Fee Alignment and Corporate Governance in Private Equity-Backed Public Holdings: A Strategic Shift in Value Creation

In the ever-evolving landscape of corporate governance and private equity, the interplay between fee structures and investor alignment has become a critical lens through which to evaluate strategic value creation. Recent developments involving Pershing Square Holdings, Ltd. (LN: PSH) and its relationship with Howard Hughes Corporation (HHH) offer a compelling case study in how private equity firms are redefining their roles in public markets. By reducing management fees and restructuring governance frameworks, Pershing Square has signaled a departure from traditional fee models, prioritizing long-term alignment over short-term gains.

The core of Pershing Square's strategy lies in its May 2025 amendments to its Investment Management Agreement (IMA) with its investment manager. The firm reduced its management fees by an amount equal to the fees it receives from HHH for advisory services. This move effectively eliminates double-charging for overlapping services, ensuring that PSH's investors are not paying for the same expertise twice. The reduction is not a mere cost-cutting exercise but a deliberate step to align economic incentives. By tying its compensation to HHH's performance—through a base quarterly fee of $3.75 million and a performance-based fee of 1.5% on share price growth above an inflation-adjusted hurdle—Pershing Square has created a structure where its success is inextricably linked to HHH's long-term value creation.

This alignment extends beyond financial mechanics into corporate governance. The Voting Proxy Agreement, which appoints Pershing Square's parent company, ManagementCo, as the designated proxy for HHH shares owned by the Funds, centralizes decision-making authority. While this concentration of power raises questions about minority shareholder influence, the agreement includes safeguards: caps on voting power at 40% and beneficial ownership at 47%, along with requirements for majority support from disinterested directors in any change of control. These provisions aim to balance strategic agility with accountability, a hallmark of modern corporate governance in private equity-backed public companies.

The strategic implications of these moves are profound. By reducing its discount to net asset value (NAV) from -27% through share repurchases and employee ownership incentives, PSH is signaling confidence in its long-term value. The potential launch of a U.S.-based fund, which could generate fee rebates for PSH, further underscores a commitment to cost efficiency. Meanwhile, HHH's transformation into a permanent capital vehicle—expanding into insurance and non-real estate sectors—reflects a broader ambition to diversify revenue streams and enhance shareholder returns.

Critics, however, remain skeptical. The use of inflation-adjusted hurdles in the performance-based fee structure could dilute accountability if inflation outpaces actual value creation. Additionally, the lack of direct shareholder approval for the Services Agreement, despite its material impact, highlights ongoing tensions between private equity governance and public market transparency. Yet, these challenges also present opportunities for refinement. For instance, tying performance metrics to absolute returns rather than inflation-adjusted benchmarks could sharpen focus on tangible value creation.

For investors, the key takeaway is clear: structural changes in fee alignment and governance can drive meaningful value, but their success hinges on execution. Pershing Square's approach—combining fee reductions, proxy control, and performance-linked incentives—offers a blueprint for aligning private equity interests with public market stakeholders. However, vigilance is required. Investors should monitor HHH's operational performance, the effectiveness of its diversification strategy, and the evolution of PSH's discount to NAV as barometers of success.

In conclusion, the Pershing Square-HHH saga underscores a broader trend: private equity firms are increasingly adopting hybrid models that blend the agility of private capital with the discipline of public markets. For investors, this represents both a challenge and an opportunity. The challenge lies in navigating the complexities of fee structures and governance dynamics. The opportunity lies in capitalizing on firms that, like Pershing Square, are willing to restructure their incentives to prioritize long-term value over short-term gains. As the line between private and public markets continues to blur, the ability to discern strategic alignment from mere rhetoric will be the hallmark of successful investing.