As AI stocks retreat and rates remain a concern, Pershing Square CIO Ryan Israel joins Bloomberg Open Interest to explain why the firm is focused on durable businesses at attractive prices. He discusses the long-term cases for the eye-care company Alcon and Netflix, when a macro bet makes sense and the firm's expansion into private growth companies.
Joining us now, I'm pleased to say is Ryan Israel, Chief Investment Officer at Pershing Square Capital Management. Ryan, great to get you on.
And and look, CoreWeave is maybe the poster child for this, but a lot of AI names selling off. In your portfolio, you don't have any sort of pure AI type names. You have Amazon, that's maybe the closest corollary. I wonder when you look at semi selling off like 18% in just the past two weeks, if you're feeling quite validated by that decision to avoid them.
Well, I think it's certainly very interesting. Um, if you kind of take a step back, when we look at the markets this year, one of the things that's fascinating to us is the strength in the S&P 500 has been driven by a very small collection of companies, a lot of the ones that you just mentioned. What that means for our strategy where we're trying to curate a portfolio of, let's say a dozen or 15 of the world's great, we call high-quality durable growth businesses, those have been on sale all year long. The businesses are performing incredibly well, but the stock market hasn't been paying attention to those businesses. We've been able to buy them, uh at what we think are very attractive prices. And on days like today, you're starting to see the strength of that strategy where a lot of the names that have driven a lot of the stock market performance here to date are giving up and a lot of the names that that we own are doing quite well as people are starting to differentiate uh the businesses where we think the purchase prices are very attractive that have great growth in a relatively volatile environment of of higher rates and just overall uh a little bit of uh question marks about exactly the rate of AI spending from some of the large labs.
Just on that because we're starting to question it really in earnest and price that in. Do you think something has flipped in this market that now those unloved names that you picked up when they were unloved are starting to get recognized that a leadership shift might be undergoing on this market?
I think it's always hard to say exactly when a leadership shift will emerge or or when it's happened. But if you step back, what we're ultimately trying to do is buy businesses that we believe can compound their earnings anywhere between 15 and 25% a year taking a longer-term perspective. If we hold these businesses for a long period of time, the returns we earn will over a very long period of time, say the life of the business, approximate the growth in their earnings per share. Now, that's only one component of it. The second component of how our returns are is how the multiple that people assign to those earnings changes. In the short term, that fluctuation of the multiple has a much larger impact than the growth. Over a long period of time, the growth of the businesses matters. So our game is really just trying to find great businesses where we know if we hold them for three, five, 10 years and we're right in our analysis of their prospects, they'll be right. In the shorter period of time though, it's very hard to say. But I definitely think that the businesses are performing incredibly well that we own, and we're starting to see a little bit of that multiple appreciation, uh which could be the start of a trend, but we'll have to see.
Could you talk a bit more about that curatorial process to borrow a word that you used there, the way that you look at companies and sort of what you're looking to add to the portfolio.
Absolutely. So at Pershing Square, we've basically had a library for the last two decades of what we would say would be 3 to 400 of the world's great businesses. Great businesses in our view are businesses that have what we call simple, predictable, free cash flow generative businesses, strong competitive barriers to entries or moats, run by really high-quality management teams, minimal amounts of financial leverage where the shareholders ultimately get a lot of value from the capital allocation decisions the management team makes. We think there's a broad universe of those across the world that at scale, maybe 3 to 400. We monitor those companies really every single day, always looking at adding to the library for new companies that become available. And we're really just waiting for the opportunity to purchase them at attractive prices. So, this year, where there's been a small number of companies that have driven the stock market performance, that's really advantageous to our strategy because we get businesses that are some of the world's great businesses that are on sale uh at prices that we would not probably have guessed they would become available at the start of the year.
So the compliment to that concentration that we talked so much about.
So I'm sure you don't want to give any names away. You're very much so allowed to. I don't think this is a market that will front run you, but I wonder what what is on the watch list and if you can't say, what's in the library? And if you can't say specific companies, like, what type of companies? Is there is there a sector, for example, that you have your eye on?
Well one of the things at a very high level is I think that when you look at a lot of the stocks that have historically grown their earnings at 15 plus percent a year, where they would not really be affected by what happens in AI. If AI grows even larger than some of the biggest bulls think, or if AI maybe is more in line with some of the bears think, those businesses would probably produce the same level of earnings over time. A lot of those businesses are completely outside of the AI space and they've really just been ignored. So to give you one example of something that we have purchased we've talked about before, is a company called Alcon, which is a contact lens manufacturer, uh and they also do a lot of uh things involved with cataract surgery. That business we think is one that can grow its earnings at a high teens rate, very strong revenue growth, very stable as you have a a world that is emerging uh that needs a lot more eye care in totality. It's a duopoly effectively, and they have an opportunity to improve their profit margin significantly. We've watched this business for since it spun out in 2019 from Novartis, never had the opportunity to buy it because it's been a great business run by a very good management team, but always traded at a multiple that was a little too high as people were excited. This year, it feels like that whole sector in MedTech or healthcare has really been thrown by the wayside as people are focusing on things like AI. So that's an example of something we've had an opportunity to step in and buy a business we've watched for nearly a decade that has had very good business progress, but was always too expensive and now has become available for what we think is a very very attractive price.
We're going to come back and talk about a few more companies and specific those that are you've checked out of the library, shall we say. Um but let me just ask you about the economic environment that we're in right now and what concern if any that's kind of giving you at this moment. We were talking about inflation a moment ago, the health of the the consumer. Any red lights or alarms sounding uh that you that you see right now?
I wouldn't necessarily use the words red lights or alarms, but I think it's a very interesting backdrop that we probably haven't seen in a while and I would say it's an incredibly bifurcated economy. So if you decompose sort of GDP, uh 70% of the economy is generally driven by consumer spending. You are seeing a lot of pressure uh and you can see this in sort of the government macro data. You can also see it in individual companies about people are saying the cost of living is very high. Wages are actually not keeping up with the inflation, which is a relatively new development. So people's real incomes that they can spend are going down. And so in order to finance the goods that they need, the services that most consumers need, they're actually having to borrow or they're having to reduce the amount that they can save, which is generally not a sign of of great health. Um at the same time, you're also seeing just a lot of weakness in sectors that depend upon financing. Housing is very weak, automobile sales, things that require the cost of capital to be lower for purchases, those are struggling right now in a higher than normal rate environment, at least as judged by the last 20 years. On the other hand, you have this AI growth and infrastructure that is simply unbelievable and doesn't seem to at all be impacted by higher rates and it's not really clear even if you doubled the federal funds rate whether that would have any impact on slowing down a lot of this build out of growth. That is really what's holding up the economy right now. And so it's not a typical economic environment where you have a large portion of the economy that is actually being hurt by higher rates. But you have another part of the economy that even if you raised rates significantly, may not slow down at all. And how you solve that, uh seems to be a real puzzle.
The rate insensitivity has been remarkable and probably is for this Fed too. And look, I know at Pershing Square every now and then you'll have a macro layer, kind of a hedge that you'll put on your portfolio. I know you've described it before as something that will be just episodic when you have asymmetric information. Um the COVID trade to put on CDS, I think many have tagged that as kind of an epic trade that paid off handsomely. Is there anything that you're eyeing now? Is there any sort of macro overlay that might make sense for the portfolio?
So the work and figuring out what goes into those asymmetric trades, trying to come up with a view, what I just described of a bifurcated economy, that happens every single day and we have a team including myself and Bill who really work on that uh at Pershing Square. But in order to actually put on one of those trades, we need two things to happen. One is we need to have a differentiated perspective about what the world might ultimately turn out to look like versus what a lot of people think is the case. And then secondly, we need to find an instrument that is trading at a very attractive price so that if we're correct in our analysis, we can have these huge asymmetric returns in terms of making many multiples of the capital that we put in. I would say right now, we're not sure we have a differentiated perspective, but as I mentioned, we're seeing some things that are quite interesting that we're carefully following. But the pricing of those instruments that we need, uh that has not yet come at a level where we think it's very attractive. And so when those two things line up, we'll we'll have something to do. And if not, we'll just continue to patiently study and and wait until an opportunity appears.
Pershing Square is currently working on a new fund that will give investors access to pre-IPO companies. Ryan Israel, the firm's chief investment officer, is back with us. Ryan, the overall market for private markets at this moment is concerns about exiting, where the opportunities are beyond AI. And I wonder how you're thinking about it as you build this strategy. Why start this now and what are you looking at?
Sure. So, really the way that the strategy has started is really the way that any strategy at Pershing Square starts, which is we look at what are we already doing internally that we could further leverage in order to do something more. So, for example, we've really been doing a lot of work in the AI space for some of our historical investments, a lot of the hyper scalars and other companies that touch AI. The more work that we have done on those businesses, the more we started to develop a framework for what good in AI looks like. At the same time, there are so many large and emerging private companies that could be among some of the largest companies in the world, uh certainly the S&P 500 if they were public. So we've really had to diligence those companies. So we find ourselves increasingly doing work on private companies and then having a public market's perspective that could actually be very value added to the CEOs of a lot of these private companies. We felt there was a natural synergy there to ultimately say, why don't we start investing uh in later stage growth companies and um VC companies more broadly and that's really what Pershing Square Ventures is going to reflect.
