BAM - Brookfield Asset Management

[EricSchleien]

Reuters [February 8^th 2019] : Brookfield in talks with India's Reliance Industries to buy tower, fibre assets: report.

 

Nice, thanks for posting John - that would be a big one.

 

Yes, Mike,

 

I have my personal concerns, though. I haven't been adding to BAM for quite some time now.

 

In the spirit of better decision making, what are the your personal concerns about Brookfield?

 

JH had previously (I assume still) been big supporter of BAM.  Recently upthread, I think he expressed concern with expanding to credit (and the conflict of interest) which is less likely to sustain the return profile BAM has historically touted. 

 

That's my quick summary after wondering what/why he hasn't been adding.

 

my biggest concern is the numbers they give with projections. it could create incentives to fudge the numbers in the future. i think the risk is super low but something i've actually talked pretty extensively with the company about.

[spark411]

Agree - fudging numbers aka being aggressive with accounting is my #1 concern for this investment as well.    Not sure how I can come comfortable with that b/c as the number of people and $$$ to share grows, the higher the likelihood of someone reaching over the line.

[LongTermView]

Og and spark411,

 

BRK and BAM are big positions for me. I think about the BAM plan value a lot.

 

In the Spring 1994 Berkshire meeting there is a two-part question on intrinsic value and cash/buybacks.

 

In response to the intrinsic value part of the question, we have the following:

CHARLIE MUNGER: Well, your attitude on that subject reminds me of a famous headmaster who used to address the graduating class every year. And he’d say, “You know,” he says, “Five percent of you people are going to end up criminals.” And he says, “I know exactly who you are.” (Laughter)

 

And he said, “But I’m not going to tell you, because it would deprive your lives of a sense of excitement.” (Laughter)

 

If you stop to think about it, the companies that constantly told their shareholders what the intrinsic value was were the real estate holding companies in corporate form.

 

And I must say, that the amount of folly and misbehavior that crept into that process was disgusting. We would be just associating with a bad group if we were to change our ways.

 

WARREN BUFFETT: Bill Zeckendorf Sr. I think was probably the first one to do that, with Webb and Knapp back in the late ’50s. I still have those annual reports. And he would announce, you know, like, to eight decimal places what the intrinsic value of Webb and Knapp was. And he did it right till the day they filed for Chapter 11. (Laughter)

 

CHARLIE MUNGER: I remember that well, because somebody said that he fell into bankruptcy. And somebody else said, “How can you fall off a pancake?” (Laughter)

 

WARREN BUFFETT: Beware of people that give you a lot of numbers about their businesses. I mean, in terms of projections or valuations or that sort of thing.

 

We try to give you all of the numbers that we would use ourselves in making our own calculations of value.

 

We really — if you read the Berkshire reports, you essentially — you have all the information that Charlie and I would use in making a decision about the security.

 

And if there’s anything really lacking in that respect, you know, we would actually — we would truly appreciate hearing from you, because we want to have that kind of information in the report. But then we want you to make the calculation.

 

But we’ve stuck, I mean, that material, for example, on the float in the insurance business, we consider that quite relevant, obviously, because we use up almost a page printing it. It’s pretty serious stuff at Berkshire. (Laughter)

 

But that is relevant. I mean, your interpretation may be different than mine or Charlie’s, but those are important numbers.

 

I don't want to take things out of context when Buffett says to beware of people that give out a lot of numbers in terms of projections or valuations. Of course when companies make projections based on total addressable market I get uneasy but I'm fine with the way BAM talks about the potential of real assets.

 

As for valuations, Munger used to calculate the intrinsic value for Wesco in his letters to shareholders:

And, finally, this reasonable-to-this-writer, $273-per-share figure for intrinsic per share value of Wesco stock should be compared with the $300 per share price at which Wesco stock was selling on December 31, 1997.

 

And, finally, this reasonable-to-this-writer, $342-per-share figure for intrinsic per share value of Wesco stock should be compared with the $354.75 per share price at which Wesco stock was selling on December 31, 1998.

 

And, finally, this reasonable-to-this-writer, $286-per-share figure for intrinsic per share value of Wesco stock should be compared with the $245 per share price at which Wesco stock was selling on December 31, 1999.

 

So I think it all depends on how one calculates valuations.

 

In the 4Q18 supplemental BAM shows a February 2019 plan value of $62.32 per share on page 3. Of course the real plan value is a range and it might be better if they just rounded to $62.

 

Carried interest can be confusing so I can see why they show a 10x plan value factor to get to $10 billion. Still, it might be good to see this as a range.

 

I'm ok with the way they show listed investments. After all, they're using market prices with the exception of BPY (IFRS).

 

I'm also ok with the way they use IFRS for unlisted with the exception of Brookfield Residential which has a privatization value premium.

 

Sometimes the display of annualized fee earnings with the 20x multiple makes me a little uneasy. This $19.6 billion sub total is a huge part of plan value and it might be good to see it as a range.

 

[EricSchleien]

Og and spark411,

 

BRK and BAM are big positions for me. I think about the BAM plan value a lot.

 

In the Spring 1994 Berkshire meeting there is a two-part question on intrinsic value and cash/buybacks.

 

In response to the intrinsic value part of the question, we have the following:

CHARLIE MUNGER: Well, your attitude on that subject reminds me of a famous headmaster who used to address the graduating class every year. And he’d say, “You know,” he says, “Five percent of you people are going to end up criminals.” And he says, “I know exactly who you are.” (Laughter)

 

And he said, “But I’m not going to tell you, because it would deprive your lives of a sense of excitement.” (Laughter)

 

If you stop to think about it, the companies that constantly told their shareholders what the intrinsic value was were the real estate holding companies in corporate form.

 

And I must say, that the amount of folly and misbehavior that crept into that process was disgusting. We would be just associating with a bad group if we were to change our ways.

 

WARREN BUFFETT: Bill Zeckendorf Sr. I think was probably the first one to do that, with Webb and Knapp back in the late ’50s. I still have those annual reports. And he would announce, you know, like, to eight decimal places what the intrinsic value of Webb and Knapp was. And he did it right till the day they filed for Chapter 11. (Laughter)

 

CHARLIE MUNGER: I remember that well, because somebody said that he fell into bankruptcy. And somebody else said, “How can you fall off a pancake?” (Laughter)

 

WARREN BUFFETT: Beware of people that give you a lot of numbers about their businesses. I mean, in terms of projections or valuations or that sort of thing.

 

We try to give you all of the numbers that we would use ourselves in making our own calculations of value.

 

We really — if you read the Berkshire reports, you essentially — you have all the information that Charlie and I would use in making a decision about the security.

 

And if there’s anything really lacking in that respect, you know, we would actually — we would truly appreciate hearing from you, because we want to have that kind of information in the report. But then we want you to make the calculation.

 

But we’ve stuck, I mean, that material, for example, on the float in the insurance business, we consider that quite relevant, obviously, because we use up almost a page printing it. It’s pretty serious stuff at Berkshire. (Laughter)

 

But that is relevant. I mean, your interpretation may be different than mine or Charlie’s, but those are important numbers.

 

I don't want to take things out of context when Buffett says to beware of people that give out a lot of numbers in terms of projections or valuations. Of course when companies make projections based on total addressable market I get uneasy but I'm fine with the way BAM talks about the potential of real assets.

 

As for valuations, Munger used to calculate the intrinsic value for Wesco in his letters to shareholders:

And, finally, this reasonable-to-this-writer, $273-per-share figure for intrinsic per share value of Wesco stock should be compared with the $300 per share price at which Wesco stock was selling on December 31, 1997.

 

And, finally, this reasonable-to-this-writer, $342-per-share figure for intrinsic per share value of Wesco stock should be compared with the $354.75 per share price at which Wesco stock was selling on December 31, 1998.

 

And, finally, this reasonable-to-this-writer, $286-per-share figure for intrinsic per share value of Wesco stock should be compared with the $245 per share price at which Wesco stock was selling on December 31, 1999.

 

So I think it all depends on how one calculates valuations.

 

In the 4Q18 supplemental BAM shows a February 2019 plan value of $62.32 per share on page 3. Of course the real plan value is a range and it might be better if they just rounded to $62.

 

Carried interest can be confusing so I can see why they show a 10x plan value factor to get to $10 billion. Still, it might be good to see this as a range.

 

I'm ok with the way they show listed investments. After all, they're using market prices with the exception of BPY (IFRS).

 

I'm also ok with the way they use IFRS for unlisted with the exception of Brookfield Residential which has a privatization value premium.

 

Sometimes the display of annualized fee earnings with the 20x multiple makes me a little uneasy. This $19.6 billion sub total is a huge part of plan value and it might be good to see it as a range.

 

RE: The IFRS part. I know some people have issues with that. That actually doesn't concern me as much as the company has a history of actually being too conservative with this number.

[Spekulatius]

^ You can use your own multiple for fees to derive your own valuation.

 

I personally don’t like the high debt load if the subs, especially the real estate BPY sub. I like infrastructure & hard assets but prefer to buy them directly and preferably those with much less leverage. I am not keen on real estate retail assets either, it will require a lot of work and capital to reposition them and the result is not certain, imo.

[Rod]

Why do you guys think management gives a valuation anyway? What is the motivation?

[cubsfan]

Why do you guys think management gives a valuation anyway? What is the motivation?

 

I do think that investors have asked for help in valuing BAM due to it's complexity.

[LongTermView]

Why do you guys think management gives a valuation anyway? What is the motivation?

 

I do think that investors have asked for help in valuing BAM due to it's complexity.

Agreed. I'm glad they share their thoughts on the accounting limitations with carried interest.

[jfan]

Why do you guys think management gives a valuation anyway? What is the motivation?

 

I do think that investors have asked for help in valuing BAM due to it's complexity.

 

BAM has been providing its intrinsic value for a very long time in its annual reports. Before IFRS, I recall they usually had a page in the footnotes describing how they broke their components down. Since IFRS, they have simplified things to be 15x - 20x Fee-related earnings, 10x carried interest, and IFRS/Market Values of their invested capital.

 

I think the primary reason is that it gives the market a target for the share price to fluctuate around. This has the advantage to allow BAM to use its shares to purchase assets and to raise capital if they are overvalued.

 

Whether it is appropriate for management to annually provide the market their intrinsic value, I guess depends on whether their methodology is transparent, consistent over time, and conservative. They certainly have been consistent with their simplified valuation method over time and have been relatively conservative as their assets tend to sell above IFRS values. Berkshire and Wesco do also provide the key variables and a simplified methodology to quickly value their businesses. Which may not give you precise values but a reasonable approximation. As per Garrett Hardin, the more variables one introduces into the equation, each small error can compound into a very imprecise number.

 

I think the biggest contention is their valuation of their asset management component at 20x. Given that the past 5 years, the CAGR of their FRE is about 30%. If they can continue growing their FRE at 30% the next 5 years, then grow at 2% thereafter, at a 15% discount rate, the multiple would be 20x. I guess it would depend on what the the range of possible future growth expectations will be.

 

^ You can use your own multiple for fees to derive your own valuation.

 

I personally don’t like the high debt load if the subs, especially the real estate BPY sub. I like infrastructure & hard assets but prefer to buy them directly and preferably those with much less leverage. I am not keen on real estate retail assets either, it will require a lot of work and capital to reposition them and the result is not certain, imo.

 

The leverage is always a concern and in BPY is certainly more than the usual REITs. However, I think most of the debt is fixed and not due for more than 5 years, and BAM does state that it is non-recourse to the parent entities. I guess it depends if BAM learned its lessons from the Brascan days. Bruce did appear around that time and saw its demise. Personally, I think he is well aware of that lesson.

 

 

 

 

 

 

[petec]

Oooh: https://bam.brookfield.com/press-releases/2019/03-13-2019-132118887

 

BAM buys OAK.

[chesko182]

Value buying value: Brookfield to Acquire 62% of Oaktree Capital Management

 

"The two companies together will have approximately $475 billion of assets under management and $2.5 billion of annual fee-related revenues, making this one of the leading alternative asset managers"

"In addition, Howard Marks will join Brookfield’s board of directors."

 

Bruce Flatt, CEO of Brookfield, stated, "As we continue to strategically grow Brookfield, we are thrilled to be partnering with Oaktree and with its exceptional management team whose credit business is second to none. This transaction enables us to broaden our product offering to include one of the finest credit platforms in the world, which has a value-driven, contrarian investment style, consistent with ours."

 

Howard Marks, Co-Chairman of Oaktree, stated, "The opportunity to join forces with Brookfield is ideal. Our firms share a culture that emphasizes both investing excellence and integrity, and our businesses mesh without overlapping or conflicting. The rest of Oaktree management and I are excited about the combination of support and independence we expect. We look forward to having Brookfield's contribution to our ability to serve our clients, and to doing the same for them."

 

https://www.nasdaq.com/press-release/brookfield-to-acquire-62-of-oaktree-capital-management-20190313-00526

[chrispy]

I guess this is how they will kickoff their credit business?

[villainx]

So... OAK'ed happened.

 

Wow?

 

I can't really process what this means.

[cubsfan]

Not knowing Oaktree that well - does Oaktree have substantial distribution channels that BAM does not possess?

[Rod]

Not knowing Oaktree that well - does Oaktree have substantial distribution channels that BAM does not possess?

 

It's probably the in-house capability of Oaktree in credit rather than distribution that BAM wanted access to.

[petec]

OAK has a superb credit business which BAM can leverage.

 

It's also cheap, or was last time I looked.

 

Plus, clearly, its founders were looking for an out. This gives them the right to slowly sell down from 2022 onward.

[Peregrino]

It is a cheap price.  Oaktree's earnings are cyclically depressed by the lack of a distressed cycle.  As recently as 2013/2014 when OAK was riding high on the profits from it's post GFC investments, the units traded for over $60/sh.  OAK's AUM is 20% higher today than it was back then, and that's with a lot of assets not paying fees because they haven't been called yet...

 

Would have expected Marks and team to hold out for at least a mid-cycle price.  Looks like OAK owners have the option of taking BAM stock rather than cash at least.

 

Does sort of explain why OAK's shares held up so well in December's vol...

[racemize]

It is a cheap price.  Oaktree's earnings are cyclically depressed by the lack of a distressed cycle.  As recently as 2013/2014 when OAK was riding high on the profits from it's post GFC investments, the units traded for over $60/sh.  OAK's AUM is 20% higher today than it was back then, and that's with a lot of assets not paying fees because they haven't been called yet...

 

Would have expected Marks and team to hold out for at least a mid-cycle price.  Looks like OAK owners have the option of taking BAM stock rather than cash at least.

 

Does sort of explain why OAK's shares held up so well in December's vol...

 

Also worth noting that the insider owners can sell to BAM with a formula starting in 2022.  I imagine that formula is way better/more rational than what the market has been giving them.  BAM can own the whole thing by 2029, so that gives OAK management a long-term liquidation strategy.

[villainx]

What does this mean for BAM near term and long term?  Is it transformative? Or kinda piece in the bigger puzzle?

 

Reputation wise, I assume it's a big deal, but don't follow or understand OAK.

[Peregrino]

What does this mean for BAM near term and long term?  Is it transformative? Or kinda piece in the bigger puzzle?

 

Reputation wise, I assume it's a big deal, but don't follow or understand OAK.

 

What BAM is to real assets and infrastructure, OAK is to credit, particularly distressed credit.  In that sense, its not "transformative", its more moving in to an adjacent market.  If BAM wanted to expand into credit, they could build their way in over years or buy in immediately, and it just so happens that an asset was available at a good price, so they chose to buy their way in (can basically buy OAK at trough earnings due to the lack of distress for the past several years).

 

(OAK also happens to own a big chunk of DoubleLine, having seeded Gundlach in the early days.)

 

Despite operating in different parts of the investment world, they both share a similar philosophy of waiting for the fat pitch and making the cycle your friend, not your enemy.  The purchase of OAK at this price illustrates that on BAM's part.

 

 

[Sportgamma]

Oaktree has made its name in distressed and high yield credit. That is their speciality. As an OAK shareholder, I'm kinda sad loosing that pure play possibility of betting on a correction in the highly inflated high-yield market. I think OAK will do very well in the coming years for its shareholders.

 

Oaktree also owns a big share in Jeffrey Gundlach's DoubleLine Capital.

[vinod1]

I never invested in OAK to avoid K-1 headaches.

 

I do own BAM. Does anyone know if BAM shareholders are likely to get K-1's? Or in the future once BAM's ownership exceeds a certain percentage?

 

Thanks

 

Vinod

[petec]

What does this mean for BAM near term and long term?  Is it transformative? Or kinda piece in the bigger puzzle?

 

Reputation wise, I assume it's a big deal, but don't follow or understand OAK.

 

Piece in the bigger puzzle. $40bn company buys $8bn company. Win-win in that it helps BAM do credit and it helps OAK founders cash out.

[Peregrino]

Put it this way. 

 

If I were purely an OAK shareholder, I would not support the deal at this price.  As a big fan of BAM, though, I feel more conflicted.

 

Insiders own 60% of OAK, so fat lot of good my objections would do.

[Sportgamma]

Put it this way. 

 

If I were purely an OAK shareholder, I would not support the deal at this price.  As a big fan of BAM, though, I feel more conflicted.

 

Insiders own 60% of OAK, so fat lot of good my objections would do.

 

They even own 92% of the voting power, so we really don't have much say in this one, Peregrino... :)