Pershing Square Q3 2026 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2026

Key Takeaways

  • Positive Sentiment: Pershing Square sees substantial upside in hyperscalers, arguing that strong cloud growth at Amazon and Microsoft has not yet been fully reflected in share prices. Management believes short-term sector rotations and trading reactions may be obscuring longer-term business progress.
  • Positive Sentiment: Pershing Square remains highly confident in Uber’s positioning for autonomous vehicles and robotaxis. It believes Uber’s large marketplace, logistics capabilities, and partnerships with more than a dozen autonomous-vehicle providers could make AV adoption complementary rather than a threat.
  • Positive Sentiment: The firm plans to transform Howard Hughes into a real-estate asset-management and insurance holding company by selling minority stakes in real-estate assets and deploying capital into its insurance operation. Management believes this could materially improve returns on capital, making a near-term stock buyback less attractive than reinvestment.
  • Positive Sentiment: Pershing Square expects to focus on permanent capital and performance-driven growth rather than raising redeemable funds. Fee-paying assets reached approximately $24 billion, and the firm is considering initiatives such as dividends for PSUS to broaden its investor base and potentially narrow its trading discount.
  • Neutral Sentiment: Management remains optimistic that Fannie Mae and Freddie Mac could eventually exit conservatorship, describing the potential value creation for taxpayers as substantial and suggesting resolution may occur during 2027–2028. However, the timing remains dependent on political, regulatory, and ongoing legal developments.
AI Generated. May Contain Errors.
Earnings Conference Call
Pershing Square Q3 2026
00:00 / 00:00

There are 7 speakers on the call.

Operator

Hello, and welcome to Pershing Square's third quarter earnings Q&A. I will now turn the call over to Pershing Square CEO, Bill Ackman, and CIO, Ryan Israel.

Speaker 1

Thank you for joining. Just a few instructions on how to ask a question. If you would like to ask a question over the phone, the dial-in details are in my pinned post on X and in the events section of the Pershing Square Inc. website. If you have already joined by phone, you press star one to join the question queue. We will only accept questions from those who recorded their name while joining. If you are dialed in but did not record your name, you can do so now by pressing star zero and speaking to a member of the support team. Please listen carefully as the operator will announce your name prior to unmuting your line. You can also respond to my pinned post on X with your question, and we will do our best to answer as many of them as we can over the course of the next hour.

Speaker 1

With that, Fran, why do not you start with a question we received on X?

Speaker 2

Sure. The Bullish Broke Guy writes, "Love that the Q&A is open to all. Most funds hide behind the earnings script like it is witness protection. My question is, what in the Q3 numbers would you say the market is still pricing wrong, and why has not that closed yet?" In the Q3 numbers for Pershing Square Inc. for the portfolio companies, I think is what it is referring to.

Speaker 1

Oh. I'll hand that over to Ryan. Why is the market misvaluing all the stocks we own?

Speaker 3

Yeah. I think that when I look at the share price performance in response to the earnings that have come in across our portfolio over the last couple of weeks, at the highest level, I would say, well, there's definitely been some very strong performance. For example, I would say, Visa and Mastercard have done incredibly well since earnings, which I think is an appropriate response to how great these businesses are and how well the businesses have grown and how strong the earnings are. I think across the hyperscalers, whether you think about, be it Meta or Amazon or Microsoft, these are businesses that have performed a lot better than expectations. For example, Amazon actually guided that they thought that their revenues could grow 40% plus in 2027, 2028, the next several years in their cloud business.

Speaker 3

They are the first company to have given any guidance at all in terms of multi-year, specifically like that of the large hyperscalers. And we did a lot of work in the letter where we talked about what we thought the opportunity was, and that's really a validation of the work that we have done. While they had a nice response yesterday, I would say the initial reaction was the stock was slightly down after that. And that is kind of a theme across the portfolio. You can make a similar argument for Microsoft, where they really have been growing incredibly well. They talked about how next quarter's Azure growth, which is their cloud business, could actually be above 50%.

Speaker 3

I mean, these are some of the largest growth levels at scale of the company's cloud businesses have ever reported, and yet the stocks were unable to actually or did not increase in the next day. I think the market is just sort of missing the opportunity that's really right in front of our eyes with respect to the hyperscaler companies and the cloud businesses, where the results were nothing short of phenomenal, in our opinion. Yet, in aggregate, the companies are actually slightly down since reporting what are, I think, a lot of people thought were phenomenal earnings.

Speaker 1

The other thing I think is going on in markets is there's just huge short-term capital flows based on various forms of sector rotation. Depending upon whose capital's being withdrawn or funds that are winding up, I think actually, despite the real-time nature of markets and the greater liquidity, I think it takes actually time for the market to recognize business progress in the quarter. I wouldn't judge the trading of the stock in the day and few days after earnings as kind of the metric as to how the stock's really going to respond to the new news. Go ahead, Fran. Next question.

Speaker 2

Okay, great. We had several questions about Netflix and Uber from Master Group of Funds, Rich Zhang, Joseph Duff, and others, asking whether we would ever take more active roles in companies such as Netflix and Uber, whether on the board or in discussions with management. Further on Uber, if you can talk a little bit about the market concerns around robotaxi competition and other AVs. Does that cause you to revisit your conviction at all?

Speaker 1

We are very much a, I would describe us as an engaged shareholder. While we haven't had to be a public activist in, I would say, for quite a long time, approaching a decade, we do engage with pretty much all of our companies on a pretty regular basis, and we're not shy about sharing ideas or advice or input or even criticism. We do think Uber is an exceptionally well-run company. We think the same about Netflix. If we have good ideas for them, we're going to share them, and we do. Ryan, why don't you speak to We did address in our previous call, but I'm not sure that everyone on this call was on that call, kind of the Uber-

Speaker 3

Yeah

Speaker 1

our Uber thesis and how do we assess the risk of robotaxis and so forth.

Speaker 3

Sure. At a very high level, we actually think the opportunity from robotaxis or AVs is actually larger and a positive for Uber more than anything. The reason why we think that is when you look at how Uber's business model works and what riders ultimately care about, which is we think the right way to analyze how the future will evolve, having a lot of supply of rides, whether it is human drivers or whether it is AVs, is really important because what that does is it allows users to get rides more quickly, which they care a lot about, and ultimately, the increased supply for a given level of demand will result in lower prices.

Speaker 3

By having that aggregation of supply and demand on Uber's app for all of the customers they serve and all the drivers that they currently have, Uber provides the best marketplace for that. Even if Tesla or Waymo, which are kind of the two primary AV providers today, were able to increase the size of their fleet or their cars orders of magnitudes, they would still not come even close to offering the amount of supply that they have. There is also additional concerns about how they would be able to handle a lot of logistical things. How do you clean cars? How do you store cars? How do you return items to people that are lost? I think Uber had mentioned at one point last year that like 70 million items get left in an Uber, and somebody has got to return that every single year.

Speaker 3

That is really important to have that logistical element and have a human running ultimately how the cars drive. I think that ultimately what we see is that it will be complementary. There are peaks and valleys in Uber's business in terms of when people take rides. Some popular times are Friday and Saturday nights or during the workday, during the middle of the week, random times, utilization is low. AVs can be really helpful in filling out those peaks. I think it is going to be very difficult to either have the supply of AVs that you need to meet all the demand, and because these AVs are still quite expensive to build and will likely be so for the foreseeable future, you will really need to have high utilization.

Speaker 3

Partnering with a company that can ensure the utilization or the use of your vehicle stays very high at all times is going to be the right way to earn attractive return on capital. What I would point out for as much as people are concerned about particular AV players like Tesla and Waymo, is Uber actually has over a dozen and a half partnerships with other companies that have been quite successful. It is not as if ultimately we think AVs will be dominated by just two companies.

Speaker 3

We see that there will be a number of AV providers, most of whom are likely going to work with or already are working with Uber, and I think that further allows for Uber to be in a strong position, which is you may have one or two players that decide long-term not to work with it, but if everybody else decides to work with Uber, I think you'll have enough of these positive supplies of AVs on the network, and that'll create those positive network effects that result in low wait times and lower prices, and that'll ultimately inure to Uber's benefit and Uber's customers' benefit.

Speaker 1

Great. We have a few questions over the phone in queue, so perhaps, operator, would you send over the first question?

Operator

Our first question comes from the line of Hassam Cobb. Please go ahead.

Speaker 4

Yes, good morning.

Speaker 1

Morning.

Speaker 4

I'm happy to be here. I'm a retail investor and a shareholder of both Pershing Square and Howard Hughes. I just have a quick question. As you look to grow your investor base over the next five to 10 years, how are you thinking about reaching newer and more diverse groups of retail investors, and are you open to any ideas?

Speaker 1

Well, we're certainly open to ideas. Among the ways we hope to achieve that is by being an accessible management team, having calls like this one where anyone can get in the queue and ask their question. We think investor recruitment, if you will, or just, you can't just go public. You need to tell the world that you exist. I've been making an effort. I've been on the podcast circuit over the last few weeks and done a reasonable number of podcasts to reach different kinds of audiences to create a little more visibility around Pershing Square. We have an investor relations function that's led by Jill. We have an investor relations function for the funds that we manage that is led by Tony Asnes. One of the things about Pershing, I think we're very well known as an investment firm.

Speaker 1

People know who we are, but a lot of people don't know that you can actually buy Pershing Square, the stock, or buy Pershing Square USA, the fund, or the changes that Howard Hughes is making, the transformation it's making to its business model. We're going to pound the pavement a bit on that, and our investors can be helpful as well. Please post on X if you like what we're doing. Let the world know we exist, and we're open to any and all ideas from our shareholders. Thank you.

Operator

Your next question comes from the line of John. Please go ahead.

Speaker 5

Yes. Hi. Can you hear me?

Speaker 1

Yes.

Speaker 5

Yes. Hi. I'd like to start off by wishing Bill and his family a speedy recovery and a healthy recovery on behalf of his daughter. Second of all, okay, so loaded question. You're welcome, Bill. It's in regards to two of your holdings, Fannie and Freddie. It's a bit of a loaded question. I'll start off by your recent listing on the Mexican Stock Exchange and your IPO. Will Pershing Square exceed its 10% holdings in those two entities? Second part of the question is, with an executive order that was signed approximately a little bit more than six months ago, Director Palty, when will he be visiting the ERCF as far as those two are concerned?

Speaker 5

Third part of the question, with the en banc ruling not to rehear the trial, do you feel, in your opinion, that this administration will forego all further legal proceedings or appeal to the Supreme Court for this last stage of this battle, we'll call it? The fourth part is with tonight's midterms, should the Democratic Party regain, whatever, the House, Senate, do you feel it's going to ignite a bit of a spark under this administration to expedite the process of uplisting and relisting and removing out of conservatorship? I'll let you answer that. Thank you, Bill.

Speaker 1

Okay. Thank you for a very comprehensive question set. I think what you were asking, and after we do own approximately a little over 10% of, or about 10% of both companies. We almost think of it as one position. We've got a little over 200 million shares of stock. So yeah, we're a meaningful owner, obviously. With respect to the capital rule and setting these entities ultimately to be released from conservatorship, obviously it's up to the president. But the point we made in the letter that we sent to shareholders is this is not just an economic imperative in our view where a lot of value can be created for the American people.

Speaker 1

It's really a political imperative on the part of the Republican Party not to hand these now extremely well-capitalized, highly profitable entities, which have the potential to be used as a very powerful political tool. Your ability to make adjustments to housing policy, mortgages, terms, the nature of underwriting, the kind of risks you take on. In conservatorship, the government has godlike powers. I think I'm aware, as we all should be, that obviously the Republican Party doesn't want to hand that control, if you will. We can't be assured that the next president's going to be a member of the Republican Party.

Speaker 1

I think there's definitely political reasons why Fannie and Freddie need to be released from conservatorship, which means at some point, past today, we've heard from the Treasury Secretary that this is the ownership, as he calls it, of Fannie and Freddie is something that needs to be resolved in the 2027, 2028 years, and that's because it has to happen before the president comes out of office. With respect to the litigation, the shareholder litigation, that was won by shareholders and the government keeps appealing, I don't know if there'll be an appeal to the Supreme Court or not. Unfortunately, it's not as large a recovery as it should be. Our view here was this was one of the worst economic takings in the history of the country, and it's nice to have some reward for shareholders.

Speaker 1

Actually, I wouldn't mind it going to the Supreme Court because I think the Supreme Court might attract more attention to how inappropriate and unfair this was. With respect to a change in the House and Senate, the expectation clearly is that the control of both houses are going to no longer be in, at least one will no longer be in the hands of the Republican Party, which means that the president's hands will be tied on a lot of policy issues that require the approval of the Congress. This, fortunately, the resolution of Fannie and Freddie, is one remaining massive piece of economic policy that is unresolved. It's an opportunity for the president to ring the bell at the New York Stock Exchange and literally deliver hundreds of billions of dollars of value to taxpayers.

Speaker 1

I think we're being conservative in estimating there's half a trillion of value here, 80% of which is held by taxpayers. So it's a big opportunity. Politically, it's something great for the president's legacy. It will be the greatest real estate deal of all time. Also, it will be one of the few things he can actually get done. So, we're, I would say, optimistic that this gets resolved, and hopefully sooner rather than later. Let's go to the next question, please.

Speaker 2

Great. As a reminder, if you would like to ask a question over the phone, the dial-in details are on Bill's pinned tweet or on the Pershing Square Inc. website. Taking some questions from X. We had a handful about Howard Hughes and the capital allocation strategy there, how capital is being allocated to Vantage as opposed to Howard Hughes Communities, or also, would Howard Hughes consider a buyback given the discount to which it currently trades? How do you think about that?

Speaker 1

Sure. We think we can create the most value at Howard Hughes by taking capital out of the real estate subsidiary and injecting that capital into the insurance operation. The approach to taking capital out of the insurance sub is basically to bring in Most real estate investors borrow money from a financial institution. The general partner puts up a relatively small amount of capital. In some cases, they raise that GP capital from others, and then they bring in limited partners, investors who put up the bulk of the capital in a real estate transaction. It is a highly structured way to invest. Howard Hughes has taken almost an old-fashioned approach. It has borrowed money on a very conservative basis and has put up effectively 100% of the equity in pretty much every transaction it has ever done.

Speaker 1

The problem with that approach is that the after-tax return on equity, and again, Howard Hughes is a C-corp, is at a level that is difficult to overcome, I would say, the market's cost of capital for that business. The plan is, we have hired or we are within days of hiring a financial advisor on a broader basis, but there are already transactions underway where we are going to sell down 80%-90% stakes in the equity interests in a bunch of assets, bring in kind of long-term pension funds, family offices, other investors who want to earn attractive real estate returns, generate fee income from those arrangements, including incentive fee income, and really convert, transform the business into a, think, real estate asset management firm, like Blackstone's kind of core real estate and other operations. We think that is going to materially improve Howard Hughes' return on capital.

Speaker 1

We think it also will enable Because the cost of capital for Howard Hughes historically has been so high, there have been development opportunities that are great real estate developments financed in the conventional way that real estate investors finance investments, but are hard to overcome public company cost of capital. We are not going to have that problem anymore, so we think we can accelerate some of the development at Howard Hughes and just use more of other people's capital and build a higher-returning business. That is great for Howard Hughes, and we have a management team on the liability side of the balance sheet for our insurance operation that has the capability to run a much larger insurer and sees interesting places to deploy capital. Then we have Pershing Square on the asset side of the Vantage, where we think we can earn meaningful returns on capital.

Speaker 1

Stock buyback here we do not think will generate materially. The most important thing for Howard Hughes is for the world to be able to look at the company and say, "This is an insurance holding company." The insurance operation led by Marc and David, the investments managed by Pershing Square, and we build a high ROE insurance company. That will take the stock from, in our view, something approaching 80 to twice our intrinsic liquidation value. Ryan, you want to jump in?

Speaker 3

Yeah, and I think on the buyback in particular, adding to Bill's comments, the way we think about it is, where is the best use of every incremental dollar of capital? We clearly evaluate buybacks, and as we talked about publicly with Howard Hughes in some of our presentations, we think that kind of the intrinsic value of the business is worth, or the NAV is something in the low 100s, and the stock is trading for just a little under 80. So you could argue that by buying back stock, you might be creating. Every dollar is kind of worth $1.25 or $1.30, something in that order of magnitude. We believe taking a dollar and putting it in the insurance business, we can achieve our aspirations of a 20+% return on equity. Public insurance companies like that trade north of two times book value.

Speaker 3

So we think, in effect, by putting the dollar of capital in the insurance business, that dollar could be worth something closer to two. In our view, that is a much higher return on capital for that, just to give you a little bit more context to how we think about it.

Speaker 1

Yeah, you put a dollar in, it can compound at 20% and then be worth 2x. A year from now, a dollar becomes $2.4.

Speaker 3

Yeah.

Speaker 1

And then, of course, insurance is a credit-sensitive business, and having strong credit ratings in that insurance operation are important. If anything, we want to build the capital base of Howard Hughes to improve our creditworthiness as opposed to shrink the capital base. Maybe someday that will make sense, but in the short to intermediate term, the focus is really going to be on driving the capital and returns in the insurance operation, as well as reducing the capital but increasing the returns in the real estate operation.

Speaker 2

Great. Operator, let's take a question from the phone, please.

Operator

Your next question comes from the line of Karim Assef with Bank of America. Please go ahead.

Speaker 6

Hey, good morning. Bill and Ryan, thank you so much for taking the question. I think about 96% or 98% of your fee-paying AUM is permanent today. Do you expect that share to take hold as you add more retail products, or could you take on some redeemable capital to grow faster?

Speaker 1

Yeah, we are not interested in raising open-ended fund capital. The model here is, the beauty of this strategy is we are not on a fundraising treadmill. Our focus can be on the underlying performance of the companies we invest in. We can grow this business at a very high rate just with the compounding of the various funds that we manage. So our focus really is on permanent capital models.

Speaker 6

Thank you for taking my question.

Speaker 1

Thank you.

Speaker 2

Okay, great. Just as a reminder, if you would like to ask a question over the phone, the dial-in details are on Bill's pinned post and on the Pershing Square Inc. website. We have a couple portfolio questions from the online portal coming from Yusef. He has questions about Netflix and Alcon. Let's start with Netflix. "With competition in advertising, Netflix has raised subscription prices considerably. Competition from Disney, Amazon Prime, and Hulu continues to grow. Personally, I found their content increasingly inconsistent at Netflix. How confident are you in their long-term pricing power, and could expanding advertising risk frustrating viewers and pushing them towards the competition?

Speaker 1

Just a high level, today you can be advertising-free on Netflix for $20 a month. The amount of content someone receives for $20 is really We like companies which don't, I would say, squeeze every dollar of potential profit from the consumer when they're delivering their product. I think there's a vast difference between the incredible volume and quality of content you can get at Netflix for $20 a month. By the way, if you don't want to pay $20 a month, you can pay $8 or $9 a month and get an advertising-supported subscription. The ads are, certainly in my experience compared to other websites, they're actually decent ads, and they're not nearly annoying. I think Netflix has been very cautious about overwhelming people with advertising.

Speaker 1

We think both on the advertising side and the pricing side, they've got plenty of room. Now, of course, content quality is really important. I think they've felt based on, certainly you can draw an inference from the changes they've made in the leadership of the content part of the business, that they want to continue to be at the cutting edge.

Speaker 3

Yeah, I think that's great, and just a little extra context. One of the things that's important in the way that we evaluate sort of the pricing for Netflix is we look at what is the pricing per hour that somebody might pay to Netflix versus other services, and Netflix is still much cheaper per hour than any of the competitive services out there for the main reason that most of the services, generally, the top ones are all priced around the same level. Some of the ones that are trying to gain more share, starting off a small base, are priced much lower. But people spend significantly more time on Netflix than they do on any of the other subscription services. As a result, it's better value for people. That's a key metric that we track.

Speaker 3

One thing that the company talked about on its third quarter earnings that we thought is very important of these proof points, most of these concerns which you bring up, Yusef, and that we've certainly studied, they really relate to the U.S. business. A lot of Netflix's business is outside of the U.S., and they really don't have any of these significant concerns outside. It's really U.S.-focused. One of the things that the company talked about is their churn, which is really the percentage of people who connect, which is industry-leading, actually improved. So there were fewer people canceling these services as a percentage of their customers this quarter than there was in the quarter in the prior year. We think that's ultimately sort of the real truth point, is whether or not the company is having fewer people disconnect from the services.

Speaker 3

We think that that was a really great indication that the company shared on third quarter earnings that things are going well, despite a lot of media talk about whether people are not watching as much Netflix as they might have in the past. We still think it's a very good value and that fewer customers are disconnecting, which is really important for the health of the business.

Speaker 2

Great. The second question from Yusef about the portfolio relates to Alcon. "I've researched Alcon and find it particularly interesting, a very high-quality business. Was the investment primarily driven by an attractive valuation for a reliable long-term compounder, or do you anticipate significant growth catalysts that the market is currently underestimating?

Speaker 3

I think what's interesting about Alcon is it really highlights our process overall. We have this library of maybe 300 to 400 companies that we think are the world's great businesses, and we study them for long periods of time. Alcon was one when it spun out from Novartis and is preparing to spin back in late 2019, where we really started taking a look at it, knowing it was going to become a publicly traded company. We had a price target for it. We thought we might get the opportunity, then it actually spun out at a valuation that was a little bit higher than our threshold for value and for perspective.

Speaker 3

Alcon, really going back almost seven years now, six to seven years, was trading at a high 20s multiple of earnings for a business that we thought was a high-quality compounder, as you pointed out. That valuation today is now 17 times, but we think the company has actually done a wonderful job. It's a very interesting situation where we followed a company for a long period of time. It's had enormous success in terms of its business progress, yet the market, I would say, has soured more on the entire sector, the European med tech sector, even though Alcon's really a U.S. company. I think that has been what's resulted in the significant multiple compression that gave us the opportunity to buy the business.

Speaker 3

So, to your question, we do think that it is a high-quality compounder that meets our thresholds for high degree of predictability and certainty, very good management team, a business that we think can grow at least at mid-teens earnings per share per year over the next three to five years at a very low valuation of 17 times earnings. We also think that there are some interesting yet smaller parts of the business, particularly as it relates to some of the small drug development they're doing, that have the potential to be quite blockbuster drugs, if you will, for Alcon in terms of its various parts of the eyes. We'll have to see if that plays out or not, but those are some interesting call options, I would say, on the business that I think the market is ascribing very little value to.

Speaker 3

They're not in sort of the figures I gave you, but they could be very additive to that in terms of the growth rates, those things ultimately hit and become very successful. I would say a mixture of both.

Speaker 2

Great. We'll now take a question from Sebastian Gold, who asks, "Given the expanding scope of the mandate at Pershing Square, adding Ventures, Asymmetric, and other funds in the future, how are you thinking about a potential change in the team size, and is there an expectation that those investments that may make it into Pershing Square Ventures might remain in the portfolio once they IPO?

Speaker 1

Yeah, very thoughtful question. The good news is with nine people on the investment team, including me, and a portfolio of, today, let's say 14 companies, I would say the ratio of investment team talent to capital deployed in ideas is one of the highest ratios of any investment firm in the world. We have a team that has enormous capacity. Ventures is a space that personally I spent a chunk of time on over the years. It's something now that the full team is available to look at ideas. The same kinds of themes and business constructs that we experience in the public markets, we're looking for companies that will become great public companies. We don't need a different team to assess really private businesses. I don't expect any change in the team by virtue of launching Pershing Square Ventures.

Speaker 1

With respect to asymmetric, this is stuff that we do every day, so this would just be a dedicated vehicle that would hive off, if you will, a portion of the portfolio. There's really no change in the team there. I think our business really will not change as a result of the launch of these two funds.

Speaker 3

Just one thing to add in terms of the team, particularly for PSV, a lot of the diligence increasingly in the public markets, if you think about the hyperscalers, think about the AI landscape, in order to be a great public markets investor, we think it's increasingly important to study private companies. That really gives you a lot of foresight into what's coming around the corner, if you will, and to having a really good understanding, being able to meet with these companies, being able to understand their business plans, and then being able to ultimately take those learnings, apply them to public markets, I think is something that's really done very well with the same team that's looking at a lot of those public markets investments. We view it as very complementary and actually making us better public markets investors as well.

Speaker 1

Yeah, and to your question about will we continue to hold these companies after they go public, will we become long-term owners, one of the things that's appealing, in my view, to founders about Pershing Square Ventures as an investor is it's not a traditional venture capital fund. Most venture capital funds today, after the business goes public, after the lockup is over, the stock is distributed out to the underlying investors in the fund, or they sell the stock. We can choose to retain the stock for the very long term. We are very comfortable, obviously, in the public markets. So part of our pitch is we're a great investor in a private world. We can help you with the process of going public, and we can be a long-term investor after you're public.

Speaker 1

We think this will be a very good partner to a high-growth private company.

Speaker 2

Great. The next question comes from Ludwig, who asks, "Why is Howard Hughes not part of the PSUS portfolio? I am looking to buy PSUS because I prefer the fee, but it seems like a big loss for shareholders to not get a piece of that company.

Speaker 1

I think Howard Hughes will be an excellent investment over time. The issue is we own 47% of the company, and as part of the transaction we did with the company, it was important to the board that we did not formally take control of the company by owning more than 47%. We have a restriction on our ability to acquire additional shares in Howard Hughes, which is why it is not in the PSUS portfolio, but of course, any investor can just buy the stock directly.

Speaker 2

Great. Our next question comes from Ator, who writes online asking about Brookfield. He would like for you to comment a bit about the thesis behind the company and how you assess management's historical delivery against its targets, particularly in real estate insurance.

Speaker 1

We like the asset management business, and we like asset management businesses where the company has, I would say, a real competitive advantage in the strategies they pursue. Brookfield has a very long-term track record at being a superb investor in real estate, in infrastructure, in power, and actually a lot of the AI-adjacent, data center-adjacent businesses. We have known the management team for many years, really going back almost 20 years. It is a team we have enormous confidence in, and they have generally done a very good job meeting their objectives. But Ryan, you want to comment?

Speaker 3

Yeah, that's right. I think it's a great question about how you evaluate them relative to their historical objectives. Most companies that we look at, while they do a great job over time, they don't actually give a clear roadmap at every step of the way of what they're going to do next, so it's a little bit harder sometimes to assess. The business performance is great, but how do we think about it relative to what management said that they would do? Brookfield is very unique in that every single year, they have a shareholder meeting where they tell you what they're going to do, in their view, over the next four to five years, and then the next year, they update you as to what they've done over the prior year, and they update what their outlook is for the following four or five years.

Speaker 3

I would say of all the companies we track, it's actually probably the easiest one in order to evaluate what management has done. And it's been a very clear trend. Management has outperformed their targets at really every step of the way. That is despite having what I would view as pretty ambitious targets. So, for example, we think that in our estimates, Brookfield's likely to grow its earnings per share over the next three to five years at something around 20%. Brookfield's own internal estimates, as we talked about in the letter, are closer to 24%-25%. Given their track record, it would be very reasonable, I think, for one to assume that Brookfield's numbers may be a little bit more accurate than our numbers. And so, to the extent that actually happens, I think there'll be upside even beyond what we think that Brookfield can do.

Speaker 3

And the management team, as Bill mentioned, is excellent and has done a really impressive job over time.

Speaker 2

Okay, great. In the letter, you wrote about maintenance CapEx and growth CapEx for AI infrastructure. How do you think about looking for evidence that would show whether the new capacity is earning attractive returns after the equipment has been installed or replaced down the line?

Speaker 3

Sure. In the letter, the point that we were trying to make at a very high level is it's clearly observable that these companies are spending significant amounts of extra capital. What's interesting about the AI build-out, I think, versus lots of other industries in which you might have a significant increase in CapEx is here you can actually tell exactly where it's going. The reason that you can do that is they are ultimately first constructing a data center shell, if you will, or just the physical infrastructure, and then that will take them sometimes a year or two in order to complete.

Speaker 3

Towards the very tail end of that progress, say maybe three to six months out, they actually have to acquire or install what we call the server equipment, which really includes the GPUs primarily, but also all the other networking equipment and everything you need in order to set up the data center so that you're able to monetize it. That clearly allows us to better track what they're spending the money on. Ultimately, the question is, how do we evaluate whether that return on capital is an appropriate one or not? The way that we think about it is in order to earn an attractive return on capital, and we gave a little example of this in the letter, we need to see revenue growth accelerate beyond historical levels.

Speaker 3

If revenue growth is able to accelerate beyond historical levels, we can then look at how profit margins change over time and make an assumption about the profit per dollar of CapEx that is ultimately coming back. We wrote about this a little bit more in the letter, but we think, based on our analysis, which involves looking at what the companies have said, talking to a lot of experts in the space about how data centers get constructed and ultimately what the return should be, looking at some pure play competitors who are already doing this, where it's a little bit clearer to see what the standalone P&L is. Our expectation, pretty conservatively, is that a return on capital pre-tax of 15%-25% would be what most companies who are just renting out compute capacity could do.

Speaker 3

We think for our hyperscalers, Amazon, Microsoft, even increasingly Meta over time, they're going to have a lot of value-added services that they could provide on top of just renting out compute, because they're able to be able to layer effectively in software that will allow people to do more things with that compute, and that value add should allow them to have even higher returns on capital. The way to ultimately measure it will be to look at what the revenue growth is over time in aggregate and want to see an acceleration in revenue growth, and then likely also going to want to see an acceleration in profit margins.

Speaker 3

Those are kind of the two key determinants that we would be looking for outside in to see whether or not the returns on capital are likely attractive in these projects, which we think they will be.

Speaker 1

One of the other things we pointed out in the letter, which I think is interesting, is that analysts have modeled the acceleration in CapEx spend. They really have not given credit for the returns that are going to be earned on that CapEx spend. Analysts generally feel more comfortable building into the model things that they know with a higher degree of certainty, and they're much less cautious about building into the model things on which they don't have as much certainty. Obviously, return on the construction of data centers several years out is something that's a little more uncertain. One of two things has to be true. Either the CapEx is earning an attractive return, which means revenues will grow at a rapid rate, or the return objectives are not met, and therefore the CapEx budgets get cut.

Speaker 1

It seems like the stocks today, or at least the models are being built as if it's a certainty the CapEx is spent and it's an uncertainty the revenues are going to come in. That's just not, we think, the right way to look at the business.

Speaker 2

Okay, great. Our next question comes in response to Bill's X post from Arda. He says, "As someone who's been following you for a long time, your style seems to have moved from more traditional value investing in great businesses," excuse me, "to great businesses like Meta and Netflix at about 20 times earnings. I'm aware that these are all great companies, but it feels like you're asking for less margin of safety. Has your style actually shifted, and how do you find margin of safety at these valuations and manage risk? Thank you.

Speaker 1

Yeah, I think the margin of safety can be meaningfully greater. There is not necessarily a correlation between a higher multiple and a lower margin of safety, right? There are plenty of low multiple businesses that are poor quality businesses that are going to disappear over time, and there is no margin of safety at all. It is not just a pure statistical analysis, the higher the multiple, the lower the margin of safety. I think Meta’s margin of safety comes from the billions of people who use their products, that distribution channel they can launch, Muse, the very high returns they earn in their core business, the stickiness of people who use their products. These are really important moats that make it very difficult to compete with a company like Meta. Or Visa.

Speaker 1

Visa today at mid-20s times earnings, I think there is an enormous moat around that business, and therefore there is a meaningful margin of safety. The value of a financial asset is the present value of the cash it generates over time. Growth plays a If you can be The business is one where you can have a high confidence level in the growth that is going to occur over time, that growth, present value today, should add to your margin of safety.

Speaker 3

Yeah, and one thing I would just add to that, agreeing with Bill’s commentary, is that the characteristics of the businesses that we own today, those have always been the characteristics of businesses that we wanted to own by and large. One thing that has changed recently in the capital markets is that these wonderful businesses have come down significantly in terms of either their share prices, or more likely, because their earnings have grown significantly, in terms of their multiples. When you look across our portfolio, most of what we are buying, even though the aggregate portfolio multiple is about 20 times, the companies themselves are trading at significant discounts relative to the multiples they have traded at historically. I would argue that is despite having probably better business prospects today and higher competitive moats today than they have had previously.

Speaker 3

I think part of this is just trying to take full advantage of what the opportunities are that we think the market is offering us, that historically would have been too difficult to have acquired these companies at much higher multiples where they have typically traded at.

Speaker 1

The other point I would make is inflation is a threat to many businesses. One of the things that creates a margin of safety with a great company is their ability to is pricing power, their ability to raise prices in a world in which inflation turns out to be persistent. Your protection doesn't come from a cheap multiple, it comes from a great business.

Speaker 2

Okay, great. We had several questions on the use of derivatives from Daniel, Nicholas M., and Adam Funk. The questions essentially ask, "Can you explain how Pershing Square uses derivatives, why PSUS holds forwards, and how investors should think about the reported values of the positions in that context?

Speaker 1

Sure. There are regulatory requirements for 40 Act funds that limit. For half the portfolio, you can invest as much as 25% of assets in any one name. That's a degree of concentration that certainly covers what we do. For the other half of the portfolio, at cost, there are limitations on deploying more than 5% of the fund's capital in any one name. There are technical rules around those acquisitions that could cause you to trip the 5% threshold. One of the ways in which we use derivatives is to make sure we don't inadvertently trip those thresholds in building positions. We don't use forwards as a way to generate financial leverage. We think of that position as a direct equity ownership, and as soon as we can turn the forward contract into an equity interest, we do so.

Speaker 1

The other reason why we use forwards is that the Hart-Scott-Rodino requirements for investors who are other than entirely passive require sometimes that we make a filing with regulators before we have beneficial ownership of the stock. We'll use a forward contract as a way to kind of get economic exposure before we ultimately meet the regulatory requirements and own the securities. Since we've purchased a bunch of new investments over the last since the launch of Pershing Square USA, you've seen more forward contracts than we will use once those positions are held for more than probably a few months. It's not something that should you should just think about a forward contract as the economic equivalent as if we own the shares.

Speaker 2

Great. The next question comes from Value is Important, who asks, "Hi, Bill. I'd like to ask if Pershing Square has any interest in investing in Hong Kong, in tech stocks." I would broaden this to say several investors have asked whether Pershing Square would invest outside of the U.S. more broadly. If you could comment on that.

Speaker 1

Yes, we would invest outside of the U.S. I would say more likely investor in countries that are closer to the U.S. or where English is spoken. We've invested in Canada over time. We've invested occasionally, Universal Music is a European domiciled company with its principal headquarters in the U.S. But our focus on, while the vast majority of the portfolio over time has been U.S. focused, really relates to a combination of many of the best businesses happen to be headquartered here, listed here, and have market caps that enable us to build positions in a relatively short period of time.

Speaker 1

If there's an issue or we want to be more engaged in the company, it's just obviously much easier to do so if we don't have to have a passport and make it through customs, or travel long distances in order to engage with the management team. So our biases relate to the U.S. That being said, occasionally a business will meet our standards, will be sufficiently compelling that we'll step outside of the U.S.

Speaker 2

We have questions from Adam and from The Silent Investor, along with a few others, about SPARC, asking if there is any update that you can provide or how you think about that over the long term.

Speaker 1

SPARC, Pershing Square SPARC Holdings, is an acquisition company. We call it a SPARC because instead of using the traditional SPAC approach, what we did here is we gave what were initially non-transferable rights to the investors who invested with us in our previous SPAC, Pershing Square Tontine Holdings. The beauty of this entity is there's no founder stock, there are no shareholder warrants, there are no underwriting fees. We take no compensation in connection with this vehicle. The only differential security the funds own here is these warrants on up to 5% of the outstanding shares of a company that we were to take public. We have engaged with private equity funds, some founders, and others over time about the business or about this entity, this vehicle, as a way to go public.

Speaker 1

The lines have not yet crossed on a company we want to take public on terms that make sense to take it public. The public markets, there's been a huge amount of companies that have been funded in the private venture markets. The IPO market is open really episodically, and this year is kind of a good example. There have been some pulled IPOs of very notable companies, Oura Ring and others, this year. We can really offer a certain execution to those businesses. So, there will come a day, and hopefully sooner rather than later, we find a business we really like on terms that make sense to us as the sponsor of the entity, where we take a company public and we give them the certainty of a listing on terms that make sense.

Speaker 1

I think the market environment's actually well-positioned with uncertainty and volatility and interest rates and some failed IPOs for us to get something done here. So, it's definitely on our list of things to do, and I hope that we get something done sooner rather than later.

Speaker 2

Great. Just a couple more questions. You addressed this at the beginning of the call, but we've had a number of folks write in about the discount at which PSUS trades and how you think about it and some of the initiatives that you have undertaken to start to address it.

Speaker 1

Definitely something we are focused on. One of the things that we are going to examine carefully is whether some of the funds that trade well actually pay dividends. We are going to take a close look at that as we think adding a yield to this vehicle, where you get the benefit of Pershing Square's performance over time and a current yield along the way, will open up the universe of people who will be able to own this entity. That is something we are going to study.

Speaker 2

Okay, great. This question comes from Frederick Justice Online. As you think about launching new products to grow fees, how do you protect against the simplicity of the permanent capital base, and does adding complexity start to dilute the core advantages rather than compound it?

Speaker 1

I missed a little bit about the first part of the question. Just say it one more time.

Speaker 2

Sure. They are asking how you weigh the launching of new products, of new funds, essentially.

Speaker 1

Yeah. The core driver of the value of Pershing Square Inc., the manager, the alternative investment manager, is the growth in our fee-paying assets under management. The biggest long-term driver of our fee-paying assets under management will be the underlying performance of the funds that we manage. We are fortunate in having a high-return investment strategy. We have, as of this moment, $24 billion of fee-paying assets, up $1 billion from the end of September, just from performance. That is as if we raised a new billion-plus-dollar fund. The effort associated with that is much greater than just the compounding of the underlying assets. Our first focus, and importantly, we are in the business of generating returns for our investors. It is a great model when our interests are perfectly aligned with our investors. We will do better if our performance is better, even if we never raise another dollar of capital.

Speaker 1

That is our first and very much focused priority. Beyond that, if there are funds that we can launch that we have the capability and acumen and relationships or whatever is required to launch a new fund, and we think it is additive strategically to the firm, we are going to do so. What we like about Pershing Square Ventures, it is a space we have spent time on historically, bringing the full team to focus on. The biggest risk to an investor always is disruption. Someone will come along with a business that disrupts a company that you own. The best way to understand what is coming is to pay attention to basically venture-backed businesses. This will just launch the vehicle, make us systematically look at really all the interesting private companies that are potential threats to existing public companies and potential opportunities for investment.

Speaker 1

It is also a way for us to grow that is really largely unrelated to the other strategies, but complementary to the overall business. We will launch vehicles like that. Do not expect for us to have 20 new funds in five years or anything like that. It is going to be a handful.

Speaker 2

Okay, great. At this time, we have no further questions over the phone, and we have addressed all of the topic areas from folks who have written in on X and online.

Speaker 1

Okay, great. Look, we're really grateful. I have to say that the quality of the questions we've received from our shareholders is really fantastic, and it enables our other investors who are a little more timid about asking questions to learn answers to things that they would like to know. So, we like this approach of really having a broad. We open the questions to a very broad number of shareholders. We thank you for being an investor in Pershing Square and the Pershing Square funds. Have a great day.

Operator

This concludes today's call. You may disconnect.

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