Permanent Capital And AI Exposure Will Drive This Asset Manager’s Next Chapter

Catalysts

About Pershing Square

Pershing Square is an investment manager that runs concentrated portfolios of large public companies through permanent capital vehicles.

What are the underlying business or industry changes driving this perspective?

• Concentrated ownership of what Pershing Square views as high quality, cash generative companies such as Amazon, Meta, Microsoft and Netflix gives the firm direct exposure to large scale adoption of cloud computing and artificial intelligence. This exposure can support higher fee revenues and earnings over time through growth in net asset value of the funds it manages.
• The build out of an extensive research library of hundreds of businesses followed for many years allows Pershing Square to rapidly deploy capital when volatility dislocates prices. This can support higher long run returns on invested capital and, in turn, higher performance fees and operating margins.
• The planned use of modest investment grade leverage at both Pershing Square Inc. and Pershing Square U.S. at 15% to 20% of assets is intended to scale exposure to underlying holdings in a measured way. This approach can magnify fee related earnings if portfolio values grow while keeping interest costs contained as a share of revenue.
• The launch of Pershing Square Ventures as a permanent capital crossover vehicle targeting high growth private and pre IPO companies gives the firm access to earlier stage technology and AI driven businesses that public investors often cannot reach directly. This can diversify fee streams and support growth in total assets under management.
• The transformation of Howard Hughes from a real estate focused company into a business with a growing insurance platform in Vantage, alongside Pershing Square’s role managing the investment portfolio for that insurer, creates potential for higher fee earning assets linked to insurance float. This can support revenue growth and scale operating leverage in Pershing Square’s income statement.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Pershing Square compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Pershing Square's revenue will remain fairly flat over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.1% today to 92.6% in 3 years time.
• The bullish analysts expect earnings to reach $710.7 million (and earnings per share of $1.72) by about August 2029, up from $16.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 37.4x on those 2029 earnings, down from 1015.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 39.5x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Pershing Square is highly reliant on a concentrated portfolio and on a handful of large technology and financial holdings, including Amazon, Microsoft, Meta, Netflix, Alcon, Visa and Mastercard, along with sizeable exposures such as the 230 million Fannie Mae and Freddie Mac shares and the Howard Hughes stake. A long period where these companies or sectors underperform or trade on lower earnings multiples could dampen fee revenue growth, limit performance fees and leave earnings materially below the bullish case.
• The bullish narrative assumes that Pershing Square can benefit from long run compounding in its holdings with modest leverage. Management repeatedly highlights that market multiples are volatile, that the equity risk premium is currently small and that short-term market behavior can be highly unpredictable. A sustained period of weaker equity returns or a broad reset in P/E multiples would pressure assets under management, fee income and ultimately net margins.
• The plan to use 15% to 20% investment grade leverage at Pershing Square Inc. and Pershing Square U.S., as well as to finance fund seeding and management stakes through the credit markets, exposes the company to refinancing risk and higher interest costs over time. A prolonged phase of higher funding costs or tighter credit conditions could erode fee related earnings and constrain growth in distributable free cash flow.
• Pershing Square’s expansion into new permanent capital vehicles such as Pershing Square Ventures, crossover funds and asymmetric strategies, along with the continued work on SPARC, depends on consistent investor appetite and on the company’s ability to source attractive deals that public investors cannot replicate. If demand for these structures weakens or execution on new products disappoints, growth in fee paying assets could fall short of expectations and limit revenue and earnings growth.
• The bullish thesis leans heavily on turning Howard Hughes from a real estate focused business into a more insurance led group via Vantage, including ambitions for Howard Hughes to resemble a modern Berkshire Hathaway. This depends on successful capital migration out of real estate, sustained high returns on equity in insurance and market acceptance of the new model. If real estate remains out of favor, insurance returns are lower than planned or the sum of the parts story fails to gain traction, fee streams tied to Howard Hughes and the Vantage float could stay modest and weigh on Pershing Square’s long term margins and earnings power.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Pershing Square is $53.0, which represents up to two standard deviations above the consensus price target of $41.89. This valuation is based on what can be assumed as the expectations of Pershing Square's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $53.0, and the most bearish reporting a price target of just $34.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $767.6 million, earnings will come to $710.7 million, and it would be trading on a PE ratio of 37.4x, assuming you use a discount rate of 7.9%.
• Given the current share price of $40.83, the analyst price target of $53.0 is 23.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.