James Elbaor is investing in Bill Ackman at a Discount $PSH (podcast #124)

James Elbaor, founder and CIO of Marlton Capital, discusses his investment thesis for Pershing Square Holdings (PSH).

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Transcript begins below

Andrew Walker: All right. Hello. Welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you liked this podcast would mean a lot if you could rate, subscribe, review it wherever you're listening to it. With me today, I'm happy to have on for the second time, James Elbaor. James is the founder and CEO of Marlton. James, how's it going?

James Elbaor: It's going well. Good to see you again, Andrew.

Andrew: Hey, it's great to see you too. Let me start this podcast the way I do every podcast. First, disclaimers, I remind everyone, nothing on this podcast is investing advice. We're going to be talking about a stock that mainly trades internationally today. So just remember, that comes with a little bit of added risk, a little bit of added maybe tax complexities there. We're not tax advisers. Everyone should just please consult a financial adviser, do your own work. The second is a pitch for you, my guests. People can go listen to the first podcast from... I can't believe it was all the way to summer 2021. It feels like it was much sooner than that.

Great to have you back on. I think you're a super smart guy. I know you know this thing really well and you caught some really interesting tidbits in the disclosures, which shows how closely you're reading the filings. But all that off the wait, let's just turn to this company we're gonna talk about. It's not a company, it's actually a closed-end fund. It's Pershing Holdings. The ticker is PSH and it trades over in London. I'm just going to stop there and turn it over to you, James. What is PSH and why is it so interesting?

James: Oh, gosh. Well, it's great to be back. Similar to the last conversation that we had, we talked about Third Point Offshore and today we're going to talk about Pershing Square Holdings, which I should remind everybody is not only on the London Stock Exchange. It's also on the Euronext as $1 USD. Then there's also a pink sheet as well. There's a couple of different ways to get it but I think probably the best is usually trading through the Euronext. Like you were saying, Pershing Square Holdings is a closed-end fund. It's an investment holding company run by Bill Ackman. It's incorporated currently in Guernsey which is important because the main crux of our conversation here is that I think it's going to re-domicile to the United States, which creates a really interesting event path and investment opportunity.

Let's take a quick step back and describe what this is because one of the things that you said was it's a closed-end fund. It is a closed-end fund but I think the way that Bill is positioning this, the way that it is run is really more like an investment holding company. So I think people should really start to and will start to see this as more like a Berkshire Hathaway or Icon Enterprises. Let's talk about what this is not. This is not a reinsurance company like some hedge funds have. This is not a feeder fund like Third Point Offshore, which is a company that's investing in a hedge fund. This is truly you're making an investment into the holding company of Pershing Square Holdings. They make direct balance sheet investments into underlying securities, principally North American. Right now, they have nine companies. They're long-only. And yes, I'm sure it's going to come up, they have a very interesting swaption on interest rates. We don't know exactly where on the curve they are, but we can talk about that a little bit.

So I think maybe what might be helpful when I was thinking about this and thinking about some of the listeners here is why Guernsey. So Pershing Square Holdings is basically domiciled in Guernsey right now to avoid compensation or specifically the carried interest restrictions. There's other regulatory restrictions as well, but mainly the carry interest restriction that is imposed by the Investment Company Act of 1940. So that is why they're generally incorporating Guernsey right now. So that begs the question, okay, how are you not deemed an investment company under the 40 Act? One way to look at that, I would encourage everybody to kind of figure find their own opinion as to how this happens. One of the ways that we did it was to pull up Berkshire Hathaway some 10k, you can just control fine in the 40 Act, and they will very succinctly describe to you why the 40 Act does not apply to them.

I'm gonna read part of that right here. It says the company does not invest or intend to invest in securities as the primary business and no more than 40% of total assets will be invested in investment securities, as such term is defined in the Investment Company Act. And what we think is, Bill is telegraphing and has been telegraphing that they are going to make the move from Guernsey, which is where they're currently trading as essentially acting like a hedge fund, just incorporating Guernsey trading regular securities, and will be more like a US domiciled investment holding company like Berkshire Hathaway. But in order to do that, as we said trading securities need to be less than 40% of your assets and Berkshire Hathaway gets around that by owning GEICO in the sense their insurance company, Icon Enterprises has energy companies that are affiliated with them that they have full control over. And then you've also got KNI which is Bill Foley's holding company, which has consolidated other businesses as well.

Andrew: I'm laughing because I didn't think we'd bring Bill Foley in here.

James: Yes. So maybe one of the things that is actually pretty interesting right now about Pershing Square Holdings is the discount to NAV. So it's trading currently at around a 35% discount to its net asset value. I think it may be helpful to talk a little bit if you think about why the discount to NAV exists.

Andrew: Yep.

James: So we think of it as three reasons primarily. So reason one is the concentration of the Pershing Square portfolio is 9 long-only equity positions. Two, he employs leverage. So if you look at how the portfolio was running in January, it was running about 128% net long. Today the portfolio is 106% net long as he is taking that down. I think what's really important worth mentioning, because I know that Bill would mention it, that the debt is true debt, these are bonds. So this is not margin debt. So if Pershing Square were to find themselves in a market downturn, there is no risk that they're going to get a margin call on their securities, because they just don't use margin debt. Then three, what we think is really actually coming on here is that traders or investors just can't arbitrage the underlying NAV, because Pershing Square trades, ULSE Euronext Market hours, so European market hours but has underlying investments that trade New York Stock Exchange Market hours.

So it makes sense that in a portfolio that's concentrated and levered that you apply some type of discount, and probably a significantly larger discount than you would normally apply. Given the fact that if all of a sudden the market starts to tank as we have volatility right now, there's no way that you're going to be able to move out of your Pershing Square Holdings position, especially if you have that margin. So all these reasons, and all the different things that Bill has done to close this discount, and there are many, and we can spend almost an entire podcast talking about what a great capital allocator has been for shareholders thus far, including buying back shares uplisting to London Stock Exchange premier selection, starting a dividend that has now actually increased the dividend recently.

There's plenty of shareholder-friendly things that he's done, we think the most shareholder-friendly thing that he will do is re-domicile and move into the United States. And once he does that, you're no longer looking at a valuation on that asset value. You're no longer saying, well, James, is Pershing Square going to be a 35% discount to a 10% discount? No. Berkshire Hathaway trades at 1.36 times book value. IEP trades at 1.6. It's a little bit misleading because of the energy holdings that he has. Historically, it's traded closer around like one 2.8 times book. But can I historically trade it at 1.2? So that's a 20% premium to book value. And just to take this back because I think this is a headline that I even forgot to mention, Ackman has compounded over the last 18 years. It's 17.5%. 17.5% over the last 18 years, that's including Valley and Herbalife. So we think that there's just plenty of upside... I'm gonna pause there if you have questions because then I can kind of go into the math as to how this really starts to look attractive over the next few years but open it up.

Andrew: No, this has been great. Look, you've done all my work for me. You hit most of the questions that I had over here. So I'm gonna try and add some stuff to earn my keep as a podcast host. Let me just bounce around through a couple of things. Now, the last thing you said. So I think a piece of your thesis is there's a lot of pieces right? Like it trades for 30 to 35% discount NAV. Ackman has got a great track record so if you keep those 15 to 20% From here, that 30% NAV with buybacks, 15 to 20% annualized, the growth is incredible, right? So there's that piece of it. You think that that NAV discount can collapse because he might do a US by some US operating company giving US listing. I know they talked about US listings in general, there's some annuals. We'll get to that, all that types of stuff.

Let me just start with the last thing you mentioned. You said, hey, if you come to the US, if you look at Berkshire Hathaway trades at 1.3 times books, KNI trades at 1.2 times books. IEP trades at 1.6 times book. And I think my first pushback there would be okay, I get you, he's gonna come over here. And this is going to trade for. And you think this could close the gap if he comes over here and gets the operating company? But my first question would be well, yeah, but like, Berkshire Hathaway treats at 1.3 times book, but GEICO has held on the books at what they acquired it for in 1992 or something. KNI, I knew for a fact because I've done a lot of work. They've got a lot of the startup investments and every now and then they'll IPO-1 or it'll turn out oh, lo and behold, it was worth 5 times book, and people got a pretty good insight into that.

So I would kind of push back and say, look, if he comes over here, I don't know what the fee structure will be. We'll probably talk about fees in a second. But if he comes over here, and he buys, name your company to get a listing over here, I still feel like he would probably trade at a discount because people will just look at it and be like, okay, cool. You paid an acquisition premium to get it over here. We've still got the fees, and we've got some really liquid publicly traded stocks, maybe it gets a little bit better because there's a little bit more ARB opportunity. But maybe it gets a little bit worse because people look and say, okay, cool. He owns 10 large caps, really nice companies, and then this unhedged-able US operating business. So it's really just a bet on Bill Ackman's capital allocation going forward, which is probably a very good bet but I could see how it goes the other way from what you're talking about.

James: Yes, I don't totally disagree with you. I think that realistically, we think that this is going to play out between 18 and 24 months. I think that this is a pretty big focus for them right now. Also what we never even mentioned, which is what's worth mentioning, while Marlton, my firm has been talking about this since 2018, we think that this is what Bill's going to do. The last annual report, which I encourage everybody to read makes it abundantly clear that Pershing Square at the board level and the investment management company level, Bill is thinking about it. In fact, there's a literal line in there that says, the way for us to close this discount is to re-domicile, and we are continuing and will potentially explore options on that.

Andrew: Quick clarification, was it the last semi-annual report or the annual report?

James: Semiannual report.

Andrew: I thought it was the semi, I just wanted to clarify in case anybody's gonna go check us on that. But yeah, everything else you said, I 100% agree with it.

James: Yeah. So starting there. Taking a step back, the reason why I bring that up is we think that realistically, this is going to take some time. There's a few things that are going to happen. One, there's going to be an announcement of potentially having some type of a target. There's going to have to be some type of financing involved. We think that whatever target it's going to be is likely going to be real estate in nature. I know that he has more of a consumer background but remember, one of the things that we're trying to fix here is how we get trading securities to be under 40%. So you need an asset-heavy business and more of an asset-heavy business that you can add a lot of leverage to is real estate, outside the fact that Bill has had such a fantastic experience with general growth and the experience there.

So we think that it's going to be real estate in nature. That is to say, I agree with you that initially. I don't see this trading at a massive, necessarily huge premium, where you're looking at Berkshire and saying, well, it's 1.4 times book and they acquired GEICO forever ago. And that is true, they did do that. That is how accounting works. What I do see is happening though, is that these liquid securities should realistically in our closed and fun experience trading anywhere between a 10% discount to par. I think that it's highly realistic, that what you're really paying for here is a par-like value as people then start to assign what is the value that if we give par to the actual trading securities, then what's the value of operating company going to be and then how we kind of value the sum. Altogether, I think you'll get to something of probably current NAV in between as it works out. Yeah, there can be a downside for sure. Look at Howard Hughes. Howard Hughes trades at a pretty significant discount when you think about the value there. So it's highly likely that a discount remains, we just think that it's not 35%. We just think that it's something closer to the current NAV of negative 10 to par.

Andrew: It's funny because I posted this on Twitter, obviously and there were two or three questions that were most common. The most common by far was, when does the discount close? Which I get it, like investing into security trades at a 30% discount to NAV, everybody wants that to close the next day, right? But it's funny we're saying this because tell me if I'm wrong, I think the core thesis for you as Ackman has compounded 17% annualized over the past 20 years or something along those lines, right? It's like, hey, if he's gonna do 12%, annualized for the next 20 years, you're really not going to care if that discount closes now. By the way, it might be better because he can keep buying back their shares, which will be very accretive and increase that compounding, but it is funny how focused and I'm focused your focus, it's where all of our minds go. But if you can get over to the US, get the cash flow from an operating business, and then start repurchasing shares, you kind of get that snowball rolling.

James: Bill is obviously very public facing he gets a lot of criticism. I want to say two things for at least Pershing Square shareholders like myself that have experienced this. We have an absolutely incredible capital allocator at the helm and this isn't just because he's a smart person. Let me give a really good example right now. We were right in the midst of this year. Share buybacks at Pershing Square had stopped. Why? Because they were deploying capital. No sooner than May of this year, Pershing Square bought back $113 million notional worth of shares at a 35% discount NAV. That's 2% of the float. That was an immediate move on the Pershing Square board and investment manager in order to make that capital allocation decision. They've made that incredibly nimbly.

That is not what you typically see at the corporate level, where these types of buyback programs are longer, they're more thought out and not always appreciated, because they're kind of just done well, we have a buyback program and we're just running through the numbers. This is done in a very nimble way. I also want to say I get a lot of credit that while there's a lot of time and focus spent on tontine, he could have done a really bad deal and he chose not to. At the same time, he's moving forward with Spark. Spark is still moving forward. There's still that shell filing and we think that that's really possible to happen in the next three years. That's what happened. It won't be listed, as we know, but it will certainly be OTC and that's going to create its own event path. We're dealing with an incredibly nimble capital allocator that I think really surprises people continually. I don't know why it surprises people. It doesn't surprise me when I see these things but it's somebody who is very much on the side of shareholders and the structure, in general, is on the side of shareholders. Ackman himself went NAV through various different trusses, as has been publicly disclosed. He's the largest shareholder in Pershing Square Holdings.

Andrew: I hadn't thought this fully through but you said in order to avoid the investment for debt, Pershing, if they want to come to the US and buy operating businesses, they probably need to do something with a lot of assets, a lot of book value assets so that they can come. They're not going to do a US franchise or something because there's no assets there. So they would just still be an investment holding company, even if the franchisor was hugely, hugely valuable. You mentioned real estate. So I just want to ask, I know several people have mentioned being like, hey, would they just buy all have HHC and use that as their operating company? And I don't know, obviously, HHC is one of the nine companies that they're invested in. Bill's got a lot of knowledge of HHC. It's been a kind of controversial stock. It's kind of gone nowhere since the spin despite lots of upsides. Do you think HHC is a target or do you think he's going to kind of do something of his own? If it's not HHC, what type of real estate do you think it would be?

James: My inkling is that HHC plays a role in this story in some way. So you're looking at it right now, Pershing Square owns roughly around 20% a little over possibly of the shares outstanding. It is a real estate play. It could be levered. It wouldn't surprise me if there was a play for Howard Hughes and as well as Howard Hughes buying something else for Pershing Square and Howard Hughes doing a much larger deal. What's really fun about this is that, again, not to kind of restate what I just said, you have a capital allocator who's not afraid of doing anything that's very complicated. Just look at history. Everything that we've just seen in the last 36 months with Bill Ackman has been something that has been completely out of the box, very shareholder friendly, especially to shareholders that are aligned with him. And I hate to say the word complicated, but complicated in a way that's creative to everybody involved. He's not shy of doing a deal. That might take some explaining. But once it's explained, everybody gets on board and realizes, oh, this makes a lot of sense and this is a great deal. So to answer your question, do I think it's Howard Hughes? I think Howard Hughes plays a big role in this. It wouldn't surprise me if it's a play for Howard Hughes and Howard Hughes is buying another partner as well.

Andrew: Forget Howard Hughes. Where did he find the money to buy something? Because this is a company that's 100% invested right now, the shares are trading at a 30% discount to NAV. Obviously, you can get a decent bit of leverage if you go buy office towers or something. I don't think fully leased-up office towers are the target, I'll just throw that out there but where do they get the money to go buy an operating business, that's going to be big enough that they're not going to be registered under the Investment 40 Act?

James: It's a liquid portfolio. We saw them move out of Netflix incredibly quickly through what was an over-billion-dollar notional position. I don't think that coming up with equity is going to be a problem. And depending on what the target is, I don't think that coming up with either co-investors through equity co-invest and or a line of credit, any type of credit that they're going to try and put on this from a debt perspective is going to be hampering them from a deal. Guggenheim has advised them in the past and has done a really nice job structuring deals that can sometimes be hard to get done.

Andrew: So you wouldn't be surprised if they sold down a position to help fund this in part?

James: Yeah, no, I wouldn't be surprised by that.

Andrew: You know the company better than me. I think I would be a little bit surprised by it just because there's nine companies like he's talked so highly about all of them, but it certainly does make sense. Let me ask. so turning back to the discount here. A lot of people say, hey, the discount is because A, foreign listed all this, but the two other real pushbacks are fees and Ackman's reputation. Let's do Ackman's reputation first because I'm with you. I've got a lot of respect for him. But you know, the second most popular question we got aside from when is the discount going to close? Well, it trades at a discount because Ackman is going to blow up again. Right? Which I think he's like, I've got feelings. I think that's very disingenuous, but people point to the value and experience and Herbalife experience and they say, look, it's investable, it's trading at a discount because he's gonna blow up. I say, look at the portfolio. Look at its history. But that's just my thoughts. I'll pause there like, what do you think? What would you respond to people who say, just look at the blow-up history? And actually, people will even go back to his first hedge fund? I think it was Gotham Partners. We can even go back to his first one and say, look at that history.

James: Right. I would say I almost don't even know how to answer this question with a straight face.

Andrew: I know, it's the second most popular question.

James: I will try. I mean, it's the second most popular question, if I can for the next 18 years compound at 17 and a half percent with multiple public failures and do it with a smile on my face and still treat shareholders right, then I will have lived a very full life.

Andrew: We'll be seeing each other on the beach if that's the case.

James: You know what's funny about that? Let me just go and take that one step further. You said you will be seeing each other on the beach, you know who's not on the beach right now? Bill Ackman because he's out there making people money like ourselves, who are investors in his in Pershing Square. I mean, that's what's so fascinating. To me, it's like, yes, I think you have a very passionate person who puts a lot out there. But the numbers speak for themselves. If the numbers were terrible, then don't invest. But at the same time, I would say look at where your other options are, it's hard to find people that are that honest, that upstanding that shareholder aligned that have compounded that those types of numbers.

Andrew: Another question and the other way to explain the discount is the fees. So close in the fund right now, as we talked about, this might not be a closed-end fund forever, but it would still probably be a controlled company. The fees are 1.6 and 16 if I remember correctly. So 1.6% asset management fee and then 16% of the profits are going to Pershing, Bill Ackman. That is high. Anybody who invests in mutual funds will know that's a lot higher than mutual funds, but that It's high for closed-end funds. On the whole, I would say most closing funds in the US don't have an incentive. B, I don't think it's higher. And a lot of people would just say, hey, it's a liquid portfolio of nine large-cap US stocks, of course, it's going to trade at a discount when it's got that fee structure associated with it. Because Ackman very public, we can just copy his portfolio, build it ourselves and not pay that fee structure. So it has traded discounts to attract investors. What would you say about that?

James: Well, I would say that that's not entirely accurate. So in true Ackman style, it's the devils in the details and then the numbers. So Pershing Square runs levered. It's a long-only portfolio minus the swaption, which is treated more like a liquidity pool, but it's a levered long portfolio, What the leverage does is it minimizes actually the fee track. So when Bill and the team and IR... I fully tell people that Tony Ines, the long-term head of IR of Pershing Square is very readily available to answer anybody's questions I encourage them to reach out to Tony because he's helpful in this respect. If you look at the leverage and you run the portfolio side by side, what ends up happening is that you end up getting the gross return of what it would be had they not had the fees because of the leverage. So the leverage ends up basically compensating you for the fees and compensating them for the fees.

Now, if we're going to talk about the fees in and of themselves being too high, I want to point to the fact that you have a team that has incredible retention. That is an incredible team. Ryan Israel, who was just appointed CIO has been there since 2009-2010 when he was formerly at Goldman's Special Situations Group before leaving and joining Pershing Square. One way that you keep a Ryan Israel and keep him motivated, keep him on board is by compensating him. We're in a capitalist society and people go where the money is. Ryan's not going to go start his own fund, because he has a really great seat at Pershing Square where he's highly compensated, and it wouldn't actually make viable sense for him to probably leave and start his own fund because of the fact that he is very well compensated based on the structure there. Tony, the head of IR has been there for also decades or possibly since the structure, I believe. So you're looking at least over two decades, almost two decades, that your head of IR has been at Pershing Square.

I think team continuity is really important, especially as this firm continues to build. So if you're going to look at other larger asset managers, now I don't think of Pershing Square Holdings as an asset manager. But if you look at those, they're all struggling with their legacies, many of them are struggling with where or what is succession planning. What does this look like? Who are we bringing in? We don't have that problem that Pershing Square. Now, we can have a different debate as to whether are they overcompensated are they paid too much. Possibly, but I can say the net return speak for themselves. That's where people are going to choose to put their dollars. If I am wrong and they are overcompensated, such that the net return is no longer attractive, we won't stick around. But I think that Bill has been really thoughtful around structuring comp and having that carried interest component such that people are encouraged to stay around and put their best work forward.

Andrew: No disagreements there but let me go back to the first part of what you were saying. You said the leverage kind of can be used to offset the fees, which I get that is a rational art. That is an argument, right? If you're running 150 long and there's no margin, you can hold that through thick and thin. That will offset a lot of the fees, give people beta upside, all that type of stuff. But right now, they are 106 long, right? So they're basically not levered at this point. So does that change your calculus at all?

James: Does it change the calculus? I would say yes and no. Again, at the beginning of the year, they were running 128. Now they're running 106. There's an averaging outcome. I think we need to give some credence to the Investment Committee and the team there as to how they want to flex their net in the environment. So I don't want to penalize them too much for saying, Well, you're not running consistently at 128. If the opportunity feels more around what they could be telegraphing or not, but what we think they could be telegraphing is, we're waiting to deploy a little bit more capital or we're waiting to add to the portfolio at a time when we feel a little bit better or a little bit more stable from a macro perspective.

Andrew: Well, why do you think running 130 at the start of the year and 106 now, that's a pretty big 20 plus net drawdown and exposure? Stocks are lower now. Obviously, there's a Ukraine war. There's a lot of macro uncertainty. We're going to talk interest rate swaptions in a second. But it does strike me that if you were 128 when stocks were higher, and now you're 106, why do you think that changed? It strikes me. It should be the inverse, right?

James: Yeah, you could think of it as the inverse. In all the reading that I've done, from the previous letters that Bill has shown, Bill is not a market timer. He's a long-term investor, many of these positions have been held for a very, very long period of time. If I was without doing a complete forensic analysis, but just looking off the cuff, it really wouldn't surprise me if the swaption and the movements in the pricing of the swaption have really changed gross leverage up and down. Because the swaption, by definition has a lot of notional exposure. So you're going to get a lot of p&l. In fact, because we talked about it, I did the math. So when you look at it a year to date...

Andrew: Let me ask this actually before you get there just so people know. Look, in the past two years, Ackman made two just absolutely magnificent macro calls, right? The first was the famous buying of CVS right before COVID hit, which might have been the best trade of all time. And then the second was late last year, he starts buying interest rates swaptions, which basically lets him bet on regime inflation in interest rates going up all that type of stuff, which is paid off beautifully. Lots of thoughts around that. But I guess the first thing is, a lot of people think those have paid off well, but right now, a lot of people think that the inflation, the interest rate, and swaptions are really burning a hole in his pocket, right? You have to pay for them every month to keep them going. And a lot of people think, oh, they're not paying it off quickly enough. He's burning a lot of premium on the swaptions. I might not have said that perfectly. But I think that was the general gist. So can I ask you kind of how much is he paying as a percentage of the portfolio per month on the swaptions?

James: We don't have a good view of the per month that we're spending. So one thing I would encourage everybody to take a look at is there are wonderful transparency reports on the Pershing Square website. They are on the website. They are very transparent with shareholders, you could easily see on a month-by-month basis, what their exposures are as well as what the attribution is. So just looking here today, on the long book only, the gross performance attribution has been negative 24%. So that's without any swaptions. There's flexing of the leverage there but we're saying that the gross attribution of the logbook has been negative 24%. The short attribution, which is the swaption has been 7.3% positive. So it's been a positive net for him now.

Yes, I think if you're not going to say I will go ahead and say the criticism myself, there is a criticism that we used a good or Pershing Square used a good chunk of the short attribution from the swaption to plow it into Netflix, which is then clearly a long performance track. So when you kind of net it all out, how does it look? We haven't really looked deeply to that. One thing that we have done, though, is saying this isn't really a source of p&l for Pershing Square as much as it's a source of liquidity. And they've been very, very strong in making sure that shareholders understand that and think of it that way. While they've made great macro calls, and there have been many, there have been other macro calls that have not worked out so well.

Andrew: I recall that didn't work out well for him.

James: I believe that there was a macro call back. There was a currency situation around the devaluation of the one in China. I'm not absolutely super accurate about that.

Andrew: I honestly just couldn't remember one. I was trying to remember what swaptions in COVID.

James: Yeah, there's swaptions and there's COVID. Actually, if you go back there's tons of letters, all the previous letters are up on the Pershing Square website. You can read back and I believe that there was one where a deep peg or devaluation of the lawn was something that Bill had been playing that hadn't really worked out all that well but actually didn't cost the fund all that much. But at the end of the day, I think you get a Mac Row overlay that is seen as a source of liquidity. Then you have what is essentially a private equity portfolio on the other side that mimics very much the style of Berkshire Hathaway. So Restaurant Brands International has been held by Pershing Square for I want to say almost a decade now.

Andrew: I remember Restaurant Brands international came public through Justice Holdings, which was Ackman's first pack. So he took this path, took Restaurant Brands, and then he hasn't sold a share, so yeah.

James: Which is also highly tax efficient but I mean, that's another that's for another time.

Andrew: Let me ask. So just sticking with the interest wage swaptions and the COVID so the macro plays. I've heard a couple, one kind of conspiracy theory on them, and then a couple of criticism. So I just want to run on that a bit. The first would be the conspiracy theory and that's this. Look, Ackmak, I think he doesn't make money and stuff but some people say he does so publicly because he wants people to know, look, yes, our portfolio is very public. Yes, our portfolio is very liquid. You could go create this by yourself, but we're gonna make these macro trades. You probably can't create them by yourself. And when we do them, you will not know so you won't be able to recreate them at the time. And these can be very time sensitive. With COVID, if he had tried to put that on three weeks later, it's a nothing burger. So COVID was a real thing. It's just he couldn't have put those trades on if he tried to three weeks later, right? So a lot of people think he's doing these macro trades, not necessarily to make money, though scoreboard, he's doing them to almost lure people in stock saying, hey, this is the thing that our sock has that you can't get anywhere else. What would you say to people who said that?

James: Well, for one, that is a fact. You cannot get that anywhere else. Where else are you going to price that swaption? I mean, somebody else that's large within is that can obviously price that swaption but you can't. So I think the counter to that is I don't disagree with you, that Bill is out there saying invest in this vehicle because we have this. It is true that they have this. That's a fact. So what we're not talking about is somebody who's being disingenuous in saying we have this when in reality, they don't, or it's like a minor piece of the portfolio. You have somebody who's saying that we have this actually do have it and it is material. So you make your decision with all the information that you have in order to do that. So I'm not sure if that's really necessarily a criticism. Does that make sense?

Andrew: I was just surprised. I mean, I've had the thought before, but I was surprised by how many people have suggested that to me. And look, I would do anything too that helps me market it if I was making a hundred acts [crosstalk] on the trades or something.

James: It's not even just marketing. Let me just give the counter to that. The counter is what is being suggested that is saying, well, actually, as the CEO of Pershing Square Holdings, he should not tell people that he has these swaptions on. Well, first of all, I would be I'm gonna be frustrated as a shareholder. I'm a shareholder of Pershing Square. I'm actually a material shareholder of Pershing Square Holdings, specifically for me. I want and value that kind of transparency in my manager, her saying this is what we have on. Then I can make my choice as to whether or not I want to stay or not, or how I need to think about that. I prefer that vastly to what I think could be the counter to that, which is we have we had this swaption on and look how much money we made, and we never told you that we had the swaption on before. It's like, no, that's not the situation. In fact, what it's always been is we have a swaption on. And then it just turns out that it actually made money and it worked. But if it hadn't worked, I think that Bill would say if he was on here, and I challenge him, I think Bill would actually be the first person to go ahead and say, yeah, we had the swaption on, it didn't work, and lost us money. He'd own up to that. It wouldn't necessarily be a marketing play. I think it's more of a transparency situation.

Andrew: Second question and this is swaptions specific. It has struck me as a little strange that Bill is I believe he's on the investment advisory committee for the New York Fed. I think that's his specific role. He's got ties to the New York Fed in some way. And he's making presentations to the New York Fed arguing for higher and higher interest rates, really focusing on fighting inflation and all this sort of stuff. And he's doing that at the same time. I mean, he even tweeted out or put on the Pershing Square website, the presentation he did to the New York Fed, and he's doing all that at the same time that he's got this interest rate swaption going on. And I understand he thinks inflation is a serious problem. That's why he put this on. That's why he's doing it. But at the same time, it's like don't ask your barber if you need a haircut, right? Like somebody who would really benefit from interest rates going up, and the fed fighting, inflation even more aggressively anti has a tie to it. Like, how can you make this bet and be on the fed committee and all that type of stuff, you know, it just feels a conflict of interest to me, especially for someone who was out here arguing and has a lot of integrity and cares about shareholders. That's just a very strange piece.

James: Let me ask about the integrity piece here just so I can just parrot this back and understand the criticism. The criticism is Bill publicly discloses that he sits on this committee. He publicly pre discloses that he has this swaption on he then publicly discloses that he has a view that interest rates should go up, which he also wholly discloses he could benefit from. That's a conflict of interest and a problem versus something like, my husband makes trades, and I'm a senior person, ie Nancy Pelosi. So I think that they're not necessarily the same. No necessarily view positive or negative on Miss Pelosi, but I see them as vastly different when you have somebody who, as we just agreed, is literally saying this work. By the way, you know how we're finding out about this. We're finding out about Bill and his presentation because he put it out there, We're not finding out about it from the New York Post that is rerouted his back running trains that are not easily disclosed. So I think we're dealing with a very different... I think with the criticism, Bill's just really good at his job and he just happens to be really transparent about it. People can say what they want to say and be critical of it and I get that. But you cannot criticize the guy for being transparent because he's been transparent. It's not like, hey, he hid this. And this thing happens like it's vastly different.

Andrew: It's funny, you mentioned the congressional trading, because I've personally been of the view like Congress, people shouldn't be allowed to trade individual stocks. Like I don't see how that's even. But the one more than what you just said, the one I would almost equate it to is, do you remember at the height of COVID, in February, a bunch of senators likes got public got private briefings, and they immediately call up their brokers and sell everything. And then they go on TV and say, Everything's okay. Nothing to worry about. Yeah. And I understand you don't want to incite panic and people and stuff, but they were literally liquidating their entire portfolios. And I would compare that to this, where they'll put a position on very publicly says, I have this position, and then goes and argues to the Fed, hey, I have this position. Here's why you need to take this stuff seriously. Like, at least it's full, like pretty much open kimono versus the other side. That's the one I would equate it to. But yeah.

James: Yeah, I just think of them as night and day. I believe, not just from my own personal experience, but I think anybody's experience with Bill has always been nothing but in the highest of integrity, and very open and honest, if anything, the criticism that I've heard is that if you were going to tell me, that Bill is on a very high horse and thinks so highly of himself that he's like this absolute white knight, I would totally agree with you. But he also talks to talk and walks the walk. So I mean, I can't fault him for me.

Andrew: So just looking at the portfolio. At this point, there are nine names, and they're large if I had to describe it is large-cap growth, not growth-ish. But growing typical, growing better than your average stock, much better business than your average company holding. So like, you know, the one that pops in my mind immediately is Hilton Domino's before he sold it, that's a franchisor really nice growth. It's not hyper-growth, but it's good growth, lots of cash flow, and most of them trading or trading in the 20 to 25 times free cash flow range, right? That's just broad, broad strips of everything.

I guess it would have two questions. First, do you think his portfolio in his portfolio there is also coloring his views on inflation swaption? And I mean, in this way, the inflation swaption works really well, because higher interest rates are death for stocks trading at 20 to 25 times free cash flow. So you kind of get both sides, right? Interest rates go up, your stocks go down. So the interest rate, the interest rate protection goes up. If they don't pay off, all your stocks probably go up because if interest rates go from three to two, well, you're 20 times free cash flow earnings go to 30 times free cash flow earnings. Does that make sense?

James: It does and I think that that's absolutely accurate because that is very much in line with the way that we see Bill running the portfolio as if, in a rising interest rate environment. Those swap shins at when he decides to exit them or decides to ladder exit them however he believes the best way to play it is they will provide liquidity to them buy into or add to these positions or buy new positions at a lower, more attractive valuation. So I think it is significantly more efficient to have the swaption and provide liquidity, then try to sell and exit these positions, many of which are a defiler on oil and certainly a 13. F file or on where he's going to have to disclose that he sold down some of these positions. I just don't think that that's that that's efficient. I don't think that that's creative to shareholders and Pershing Square Holdings. I think that what's the way that bill is running, is the way I would like to see it run slow with transparency within integrity, but also in a way that is actually really elegant. This swaption provides a lot of liquidity in an environment where interest rates may be continually going up.

Andrew: Second question, the portfolio. I mean, I have no, I have no issues with it. I've done some work on some of the companies here. I like most of the companies here, right? Like especially Hilton, I've mentioned a few times that I really liked that business to that thesis. But when you just look at, again, broad strokes, it's 20 to 2020 to 25 times free cash flow companies growing nicely, but not hyper-growth or anything lots of free cash flow, but they're not going to, you know, take over the world tomorrow something when you look at that portfolio. You know, you talked you said earlier, one of the first things you said is you're investing in a manager with a 20-year history of almost 20% annualized returns, right? How do you get close to that returns with this portfolio here, right? It's 100% invested. Basically, it's invested in good companies that are trading 20 to 25 times. But if they grow 5%, and they yield 5%, in terms of free cash flow, that's about a 10% return, which is better than the market will do over time. But it's hard to see, especially once you leave the Fiat fees on how this is going to do materially better than that unless I'm kind of missing something, or you're factoring in a big macro call, or he's going to sell all these and rolling something really interesting. Does that make sense?

James: Yeah, no, it makes sense. So I would say, look, if you're thinking, typically equities have been yielding around if you're looking at the s&p like 10%, annualized, let's put aside the fact that is a realized actual historical number, that bill has basically doubled that over the last 18 years. But putting that aside, if we think, okay, we have a five-year time horizon view, others might be longer, but let's just look at the next 3 or 5 issues. Let's say the portfolio is really going to be annualized in around nine or 10%. Okay, now you say you layer on the fees, well, then you add on the leverage. So now you're looking still at nine or 10%. You're still looking at the growth on the growth side. It's like, okay, and so then you're asking me, Well, where are we going for? What should I be thinking about from here?

Well, let me tell you what I think we should be thinking about. What we need to go back to is the crux of the thesis, which is twofold. First, you have a re-domiciling effort that we think is going to be actively underway within 24 months. So where this will be moved? I think high level in this, this is Bill's only capital vehicle. This is not just one product or treated as a product. This is it and you're looking at a person who is very patriotic, who I firmly believe and he has said himself that Guernsey is just not the final destination for Pershing Square Holdings. He's already been making moves to indicate that he's going to re-domicile that. So once we go through that re-domiciling effort, we're never longer going to be talking about Pershing Square, the portfolio. We're going to be talking about Bill Ackman, the investment holding company. We're going to be thinking about this more around the view of Bill Ackman 3.0. Like, what is he doing at the operating company level or whatever operating company that's going to be? How is he allocating cash to the portfolio? How's the portfolio being run, which is really, as he's been saying, going to be more aligned with Israel, and how Israel is treating that portfolio?

We think we're at the beginning. I hate to say this because this is not like a Tesla company. Pershing Square Holdings, you're looking at something today that is not going to look like this in the future. What we're looking at today, if you and I get back on the call, five years from now, six years from now, we're going to be talking about a vastly different company. That is what is really exciting to me. Getting into Pershing Square Holdings today gets you into basically the ninth inning of what was previously a hedge fund. It was a hedge fund, a closed-end fund holding company, to now something really, really exciting.

Andrew: I thought of this off the top of my head, and I'm gonna let you steal it. Bill is mid 50s and the way you describe it, it's just like all of a sudden striking a chord with me, what you're describing with Pershing Square Holdings is basically... I mean, I think Buffett was in his late 30s at the time, but it's kind of equivalent in the late 60s or early 70s when Buffett returns all of the cash all of his partnerships to shareholders. He gives them the Berkshire stock and he says, hey, you can keep this or leave it. Like you go from the fund so you get the kind of operating company. What you're saying is PSH right now is kind of you're investing in that thing, right on the verge of going from the hedge fund portfolio to the operating company portfolio. If you follow that line of thought, Ackman is 55. That's actually pretty young for an investor. If you had invested in Berkshire when Buffett was 55, that would have been what, the late 80s or so if I'm doing the math off the top my head right? Most people would have been pretty happy with how Berkshire performed from the late 80s till today. Go ahead.

James: No, you're preaching to the choir. I think that this is a very, very exciting time for Pershing Square Holdings. I think this is a very just really exciting time for current Pershing Square Holdings, investors and shareholders alike like ourselves like me, certainly me. I just really believe yes, typically closed-end funds are not sexy. What I think is just so exciting about this situation is we are pre-transformation that has been very methodically thoughtfully and carefully telegraphed by Bill. This is not a capital allocator or a person that does rash decisions or makes decisions that he is not fully committed to and sees them through. Just history has shown commitment. On both sides, by the way, so committed to valiant and that parabolic ride, and also committed to general growth and that massive homerun that became. So that's what I see and that's what I think is really incredibly excited about it.

Andrew: I'm internally laughing because if people just tuned in for that clip, and this is just on my side, they would have heard me comparing Ackman to like a young to middle age Buffett, and I actually have huge respect for Ackman. But they'd be like, oh, he's just a rumor. But if they had listened 20 minutes ago, they would have heard me talking about like couplets at the fed or something. They'd be like, oh, this guy really does it like that, or something. So I'm just laughing on my end of it.

Let me ask you one last question and then we'll kind of wrap this up. Last question. We've talked about rational capital allocation through all this. And I think the underlying trend to everything is if you're going to make this investment, I mean, you could try to ARB and like hedge everything out and bet on the clothes and something. But the only thing is, if you're betting on Pershing, you're really betting on Ackman's capital allocation, let's just say the Pershing team's capital allocation. There's one thing that strikes me as funny in there. They pay this dividend and their stock trades at a 30% plus discount to NAV. They're paying the dividend which is this is a rational guy, right? If he buys into a company, he's gonna go to them and say, hey, you're trading at 50, I think you're worth 100. He's not going to say I need you to start paying a $2 per share dividend every year. He's gonna say I need you to take all your cash flow, do creative growth investments, and everything else after that is buying back shares. And here's the guy who's taking money and sending it out the door instead of buying back shares when his liquid portfolio is trading at a 30 to 35% discount to NAV. So just want to ask you about the dividend. I know these arguments form, how do you think about their arguments for the dividends?

James: Okay. I totally agree with you. We would prefer not to see the dividend. However, the dividend acts very much as a pick at the shareholder's choice. So we do get a dividend, we choose not to take the dividend in cash. We take the dividend and share which we're then getting into the bigger 35% discount. So putting that aside, there's actually a functional reason for the dividend. Mostly why I think a lot of people on this podcast are not actively hearing about Pershing Square Holdings as an actual company because of the fact that they are incorporated in Guernsey while they are headquartered in the United States, which prevents them from marketing to US-based investors. In fact, you don't hear about any closed-end funds in London that are actively marketing to the United States because they're not allowed to. So that means you have a shareholder base that is largely European. And from a cultural perspective as investors, those investors very much look positively towards dividends. And not only do they look positively, some of them actually have functional mandates that require them to invest in companies that pay dividends. So, as strange as that sounds, that is how it is across the pond in our conversations. So the dividend is important for that shareholder base.

Andrew: My pushback there would be like that is doing something that looks good, but doesn't actually fundamentally detract from value, right? Because if you believe you can compound value at higher than market rates, you should be keeping every dollar that you have. And to go back to earlier, I compared it to Berkshire and Warren Buffett, like there's a reason I think Berkshire got one dividend out the door in the 60s or something. Buffett kind of joked, like, hey, where was I during that meeting? But you don't pay dividends if you can compound at better than market rates and particularly if you trade a 30% discount, you don't pay dividends, because you can just buy back your shares. And I guess it pleases shareholders but there's a lot there that it looks like window dressing, and I think like hyper-rational people, I'd understand it but I would just rather not be there.

James: Look, you're preaching to the choir here. We also would rather not be there and we would rather increase the share buyback program. Part of it was also functional was that by buying back so many shares, which they were decreasing, the float actually prevented them from uplisting to the premium section of the London Stock Exchange to the FTSE 100. I think that that's like a really big deal that's being understated right here. You have basically US headquartered business that is in the FTSE 100, 100 largest companies in the FTSE. That's a really big deal. It's a really big accomplishment. Some of that had to do with just the actual logistics of share count, market cap, and the fact that by buying back shares, you're decreasing the share count. So there's some functional reasons for it. I get the argument. It's very difficult to defend. I kind of think of it as slightly negligible, but it is something that we think is overtime, it's just gonna get evened up.

Andrew: I'm just laughing because, James, on the heels of this podcast, we would just go activists on Pershing and our one demand will be to stop the dividend and buy back shares.

James: Exactly. Please, Bill, if you are listening, you have two shareholders here that are telling you the dividend is not needed.

Andrew: It did strike me as interesting, one of the things you described in there, and then we can wrap this up, is Pershing is mainly known to use investment. Obviously, Bill's got influence across the world, but their portfolio is basically all US stocks and it's listed in London. They can only market to people in Europe, a lot of people want dividends. But one of my favorite catalysts has been like when you've got something that all their operations are in the US and it's listed in London like often, it sounds so simple, and I used to dismiss it so much. But it kind of has been true. Once they listen to us and they can kind of get their natural owner base into it, the stocks do tend to... again, I hate to say close the discount, let's talk stocks and work on a relisting. We're talking about somebody that I think that thesis is will compound at above-average rates for a long time but that's just how it seems to work to me.

James: Yeah, I would say real quickly, we've been talking about this. We've been thinking that they were going to do this. We've been speaking with Tony that we would encourage them to do this since 2018. The first conversation that we had with IR was, please re-domicile this business and buy something. That's what we would like to see happen here. What I think is exciting and why it's timely for the podcast is that you now have Bill in writing, saying that is an option that they are aware of that they're thinking about. And Bill doesn't typically historically ever put anything in writing that he's not going to put effort behind. So we just think that this is the time where we're not just talking about a company that's in Europe and saying, look, they should just re-domicile. We're talking about a company in Europe that is actively telegraphing that they are aware and they're really thinking about it. So that's where I think the difference is.

So if you're asking me how I think about investment bias, how I think about it, I think about it as if we're trading at a 30% discount today, which you are, how much do I have to amortize that over? Is that over two years? Because that's 15% annualized, by the way, if that closes it to par, just to par. Or is it 12 months, I think that's a little tight. But if you're looking at 12 months, I mean, it's 35%, just from the move. Anyway, my point is there's a lot that the math works here in some pretty incredible ways. If you just think, like we were talking about before, if the portfolio is only annualized at 10%, which we think is unlikely. But let's say annualized, there's only a 10% return. Then, on top of that, you have this re-domiciling effort. If that happens in 24 months, you're looking at IRRs in excess of 40%. I mean the IRR has really become eye-popping here.

Andrew: Yep. Well, hey, I actually have a dentist's appointment. It's been about an hour, I want to give you your time back. So I think we'll wrap it up here but the last few things I would say is A, if they read it, domicile, or do anything to close the nav in the next 18 months, I think you and I 100% take credit. This podcast was the catalyst. There's no doubt about it. No one else can take credit. Then the second thing, James, it was great having you on. I didn't realize that been over a year, We've got to have you back on more frequently because this is a great conversation. Really enjoyed it and I'm looking forward to the third one.

James: This was fun. Okay. Thanks, everyone.

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