Hi, welcome to the Pershing Square IPO presentation. I'm here with Ryan Israel, our CIO. I'm Bill Ackman, the CEO of Pershing Square.
Today we're going to talk about actually two public listings, the IPO of a company called Pershing Square USA and the listing of a company called Pershing Square Inc. Pershing Square Inc. is the general partner, the management company of Pershing Square. It's the company that I work for. Pershing Square USA is a new fund that we're launching, our first fund to be launched in the US, listed on the New York Stock Exchange.
Launch of a new fund makes the management company more valuable, so we want to share some of that value with investors who are participating in the offering. The way we're doing that is that for every five shares of PSUS you buy, you receive one share of PSI. So for $250 you own five shares of Pershing Square USA and you get one free share. The market will determine the value of that share.
The plan is an offering with a minimum size of 5 billion and a maximum size of 10 billion. The way we're going to get there is in advance of this public offering, we went to what I would describe as real money investors. These are large institutions, family offices, pension funds, insurance companies, sort of ultra high net worth investors. Investors making investments in the tens of millions. And our goal was to raise 2 billion of capital. We were fortunate in having a ton of interest. We raised 2.8 billion of committed capital from these investors. I'm told this is the largest amount of committed capital for an IPO in history. The only condition to that capital is that the IPO is a minimum of 5 billion and we're going to cap the size of 10 billion plus a green shoe of approximately a billion more.
Pershing Square Inc. is the management company or as some people call it the GP of Pershing Square. That was founded 22 years ago. We manage 31 billion of assets. 21 billion of our assets are fee paying. What's unusual about Pershing Square in our industry is 96% of the capital is permanent capital. What that means is the capital that's in public companies where we're an important shareholder and we receive significant fees for managing these assets. 6 billion of the 21 billion is employee capital, which is a lot of skin in the game, if you will, for the people making the investment decisions at the firm.
We have 48 employees. Most people assume Pershing Square has to be a much larger firm for our kind of presence in the market. We can operate in a very lean organization because of the nature of our strategy. We are a concentrated investor. We own typically a dozen or slightly more companies. We tend to own them for the long term. We get deeply involved in these businesses. The other reason we can operate with such a small team is the capital base is permanent. This means we don't have to constantly fundraise, which is typical for hedge funds and other asset managers.
Over the 22-year period since we started, we've generated 16.2% return net of all fees, 5 and 1/2% per annum above the S&P over the same period.
The history of our firm, I describe it as success is not a straight line up. We started out in the hedge fund business with an onshore offshore fund limited and just kind of high net worth investors investing with us. The plan, however, was to get to a permanent capital model and the reason for this is the strategy involves taking pretty large stakes in public companies. We typically are one of the largest shareholders of the companies in which we invest. We get deeply involved in these businesses. We get to work with management teams. We join boards of directors. We sometimes recruit new management teams. We make commitments to teams we hire and we're a long-term investor. We never wanted to be in a position where investors could redeem their capital at a time where it was critical for our business and that's why permanent capital was important for our model.
We took an important step in that direction in October 2014. We launched a company called Pershing Square Holdings and it was listed offshore and the reason we launched it offshore is that you could not charge incentive fees to a US listed investment company and our business model required incentive fees to recruit talent in that we compete with other hedge funds in the industry.
Unfortunately within a year of that investment, we made one of the worst investments in the history of the firm, a company called Valeant Pharmaceuticals. The stock declined 90%. We got a lot of very negative press. We were short at the time a company called Herbalife and investors in our industry viewed this as an opportunity. They thought, you know, the vulnerability created by the bad press might lead to investor redemptions and people bought stock in Herbalife, which caused the price to rise and started shorting the companies that we owned, which contributed to our losses increasing to more than 30%.
And that really led to our decision to get out of the business of managing open-ended funds like hedge funds. Our investors who we offered them the opportunity, of course, to stay if they wanted, but if they wanted to leave, they could take their money and most did and that put us in a position beginning around January 2018 where our capital base became almost entirely permanent and as you can tell from the chart and on the next page, our performance improved significantly. We've had the best period of outperformance over the last eight years and we attribute it to the permanent capital nature of our business model.
We're not exposed to investors who constantly gave us money in the first decade plus of our business. We're not exposed to the risk of money leaving and money coming in can be as dilutive to returns as money rushing out the door. The beauty of permanent capital is it's a closed system and we don't have to worry about the money flows of our investors. That enables us to be a long-term investor. It also means we can be more focused. The typical hedge fund manager spends a fair amount of time meeting with investors because in order to keep the capital stable, you have to constantly raise money. The beauty of our model is we haven't had to raise money for, you know, almost a decade and that's enabled us to be focused on investing. We've generated 8.3 percentage points of outperformance versus the S&P 500 net of all fees over the last eight-year period.
Now, we've done this. Herbalife was our last short, so today we only own stocks. We're so to speak long only. We own some of what we believe to be the best businesses in the world. We try to buy these companies on a very kind of opportunistic basis at a time when perhaps there's either an overreaction in markets because of geopolitical or macro events that causes all stocks, even some of the best companies to decline significantly in value. Sometimes it's a great business that sort of lost its way. Management's made a strategic mistake, a bad acquisition. Perhaps they've let costs get out of control. We get deeply involved in our companies. We work with them sometimes with a board seat, sometimes just as an influential outside shareholder helping them succeed at the core engine of the profitability of the firm.
What you see on this page are examples of hedging. And so one of the things we spend a portion of every day thinking about, I spend a lot of time thinking about geopolitics, politics, macro. Ryan, maybe Ryan, speak to a typical day. What are we doing on the asymmetric hedging side? How are you spending your time?
Yeah, to sort of take that a bit further. In beginning around 2005, we started to be concerned about AAA rated companies taking on subprime credit risk. We had a concern this could lead to a cataclysm, if you will, in the credit markets. We bought an instrument called a credit default swap. A credit default swap is sort of like an insurance policy on a company defaulting on its debt. It trades in the marketplace. We bought insurance on AAA rated companies. And the insurance was very cheap because people believed of AAA rating that the probability of default was very small. We had a different view because we saw companies taking on a lot of risk. When the financial crisis happened, these instruments became much more valuable. We made a billion one. We took that money. We had about 4 billion under management at the time and we bought stocks.
And then we did very little in terms of hedging black swan risk because we didn't see any, you know, sort of storms on the horizon until early 2020 when I became concerned, at least personally I became concerned initially about COVID from a health perspective. Then I became concerned about the economic effects of COVID and I ultimately came to the conclusion that we were going to have to have a global economic shutdown in order to address the spreading virus. And the capital markets at the time, the stock market, the bond market, no one seemed to care. And the result was we could buy for a very small amount of capital in effect an insurance policy on credit spreads generally, so-called index CDS. And this instrument went from being worth nothing to being worth 2.6 billion over basically a 10 business day period. We took the money and we used it to buy stocks in March of 2020 when the market was down about 30%.
But 9 months later, our concern was inflation. President Trump had spent, you know, trillions of dollars kind of bailing out the economy during COVID, supporting the economy. We had 0% policy from the Federal Reserve and we had a vaccine. People were going to get excited about spending money again and living again and those forces, in our view, would create a demand shock at a time when supply chains, you know, the ability of companies to deliver goods to their consumers have been disrupted as a result of COVID. So, increased demand, dramatically increased demand and limited supply, we thought, would lead to mass inflation. And the way we hedged that risk was we bought an instrument called an interest rate swap which is really it's almost like a call option on interest rates. At the time, two-year rates were at 0.12% or 12 basis points and our call option was struck around 94 basis points. A bit like buying an option on a stock seven or eight times above the current market price. And what happened was inflation came to be as we expected and that instrument became a lot more valuable. We made 2.6 billion on these interest rate swaps and we bought stocks.
So, when you think about Pershing Square as an investment firm and think about the funds we manage, today we focus exclusively on owning some of the best great durable companies in the world. Think of that as the long-term engine of profitability of the firm. We also episodically identify a risk that we're concerned about. We look for an instrument, could be an interest rate swap, it could be a credit default swap, could be some other kind of currency or, for example, oil-related commodity price driven instrument. We spend a small amount of capital, typically 1% or less than 2% of our assets, on an instrument that could have very large payoff if the unexpected significant risk were to occur.
So, when you look at the firm, many firms in our industry have the real competitive advantage are the people that they hire and their ability to retain those people. And that's obviously very important for our firm and really every firm in our industry. We think we have some other attributes that give us kind of long-term sustainable competitive advantages. It starts with permanent capital. We're the only firm in our industry with a substantial majority, nearly all of our capital is permanent, which means we don't suffer from the risk of investor redemptions.
We've built a track record over time of being a very influential shareholder and that's given us what we call the ability to effectuate change without paying a true control premium. Private equity firms generally have to write a big check and have to pay a big premium to the market price to buy control of a business. We get something pretty close to control, an ability to make changes to management, to boards, to strategy by being a large shareholder and having the backing of other large shareholders. We've become a preferred partner to management teams over time. We've recruited a lot of the most talented CEOs to some of our companies and that's led to periods of outperformance. We've built relationships with these CEOs. It's a very small community. Result is it enables us to recruit other very talented teams when we need them. We've built a unique hedging program and we operate in a strategy that benefits from scale. It's better for us to own greater percentage of a company because it gives us more influence. We're investing in the largest and most liquid companies in the world, so liquidity is not a concern for this strategy and the capital base is permanent, so we're never forced to sell as a result of investor redemptions.
So, the incremental capital that we raised from this public offering will give us, we think, important long-term benefits. We've also built a brand. It's kind of I would say historically best known in sort of the institutional space as we've been an active investor and run proxy contests. We've gotten to know many institutions that have supported us over the years. We've also built a big kind of retail brand. I've got a couple million Twitter followers. We're a firm that's very closely followed by the media and that's very valuable when you launch an investment vehicle, in this case, Pershing Square USA, that can be owned by retail investors.
This will be the first New York Stock Exchange listed, first US publicly traded hedge fund and the first opportunity for many retail investors to invest in a hedge fund and one that will be liquid in that it is traded on one of the most liquid markets in the world. So, goal is to own basically the same portfolio in the same proportions with a couple of exceptions of the companies that are of a scale that we can't replicate today. One's called Howard Hughes, which we'll talk about later in the deck.
It will be the lowest cost hedge fund in the world. You're not permitted to charge a performance fee or promote to a US listed vehicle that owns securities. We'll charge just a 2% flat fee compares with a 1 and 1/2% management fee and a 16 or 20% annual fee that we charge our other funds and our other investors.
This entity will be a closed-end fund in terms of its corporate and tax structure, but we're going to run it like a real company. What I mean by that is the company has a real board of directors. Our board chair is the former head of the division of the investment management at the SEC. We have the former CIO of Fidelity Investments. We have the former head of risk management at Morgan Stanley. We have a former executive from a very well-regarded private equity firm called Providence Capital. We have an executive from a hedge fund firm called Tremblant. But it's a board that's going to run the company and oversee the business like a real business. We're going to have active investor communications. That's actually not that usual for a closed-end fund. We're going to have quarterly calls where shareholders can ask questions. We're going to have an annual meeting, call it Berkshire Hathaway style, where we're going to encourage people to show up. And Ryan and I and other members of the team will be available to answer questions about the business.
We also intend to seek credit ratings. We have a London listed vehicle called Pershing Square Holdings. We believe it's the only A-minus rated hedge fund in the world. That A-minus rating allows us to issue long-term fixed rate laddered maturity debt, invest in long-term assets. It's appropriate to finance those assets with long-term fixed rate obligations. The debt has no mark-to-market or other maintenance or other covenants. So, as long as we pay interest and principal on time, it's a very conservative way to finance our business and we keep leverage at a very low level. Leverage is capped between 15% debt to total assets and low 20s debt to total assets.
Pershing Square Inc., the GP, the entity that's principally owned by management, will be making a 100 million investment in Pershing Square USA, so we have significant skin in the game.
If you look at the Pershing Square track record over the last 22 years and you adjust for the lower fees of Pershing Square USA, our 16% return would have been a 90% compound return, 8.3 percentage points per annum above the S&P 500 over the same period. And since we've had permanent capital, that margin has expanded now almost 11% per annum better than the S&P over the same period. We've talked about some of the competitive advantages of permanent capital and I think you can see those in our results.
When you compare our results and here we do the comparison since we've had permanent capital over the last 8 years, the median equity closed-end fund generated a 7.3% return compound over the last 8 years versus 24.9% for Pershing Square. For funds, equity closed-end funds over a billion or more, the return was approximately 10% and the best performing, which would become the second best performing fund based on historic track record, had a 14.7% compound return over the last 8-year period. So, this by far, by historical track record, the best performing closed-end fund.
The power of compounding is something I talk about often. You can see that in our 27.4x return to investors. Every dollar became $27 if you invest at the beginning and you kept your investment over time. Had we charged the lower fees of Pershing Square USA, it would have been a 46-fold return over the same period. Lower fees and the power of compounding generate big results over time.
We have, as I mentioned, a London listed vehicle, which is a great entity, but it suffers from a number of important limitations. We're not allowed to market PSH in the US. In fact, when we took it public, we were not allowed to sell it to investors in the US. It's restricted. Most US retail brokerage firms will not let their clients invest in Pershing Square Holdings. And there's a large deferred tax liability. What this means, if you're a US taxpayer and you buy Pershing Square Holdings and we sell any of our existing holdings, you'll pay a lot of tax even though you haven't experienced the run-up in the share price of that underlying holding. So, that entity has grown to become the second largest closed-end fund in the world. It's listed on the London Stock Exchange, but we are very limited in our ability to market it, talk about it in the US and it's really something that cannot be owned by US investors. We also charge a 16% performance fee with Pershing Square Holdings.
PSUS will have an unlimited ability to market to US investors. This, of course, will be an SEC registered entity. We're taking it public. We're selling stock I would say principally to US investors, although there are many investors around the world that have committed to invest and we expect many more to do so as well. We'll list it in one of the most liquid equity markets in the world on the New York Stock Exchange and it will have very favorable tax treatment pass-through tax regime the so-called registered regulated investment company which is to the benefit of US investors and for foreign investors it will be treated as a typical C Corp like Nvidia or Microsoft or Tesla. And importantly there'll be no performance fees as I mentioned before.
Pershing Square Inc. is what we call the GP or the management company of Pershing Square. It's the entity that receives fees for managing the various funds. Ryan and I are on the CEO of Pershing Square. Ryan is the CIO. Ryan has been CIO now for almost 4 years.
The day after the IPO we will have three revenue streams at Pershing Square Inc. management fees and incentive fees at Pershing Square Holdings, management fees at Pershing Square USA, and management and variable management fees at Howard Hughes.
We are not the first alternative asset management company to go public. I'm sure you've heard of Blackstone or Apollo or KKR. Many of the largest firms in our industry have gone public. And as part of their public offerings they have contributed into the company all of the management fees they collect and then a portion of their performance fees or their promote income. Typically they put in 50 or 60% of their promote income and they keep 40 to 50% or so to pay the team.
The problem with that model over time and these firms went public years before we did is that they now have to compensate their team in addition with equity compensation. So equity compensation is as you know dilutive issuance of stock options and restricted stock to compensate the team because they've taken away sort of too much of that promote income from the team. The other problem with a performance fee income in a public company particularly if your underlying assets are private equity or real estate is you have to sell an asset in order for those fees to be earned and so the fees do not have the same recurring quality as management fees and the result of that is that public market investors and analysts don't assign a high multiple to those earning streams.
So to address both of those problems we've done something different from the other alternative asset management firms. We've actually set up sort of split performance fees into two components. A senior preferred component and a subordinate component. The subordinate component is held by management and the senior component is held by the public company. And so basically the incentive fees the performance fees in the first 5 percentage points of returns stay in the company. And we've kept 100% of the incentive fees on returns each year above 5% to pay the team. So we have plenty of incentive fee compensation available because this is a high return strategy. And importantly we've created a very stable stream of income that stays in the company really addressing both of those concerns.
PS USA as I mentioned flat 2% management fee. Now Howard Hughes. Howard Hughes is a public company. It's a public company that we created. We purchased 25% of a company called General Growth in November 2008 starting at around 34 cents a share. The company was headed toward bankruptcy. The company had 27 billion of debt and well more than half of that was coming due in a relatively short period of time. As you may remember during the financial crisis when it was difficult if not impossible to refinance obligations.
We viewed it as an opportunity because the stock was trading in our view at a discount to the value of the assets and we believed if we could join the board and lead a restructuring which benefited not just the creditors but the shareholders we could create a lot of value. I joined the board a few months after the company filed for chapter 11 and then I worked with the board to lead a restructuring of the company where the company emerged from chapter 11 where the shareholders got to keep their investment in the company subject to raising some new capital and some dilution and we spun off a new company called Howard Hughes. And Howard Hughes was all of the assets of General Growth that were not class A malls. We wanted to set General Growth up to compete with Simon which was a pure play class A mall company. And the assets we took out of the company were principally land and some small amount of development assets and some 60 acres on the beach where we had
Recently gotten approval to build condominiums. Fast forward a little more than a decade, we've worked through a lot of those assets. The company's developed a large amount of income-producing property and still retains many, tens of thousands of acres of land that it sells a portion of every year. So it's a very unusual company as a real estate company. Most real estate companies are REITs. This is a C Corp. Most real estate companies are in one property type. This is in many. And most public real estate companies pay dividends and this does not. So the stock market has never really given Howard Hughes, in our view, the value it deserves. The stock is consistently trading at a very significant discount, 40-50% discount to the value of its underlying real estate assets. Last year in May, Pershing Square Inc., the GP, invested 900 million in Howard Hughes, purchased an additional 15% interest in the company. That gives us 47% of the company, including 32% that's held by the Pershing Square funds. I became executive chair of the business. Ryan became the CIO of the business. The full Pershing Square team we've made available to the company and the business plan is to convert Howard Hughes into a diversified insurance holding company akin to what we call a modern-day Berkshire Hathaway. In lieu of conventional compensation like salaries and bonuses and stock options, effectively we've made Howard Hughes into another permanent capital vehicle and we receive a base management fee which is about 0.35% of the market cap of the company and then we receive a variable management fee which is about 1.5% of the company. But before I go further on the fees, it might be interesting for you to hear from Ryan. Ryan, why don't you speak to the business plan? We've entered into a definitive agreement to acquire a company called Vantage. How does that fit into this Howard Hughes strategy?
