Not So Deep Dive: Brookfield Asset Management Stock
(Ryan) What they do: Incredibly hard to understand. Here’s a quote from the financial times that encapsulates it well, “What exactly Brookfield is, and how it operates, is maddeningly difficult to ascertain. To unpack the Canadian group’s accounts is to discover not so much a company as a giant, triangular jigsaw board that spreads across the world and covers assets worth $500B”.
Brookfield Asset Management is one of the world’s largest alternative asset managers (180k employees and $690B in AUM) meaning they can invest across virtually any asset class. And they focus their investments in a few sectors. Renewable power and transition, Infrastructure, Private Equity, Real Estate, and Reinsurance.
The interesting part is that each of those investment categories is a public company in and of itself. So BAM actually owns 63% of the private equity business, 30% of the infrastructure business, 61% of the renewable power company, and 51% of their property business. But each of those also has limited partnerships associated with them that raise capital from big private investors.
The moral of the story is that BAM has tons of funding from several different sources, uses those funds to finance investments (typically hard assets), and then collects a management fee as revenue.
(Ryan) History: Brookfield actually began out of a family feud and a $15 million inheritance. So Samuel Bronfman, who was the founder of the Seagram company, made a fortune selling alcohol during the prohibition days. At one point (1952) he locked his two nephews, Peter and Edward out of the Seagram offices and forced them to sell all their shares (not exactly sure how this worked, but that’s all the color I could find). After selling their shares, Peter and Edward Bronfman teamed up with a shrewd accountant named Jack Cockwell and used their inheritance to acquire (in a messy takeover deal) a Brazilian electric utility company called Brascan.
Brascan at the time had just been nationalized by the brazilian government so was flushed with cash, and the brothers + cockwell used that cash to acquire and control as much as they could. This included breweries, sports teams, forests, mines, real estate brokers, and investment banks. By 1980 the brothers were 2 of the richest people in Canada. Now, today the company consists of dozens of separate but intertwined public and private companies.
BAM operates in the alternative asset industry, which is vague but basically stuff like PE, VC, real estate, infrastructure, renewables, etc.
Industry has an AUM of $9 trillion that grew by over $1 trillion in 2021. BAM has $364 billion in fee bearing capital
Competitors: KKR, Blackstone, the Carlyle Group, Bridgewater, the list goes on and on.
(Brad) Management and Ownership:
Insiders sold 10.85% of the company. Institutions own about 75% of the firm with RBC and Vanguard near the top of the list. Brookfield is actually listed at the top owner of its own company. I believe the insider cited here is Brookfield because there are no proxies and no data on insider ownership in their filings
CEO is Bruce Flatt:
Since 2002 in this role and with the company since 1990
71% Glassdoor rating
CFO is Nicholas Goodman
Been with the company since 2010 and had been a CFO at Brookfield Renewable Partners before then.
Several other divisional CEOs that have been with the company for a decade +
Market cap of $77 billion, ticker BAM
Enterprise value is very hard to calculate, but I came up with a value of $69.2 billion. I’m not sure whether to include or exclude investment properties from EV calculation
It is difficult to value because it owns so many different interests in other entities it manages (confused yet?). This includes 26% of Brookfield Renewable Corporation worth $1.6 billion, 11.8% of Brookfield Infrastructure Corp worth $600 million, and many others
EV/net income of 5.6
EV/fee related earnings of 39.2
EV/distributable earnings of 11
In 2021, BAM raised $71B of capital across all its segments
Generated $12.4B in total net income
Distributable earnings of $6.3B (29% per share CAGR over the last 5 years)
Paid $0.88/share in dividends this year. 41% of which was a special dividend. Comes out to ~2% div yield
(Brad) Balance sheet and liquidity:
$12.7 billion in cash and equivalents vs. $9.9 billion YoY
$10.8 billion in corporate borrowings
-$23 billion in net payables
Another $165 billion in what’s called non-recourse borrowings in entities that it manages (meaning there’s essentially nothing to secure for reparation in event of default)
(Ryan) Not really anecdotal evidence but I read a story about them acquiring a NYC office building from Jared Kushner. Not sure what the relationship is there.
Future growth opportunities:
(Ryan) Spinning off the asset management business. Ok, frankly I already thought this was its own thing. But apparently management is considering spinning off the asset management component of Brookfield Asset Management into its own company that could potentially be worth $75B on its own. I don’t know what would be left, but this would purportedly make Brookfield more asset light. According to Forbes, “Post separation, BAM will focus on growing its newly launched reinsurance and investment operations through $50 billion (net of debts) directly owned assets across real estate, infrastructure, renewable energy, credit, and private equity.”
(Brett) Apparently they are in on the Twitter deal? But in all seriousness datacenters is a big growth driver and right up their wheelhouse. Should be a steadily growing industry. Rumored to be being buying Switch (a datacenter company). The stock is valued at $7.5 billion. When it comes down to it they just need to get more money into more deals at acceptable ROIs.
(Brad) I’d love to see them explore the cannabis industry. Seems like they could figure out a back door in before the regulatory tide turns. Multiples are dirt cheap, companies are starved for cash and the industry is poised for 20% growth for a decade. Along those lines – more generally speaking – the world of M&A has gotten far more favorable to them than the last several years with the turbulence. I’d expect to see them take advantage
Highlights and lowlights:
(Ryan) Highlights: They must have one hell of a legal team. Their size gives them opportunities that others might not have (berkshire effect). They also have so many different components to the business that they’re easily able to attract funds. Also, their dependence on hard assets I would think is more resilient through periods of high inflation. Lowlights: Wtf do I own?
(Brett) Highlights: There has been a tailwind into the industry, fee bearing capital rising, and looks like strong track record of creating shareholder value. Real estate and physical assets should do good with inflation? Lowlights: Opaque. Journalist said looking at them was like “trying to watch a basketball game with the lights out.” That’s how I felt trying to learn this business, I got nowhere. Also, rising interest rates make me nervous with leveraged companies. From Institutional Investor: “Epstein said institutional investors have been drawn to higher-yielding asset classes like private equity as a result of low interest rates and monetary intervention, which have made the benchmark yield curve consistently low over the past few years. Lower yields have also prompted higher use leverage to increase portfolio returns, he said.”
(Brad) Highlights is management team continuity. It’s special to see a CEO with the company for 32 years and this seems to be a theme with its upper-management
(Ryan) Asset spin generates value. Reinsurance biz grows. And BAM continues to increase its AUM. At this size though, I don’t think investors should be expecting insane growth. It would probably be in line with management’s stated goal of 12-15% returns.
(Brett) More fees, more carried interest, more gains from asset sales.
(Brad) This company has 12-24 months to become that serial investor/acquirer and greatly bolsters its already strong return profile.
(Ryan) There’s two things I’m afraid of here. 1) There are assets or relationships under the hood that could blow up and I don’t know exist, or 2) Management is acting malevolently and taking capital that belongs to shareholders and I’d have zero idea.
(Brett) I don’t think anyone truly understands what they are buying, even the insiders. Could be some hidden liabilities here. Also, what happens if/when interest rates rise significantly? Does AUM get pulled out of alternatives? Do real estate prices go down? Does it become harder to finance LBOs?
(Brad) This is a black box of assets. Hard to become an expert on this business. It also “buys troubled and stressed things” which greatly raises the bar for leadership excellence.
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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.