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BAM - Brookfield Asset Management

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chrispy Newbie

chrispy

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https://www-bloomberg-com.cdn.ampproject.org/v/s/www.bloomberg.com/amp/news/articles/2018-07-31/brookfield-is-said-to-near-6-8-billion-deal-for-forest-city?amp_js_v=a2&amp_gsa=1&usqp=mq331AQCCAE%3D#referrer=https%3A%2F%2Fwww.google.com&amp_tf=From%20%251%24s&ampshare=https%3A%2F%2Fwww.bloomberg.com%2Fnews%2Farticles%2F2018-07-31%2Fbrookfield-is-said-to-near-6-8-billion-deal-for-forest-city

 

Do the Forest City assets go to the private funds?

 

$11B on Forest City and $15B on GGP... Over $26B of US real estate being acquired in 2018

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racemize Newbie

racemize

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Sounds like it went through the private opportunistic fund, and ~20% of BPY is in those funds.

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John Hjorth Newbie

John Hjorth

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I read it the same way as Joel does, so this likely to some extent will affect BAM dry powder on group level at closing, but likely not BAM total assets at group level, while BAM AUM and BAM fee bearing capital likely will get a bump upwards at closing of the deal.

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gokou3 Newbie

gokou3

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I read it the same way as Joel does, so this likely to some extent will affect BAM dry powder on group level at closing, but likely not BAM total assets at group level, while BAM AUM and BAM fee bearing capital likely will get a bump upwards at closing of the deal.

 

 

Their flagship $9B BSREP II fund was 80% invested per 2018Q1 report, meaning only $1.8B of dry powder remaining on that fund that would for sure be exhausted by these two deals.  BAM also also raised $9B for their estimated $20B BSREP III fund, so a good chunk of this commitment would be put into good use with these deals.

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walkie518 Newbie

walkie518

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I read it the same way as Joel does, so this likely to some extent will affect BAM dry powder on group level at closing, but likely not BAM total assets at group level, while BAM AUM and BAM fee bearing capital likely will get a bump upwards at closing of the deal.

 

 

Their flagship $9B BSREP II fund was 80% invested per 2018Q1 report, meaning only $1.8B of dry powder remaining on that fund that would for sure be exhausted by these two deals.  BAM also also raised $9B for their estimated $20B BSREP III fund, so a good chunk of this commitment would be put into good use with these deals.

 

off the top, I don't remember average fee per $1 AUM... at 1%, those two deals would boost 2019 net income by nearly 12% before carried interest?

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racemize Newbie

racemize

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I read it the same way as Joel does, so this likely to some extent will affect BAM dry powder on group level at closing, but likely not BAM total assets at group level, while BAM AUM and BAM fee bearing capital likely will get a bump upwards at closing of the deal.

 

 

Their flagship $9B BSREP II fund was 80% invested per 2018Q1 report, meaning only $1.8B of dry powder remaining on that fund that would for sure be exhausted by these two deals.  BAM also also raised $9B for their estimated $20B BSREP III fund, so a good chunk of this commitment would be put into good use with these deals.

 

off the top, I don't remember average fee per $1 AUM... at 1%, those two deals would boost 2019 net income by nearly 12% before carried interest?

 

If I recall correctly, I think those funds are at 1.5% flat fee and then a decent percentage of results over the target.  For opportunistic, the target should be 15%+.  Also, I believe the GGP buyout is pretty much only BPY, and involves waiving management fees for some period (or adding some amount of credits).  Incentive distributions have not started for BPY yet.

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Spekulatius Newbie

Spekulatius

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To be more specific here, berkshire made some awesome purchases at amazing prices when Williams Co was looking to delever their balance sheet in 2001 or 2002.  KernRiver pipeline and compression facilties were a total steal b/c Williams needed cash and needed it quickly....I am very happy BAM picked these assets up vs. PE....but as noted above between Oncur and  the noted above, BRK has missed out on $10+ of Utility like assets, which were right in their circle of competence

 

The price may not have been right for BRK. BAM can pay more, because BIP foots the bill, while BAM cashes in  fees, so growth in size benefits BAM. I am also not sure that the assets are utility like, there are some gathering assets in the packet, which generally have a lower lifespan and are hence of lower quality.

 

Just as an update, the valuation of the NG transmission assets sold to BOY was mentioned in ENB earnings CC. They were sold at 13x EBITDA. As an ENB shareholder, I am very satisfied with this price.

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chrispy Newbie

chrispy

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Can anyone help me understand their business annuity company and how it complements BAM? I found these but don't understand the overlap...

 

Today:

http://m.newson6.com/story.aspx?story=38833437&catId=112042

 

Older:

https://www.benefitscanada.com/pensions/db/brookfield-launches-group-annuity-solutions-company-91734

 

EDIT: Is this similar to float?  Brookfield buys the pension obligations and over time has to pay out the benefits?  Could it also be beneficial in building relationships with institutions for investing in their funds and/or another way of driving fees to BAM?

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petec Newbie

petec

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EDIT: Is this similar to float? 

 

Precisely. You take a lump sum up front and have to pay out a stream of cash flows later. If your investment profits are greater than the cash flows you have to pay, you keep the difference.

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chrispy Newbie

chrispy

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Looking forward to reading it after work!

 

The last few sentences of the press release:

 

"We are currently generating over $2 billion of free cash at the corporate level on an annual basis, with few capital requirements, and the amount is growing rapidly.

 

We have flexibility to use this capital in several ways. One area is to invest in new strategies directly on our balance sheet while we build up a track record prior to investing our client's capital. Credit has been a particular area of focus and this will continue. As our cash resources grow we continue to look further to shrinking the shares outstanding at Brookfield over time through repurchases."

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spark411 Newbie

spark411

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This was in the quarterly letter.  Shows management's perspective on how undervalued BAM is and their willingness to buy back shares...

 

The total equity across Brookfield is approximately $80 billion and the equity market capitalization for BAM

common shares is currently approximately $40 billion. The $40 billion can be broken into two components: our

net tangible invested capital, and our asset management business.

Taking IFRS values for our non-listed assets and real estate business and using stock market prices for our other

listed investments, the total tangible invested capital was $40 billion at the end of the second quarter. After

deducting $10 billion of long-term debt and perpetual shares, net invested capital was $30 billion.

Q2 2018 Letter to Shareholders Brookfield Asset Management Inc. 3

This scenario implies that $10 billion is being attributed to our asset management business. In our view, this

represents an extremely low value, based on the underlying financial metrics and the way most investors value

similar businesses. For example, this value represents 10 times our current estimate of annualized fee related

net earnings (approximately $1 billion), with no value attributed to the gross carried interest of $8 billion that we

stand to earn over the next 10 years if we achieve target returns. This is also based only on funds raised to date,

with nothing attributed to our ability to grow our franchise.

Stated differently, if our shares reflected a 20 times multiple for fee related earnings and a 10 times multiple for

net annualized carry on existing funds, this would add $18 billion of value, or $18 per share. This is close to a

50% increase over current stock market price. And this, still has no value attributed to the growth in our future

franchise, including larger and new funds.

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rkbabang Newbie

rkbabang

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This was in the quarterly letter.  Shows management's perspective on how undervalued BAM is and their willingness to buy back shares...

 

The total equity across Brookfield is approximately $80 billion and the equity market capitalization for BAM

common shares is currently approximately $40 billion. The $40 billion can be broken into two components: our

net tangible invested capital, and our asset management business.

Taking IFRS values for our non-listed assets and real estate business and using stock market prices for our other

listed investments, the total tangible invested capital was $40 billion at the end of the second quarter. After

deducting $10 billion of long-term debt and perpetual shares, net invested capital was $30 billion.

Q2 2018 Letter to Shareholders Brookfield Asset Management Inc. 3

This scenario implies that $10 billion is being attributed to our asset management business. In our view, this

represents an extremely low value, based on the underlying financial metrics and the way most investors value

similar businesses. For example, this value represents 10 times our current estimate of annualized fee related

net earnings (approximately $1 billion), with no value attributed to the gross carried interest of $8 billion that we

stand to earn over the next 10 years if we achieve target returns. This is also based only on funds raised to date,

with nothing attributed to our ability to grow our franchise.

Stated differently, if our shares reflected a 20 times multiple for fee related earnings and a 10 times multiple for

net annualized carry on existing funds, this would add $18 billion of value, or $18 per share. This is close to a

50% increase over current stock market price. And this, still has no value attributed to the growth in our future

franchise, including larger and new funds.

 

And he said that it was a "medium term" goal to reduce share count to less than it was in 1999.  Which means buying back more than 10% of existing shares.

 

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StevieV Newbie

StevieV

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This was in the quarterly letter.  Shows management's perspective on how undervalued BAM is and their willingness to buy back shares...

 

The total equity across Brookfield is approximately $80 billion and the equity market capitalization for BAM

common shares is currently approximately $40 billion. The $40 billion can be broken into two components: our

net tangible invested capital, and our asset management business.

Taking IFRS values for our non-listed assets and real estate business and using stock market prices for our other

listed investments, the total tangible invested capital was $40 billion at the end of the second quarter. After

deducting $10 billion of long-term debt and perpetual shares, net invested capital was $30 billion.

Q2 2018 Letter to Shareholders Brookfield Asset Management Inc. 3

This scenario implies that $10 billion is being attributed to our asset management business. In our view, this

represents an extremely low value, based on the underlying financial metrics and the way most investors value

similar businesses. For example, this value represents 10 times our current estimate of annualized fee related

net earnings (approximately $1 billion), with no value attributed to the gross carried interest of $8 billion that we

stand to earn over the next 10 years if we achieve target returns. This is also based only on funds raised to date,

with nothing attributed to our ability to grow our franchise.

Stated differently, if our shares reflected a 20 times multiple for fee related earnings and a 10 times multiple for

net annualized carry on existing funds, this would add $18 billion of value, or $18 per share. This is close to a

50% increase over current stock market price. And this, still has no value attributed to the growth in our future

franchise, including larger and new funds.

 

I understand the illustration for simplicity's sake.  However, I don't care for this particular valuation framework.

 

First, it glosses over a big part of the business - the net tangible invested capital.  Is the IFRS valuation correct?  Is the stock market valuation correct?  Are the companies growing?  What is the outlook?

 

I agree that the asset management side is undervalued.  However, I'm not sure about the multiples used: "if our shares reflected a 20 times multiple for fee related earnings and a 10 times multiple for net annualized carry on existing funds, this would add $18 billion of value, or $18 per share."  Maybe that would be appropriate, but I am not aware of any alt getting those multiples today.

 

Plus, there is a disconnect to me when you accept the market multiple for publicly listed subsidiaries, then later suggest the market severely undervalues the asset management side of the business.  If the market is so wrong on the asset management valuation, why should I trust it with the listed subs.

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StevieV Newbie

StevieV

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I'm actually wondering if we are reading the same documents..

 

Are the companies growing? What's the outlook?  It's all in there.

 

Maybe I posted before I read the letter thoroughly enough.  However, I'm not suggesting that the conclusion is wrong, or that they didn't discuss other things.  I simply don't like the valuation framework in the quoted section.  Specifically, somewhat setting aside the invested capital side in this specific valuation discussion section.

 

FWIW, I think that 20X FRE and 10X incentive may be appropriate valuations.  They are growing FRE at 34% and expect to be able to continue to grow at 20% going forward.  20X for FRE growing at 20% isn't rich.  I am also fine with 10X carry.  Maybe lumpy, but certainly valuable.  However, unlike the letter says, I don't believe that similar businesses are currently trading at those multiples.  I think I am right on that, but admit I haven't run those numbers on the competitors lately.

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gokou3 Newbie

gokou3

Posted
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This was in the quarterly letter.  Shows management's perspective on how undervalued BAM is and their willingness to buy back shares...

 

The total equity across Brookfield is approximately $80 billion and the equity market capitalization for BAM

common shares is currently approximately $40 billion. The $40 billion can be broken into two components: our

net tangible invested capital, and our asset management business.

Taking IFRS values for our non-listed assets and real estate business and using stock market prices for our other

listed investments, the total tangible invested capital was $40 billion at the end of the second quarter. After

deducting $10 billion of long-term debt and perpetual shares, net invested capital was $30 billion.

Q2 2018 Letter to Shareholders Brookfield Asset Management Inc. 3

This scenario implies that $10 billion is being attributed to our asset management business. In our view, this

represents an extremely low value, based on the underlying financial metrics and the way most investors value

similar businesses. For example, this value represents 10 times our current estimate of annualized fee related

net earnings (approximately $1 billion), with no value attributed to the gross carried interest of $8 billion that we

stand to earn over the next 10 years if we achieve target returns. This is also based only on funds raised to date,

with nothing attributed to our ability to grow our franchise.

Stated differently, if our shares reflected a 20 times multiple for fee related earnings and a 10 times multiple for

net annualized carry on existing funds, this would add $18 billion of value, or $18 per share. This is close to a

50% increase over current stock market price. And this, still has no value attributed to the growth in our future

franchise, including larger and new funds.

 

Sorry for being dim, but how does Flatt get from $40B to $80B equity?  He seems to be arguing the IV of BAM should be $30B net asset value of owned assets and $10B+$18B for the asset management business, totaling $58B...

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ValueMaven Newbie

ValueMaven

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This is an epic quarterly letter.  What an undervalued stock. 

 

Decreasing share count, increasing IV, and BV...plus higher rev from fees...

 

Let's not forget BAM management own about 20% of the co too...

 

This was a really genius letter... I read it three times today!!

 

-VM

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peterHK Newbie

peterHK

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I'm actually wondering if we are reading the same documents..

 

Are the companies growing? What's the outlook?  It's all in there.

 

Maybe I posted before I read the letter thoroughly enough.  However, I'm not suggesting that the conclusion is wrong, or that they didn't discuss other things.  I simply don't like the valuation framework in the quoted section.  Specifically, somewhat setting aside the invested capital side in this specific valuation discussion section.

 

FWIW, I think that 20X FRE and 10X incentive may be appropriate valuations.  They are growing FRE at 34% and expect to be able to continue to grow at 20% going forward.  20X for FRE growing at 20% isn't rich.  I am also fine with 10X carry.  Maybe lumpy, but certainly valuable.  However, unlike the letter says, I don't believe that similar businesses are currently trading at those multiples.  I think I am right on that, but admit I haven't run those numbers on the competitors lately.

 

You can look at it similar to ONEX, backing out the implied AM business (high quality PE/CLO with incentive fees) from the share price. I haven't done the math recently, but I think it's traded at something like 10-15x net earnings depending on where the shares are at, plus valuing the unrealized carry at 1x, which is highly conservative.

 

I think Bruce might say that there aren't any similar businesses in the AM industry growing at 20% a year, plus carry, with secular tailwinds. Blackstone/KKR/Apollo trade at 11-15x earnings, Canadian AM peers trade at 11-14x (e.g CI Financial at ~11x or so), but none of those businesses is growing FRE at 34%, so a premium to that I think is warranted, though I don't know that 20x is the right number (I use 17-18x myself).

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