only do so when we believe the potential profits vastly outweigh the capital invested. Without extraordinary opportunities, we sit tight.
While perhaps this has always been the case, now seems like an extraordinary time to be alive with the confluence of massive technological change – robots, rockets, AI, and more – coupled with a high degree of geopolitical uncertainty. While one can find many excuses to be pessimistic about the world around us, I continually find myself optimistic about our future and expect that the United States will over time become an even better place to do business.
The entire Pershing Square team is honored to have the opportunity and responsibility to steward and protect your investment assets alongside our own. I am incredibly fortunate to work with such a talented and interesting group of colleagues who are incredibly motivated to deliver on our aspirational long-term goals for our investors.
Thank you for your continued confidence in Pershing Square.
Sincerely,
William A. Ackman
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