Last December, Brookfield Corporation (BN) listed its asset management business into an independent company called Brookfield Asset Management (BAM), in essence separating Brookfield’s capital (Brookfield Corporation) from the third-party capital managed by Brookfield. The naming can be confusing, so in this blog, BN will refer to Brookfield Corporation, while BAM refers to Brookfield Asset Management.
The capital allocation priorities of both BN and BAM reflect their respective business models: BAM, being an asset-light business that earns fees for managing money, would simply pay out all of its profits as a dividend, while BN’s focus, as an asset-heavy business, would focus on managing maximizing returns on its capital.
Today, an investor in Brookfield Corporation gets the following assets:
- A 75% stake in BAM worth $39 billion,
- Stakes in Brookfield’s publicly listed affiliates Brookfield Renewable Partners, Brookfield Infrastructure Partners, and Brookfield Business Partners worth $20 billion at current market prices
- Various stakes in BAM’s funds valued at $12 billion,
- Brookfield Property Group (BPG), a large portfolio of malls and office towers around the world
- An insurance business focused on annuities with about $4 billion in equity value,
- 100% share of the net carried interest (i.e., performance fees) charged on existing funds managed by BAM and a 1/3 share of the net carried interest on new BAM funds.
A common bull case for BN shares is that sum of all of its assets listed above minus the debt and preferred shares is substantially higher than the current market price of the stock, even after accounting for its large exposure to commercial real estate (which some investors are concerned about given high office vacancy rates and rising interest rates). While these are valid points, we think this view misses the big picture.
At Baskin Wealth Management, our strategy is to make long-term investments in “compounders” that can grow earnings and cash flow for years to come rather than capturing short-term movements in the share price. BN’s leadership team (who personally own significant stakes in BN and BAM) has a long track record in growing the asset management business while shrewdly investing both third-party and its own capital. As long as BN continues to do both, shares have significantly more upside than the 20% or so from the narrowing of the net asset value discount.
BAM today manages $834 billion, up over 3 times in just the last 5 years, with leading positions in global infrastructure, real estate, renewable power, and credit. These are attractive industries that will require substantial capital investments going into the future, and BAM’s creativity in creating new funds and raising capital should lead to ongoing AUM growth and corresponding growth in the value of BN’s stake in BAM.
Furthermore, since the 1990s when current CEO Bruce Flatt fixed up Brookfield’s predecessor Brascan, Brookfield has a strong track record of investing in undervalued assets in bad times (which it can do because of its diverse funding sources) and realizing gains after improving operations and in better market conditions. Some notable examples include buying hydroelectric dams in the aftermath of Enron in the early 2000s, buying ports in Australia and the UK in 2009 in the Great Financial Crisis, or buying Petrobras’s natural gas pipeline network in Brazil after a corruption scandal in 2016. More recently, BN sold a large stake in Brookfield Renewable Partners at an elevated valuation in early 2021 while buying out minority interests in Brookfield Property Partners at a wide discount to net asset value.
With BN today generating significant cash flow from its investments and net carried interest, and a capital allocation policy that reinvests earnings rather than dividends, we expect BN to continue making profitable investment decisions and shares to compound correspondingly.