BAM - Brookfield Asset Management

[Gregmal]

This is true for BAM but likely also true for a lot of other companies with very smart folks. And while its true that it would be ignorant to assume returns come from synergies and spread sheets, its also ignorant to assume returns will come regardless of what is paid for assets. Some have already pointed out the mall conundrum.

 

The truth here is likely somewhere around what a couple have stated, that the returns comes from fees on AUM and this incentives acquisitions and also provides a buffer to the firms downside. I like the business, but its also a little risky. Playing hot potato even with a subsidy.

[vince]

So far nobody has looked at this correctly IMO.

 

If you're BAM, ~20% of the capital in these deals is yours. The rest is provided by large institutions who are NOT necessarily looking for 15% IRR's. Core infrastructure product is marketed at 10%, that's it. So if you can put $10 billion to work at earn 10%, that is exactly what these pension funds and SWF's want. Always remember that BAM is selling a product, and that product is not necessarily the highest IRR activity, it is the one that meets the hurdle of the product they are selling.

 

Second, lets say BAM earns 10% on its capital investment of say $2bn, so $200mn a year. The other $8bn is earning them ~1.2% in management fees (another $86 million), and then performance fees on top of that of say 15% of the amount above 8%, so another $24 million. In total, BAM is earning on its capital $200 + $86 + $24 = $310 million, or over 15%. Obviously this is gross of compensation expenses etc. so the net return is probably closer to 12%, but the point remains: taking a deal that is 10% but generates fees is still very lucrative for BAM shareholders.

 

Finally, remember that a growing asset management business has a higher multiple than NAV. So from BAM's perspective not only do they juice returns on their own balance sheet capital by earning fees from their AM business, it's also accretive to take deals to grow the AM business and increase the multiple on the stock. The value of BAM in the future is NOT going to be in the invested capital, it's going to be in the AM business, so the key variable is NOT whether deals are 20% IRR's or 12% IRR's, it's whether they can grow the AM business by selling attractive products to SWF's and Pensions.

 

Peter, I can assure you that I looked at and understand their model, you are missing my point and Cam's question, I think.  He asked me how in the world can Bam generate the kind of returns they need within all of Bam's activities including the asset mgmt business.  You are presuming that it's easy to get 10% yields (cash on cash) when most assets are trading with 5% yields. My answer assumed that's what Cam was asking.  The real success of Bam is getting 3 or more points of real incremental yield value from an asset which then allows their leverage to produce the returns that entices capital.  Without that ability, it wont matter what activity they engage in, eventually they will fail. 

[vince]

Well I wrote that before Cams answer posted, so maybe I didn't precisely answer his question, but I believe I have answered it anyway within my answer. Although Bam's ultimate value is represented by asset mgmt fees, the driver of those fees comes from the asset returns they generate

[vince]

I'm not saying these guys can't improve ops, but usually that's just PE hyperbole. Verdad Capital made some studies and found that historical returns (these Guys killed pubic returns from 1980-2008) were driven not my operating efficiency but buying small value (6-8x ebitda) and dropping 3-4 turns of leverage on top. While there was a big difference in private and public valuations back then, I see lots of PE investments done today at HIGHER valuation privately than publicly.

 

They're basically buying at 10-12xebitda today which increases leverage massively, and that's before all these crazy adjustments to ebitda (like adding back expected synergies in something like the 3rd year).

 

I like BAM and KKR as investments (more so before the rally), since investors love alt investments and illiquid stuff - probably some due to false perceived safety of market-to-model instead of mark-to-model. But I think some of the LP's risk being in for some massive negative surprises further down the road. Still, that could take ages to play out, and I agree with peterHK on the above. This is mostly about fees and locked-up capital.

 

Whether Bam can generate those returns matters not at all if other p/e firms bullshit their way for a few years.  Ultimately they will fail as will Bam if their model is overly risky or their process isn't sustainable.  In order for an investor to like Bam stock, they have to believe that Bam can squeeze higher returns with their operations,on average and over time. 

[kab60]

Verdad's research is biased because they are trying to convince LPs to give them $ to invest in public securities with quantitative metrics of historically successful PE investments. Not saying there isn't merit to their research, but it is certainly biased.

 

peterHK is correct in his assessment of returns. The only thing I'll add on is that BAM equity invested from the parent / GP is likely levered which also increases returns further, emphasizing equity-like returns to the parent on MSD - HSD yielding infrastructure investments. This is really no different than a portfolio manager at Millennium or Citadel skimming fixed income basis points to earn a MSD annualized return on levered money which returns 10%+ to the parent.

 

There are a lot of very smart people working at BAM and KKR and it is fairly ignorant to suggest their returns come from synergies in their excel model...

Sure it might be biased, they have a product to sell, but which part do you disagree with?

 

I know a lot of PE Guys, they're all smart, but most of them are also doing something which they haven't done historically: Buying large cap Companies at 10-12 EBITDA in highly contested auctions and adding 5-7 turns of leverage.

 

As for their operationel skills, these Guys usually aren't operators. They more often than not hire an Army of consults to co-run their businesses. Perhaps BAM is different, I know they'd like everyone to believe - but that's what every PE shops says.

 

They all say they focus on operationel excellence and have a speciel toolbox they work with, but from what I've seen their returns are driven by the same factors which "used" to work in public equities. But now they're unable to get the deals they used to.

[peterHK]

Verdad's research is biased because they are trying to convince LPs to give them $ to invest in public securities with quantitative metrics of historically successful PE investments. Not saying there isn't merit to their research, but it is certainly biased.

 

peterHK is correct in his assessment of returns. The only thing I'll add on is that BAM equity invested from the parent / GP is likely levered which also increases returns further, emphasizing equity-like returns to the parent on MSD - HSD yielding infrastructure investments. This is really no different than a portfolio manager at Millennium or Citadel skimming fixed income basis points to earn a MSD annualized return on levered money which returns 10%+ to the parent.

 

There are a lot of very smart people working at BAM and KKR and it is fairly ignorant to suggest their returns come from synergies in their excel model...

Sure it might be biased, they have a product to sell, but which part do you disagree with?

 

I know a lot of PE Guys, they're all smart, but most of them are also doing something which they haven't done historically: Buying large cap Companies at 10-12 EBITDA in highly contested auctions and adding 5-7 turns of leverage.

 

As for their operationel skills, these Guys usually aren't operators. They more often than not hire an Army of consults to co-run their businesses. Perhaps BAM is different, I know they'd like everyone to believe - but that's what every PE shops says.

 

They all say they focus on operationel excellence and have a speciel toolbox they work with, but from what I've seen their returns are driven by the same factors which "used" to work in public equities. But now they're unable to get the deals they used to.

 

BAM is different. One anecdote is all their leasing is done in house vs. BX that does it outside. BAM employs their own engineers who underwrite buildings BEFORE the finance team gets their hands on it (and the engineers tell the finance people what is reasonable rather than the other way around). I've spent a lot of time trying to delve into their culture and talked with their private fund teams at some length and they run a fairly different shop than most appreciate coming from the public markets as non-allocators.

 

Another example is breaking down the returns of the funds. BX for instance takes massive levered swings on macro things like industrial real estate. Their whole goal is that some parts of the fund return 40% IRR's, and some go to 0, but it washes out in the high teens range. BAM's assets very very rarely lose money, but they also rarely put up 40% IRR"s (the only one they can think of is EAF which isn't completed yet), and the return distributions for the assets in the funds are much much lower than other large players.

[kab60]

I'm talking PE, not Real Estate. I have no reason to believe these folks are better or worse than KKR, Apollo etc - what I'm saying is PE returns have historically come from buying right (small, value - adding leverage). That is difficult these days, everyone is drowning in liquidity, and everyone is gathering funds with long lockups like there is no tomorrow. I think these alt managers will work as investments, not so much for LP's compared to buying opportunistically in the public markets.

 

[villainx]

This is a lot of discussion when we don't even know what the valuation/term of the bid(s). And no mention that Thyssenkrupp is probably a motivated seller.  And PE vulture circling around an asset makes me think there's easy value there rather than over paying for bubble asset.

[Gregmal]

This is a lot of discussion when we don't even know what the valuation/term of the bid(s). And no mention that Thyssenkrupp is probably a motivated seller.  And PE vulture circling around an asset makes me think there's easy value there rather than over paying for bubble asset.

 

So despite the consensus that things are very stretched, valuation wise, everywhere public, there is just this pocket of really cheap investments waiting to be had and no shortage of them despite the abundance of PE capital slushing around? This makes no sense.

[villainx]

This is a lot of discussion when we don't even know what the valuation/term of the bid(s). And no mention that Thyssenkrupp is probably a motivated seller.  And PE vulture circling around an asset makes me think there's easy value there rather than over paying for bubble asset.

 

So despite the consensus that things are very stretched, valuation wise, everywhere public, there is just this pocket of really cheap investments waiting to be had and no shortage of them despite the abundance of PE capital slushing around? This makes no sense.

 

Bam hasn’t won the auction so who knows. Maybe they bid a price that makes it attractive, or bid just in case they can show they are preferred buyers. Bam gets publicity for its bid, but from the article, seems every firm is kick the tire here.

 

[Xerxes]

This is from couple of years ago, interviewing the heads of Bain Capital LP, Brookfield Asset Management, Providence Equity Partners and The Carlyle Group.

thought would be interesting given the discussion here

 

 

On a different topic, not sure if this was posted earlier.

It would be interesting to see a India-specific vehicle that has close ties to Ambani.

 

https://www.bloomberg.com/news/articles/2019-12-19/brookfield-said-to-mull-over-1-billion-reit-listing-in-India

[John Hjorth]

Brookfield Renewable Partners Press Release [January 13^th 2020] : Brookfield Renewable Submits Proposal to Acquire TerraForm Power on an All Stock Basis; Announces a 5% Distribution Increase.

 

This reminds me a bit about the GGP transaction for BPY, however here for BEP and not a cash consideration.

 

Terraform Power Inc. website.

[villainx]

Brookfield Renewable Partners Press Release [January 13^th 2020] : Brookfield Renewable Submits Proposal to Acquire TerraForm Power on an All Stock Basis; Announces a 5% Distribution Increase.

 

This reminds me a bit about the GGP transaction for BPY, however here for BEP and not a cash consideration.

 

Terraform Power Inc. website.

 

Does this seem to be a fair transaction? I'm not in BEP, though I've always been looking to get in.

 

 

[gokou3]

Brookfield Renewable Partners Press Release [January 13^th 2020] : Brookfield Renewable Submits Proposal to Acquire TerraForm Power on an All Stock Basis; Announces a 5% Distribution Increase.

 

This reminds me a bit about the GGP transaction for BPY, however here for BEP and not a cash consideration.

 

Terraform Power Inc. website.

 

Does this seem to be a fair transaction? I'm not in BEP, though I've always been looking to get in.

 

If I were to compare the reactions to this TERP transaction vs. TOO one, there were way more pushback on the TOO buyout.  I think the difference in reaction is attributable to the price trends of the two companies prior to the transaction.  TOO got taken out close to its all-time low, whereas TERP had a considerable rise (>50%) since BAM (BEP) took control and BAM is paying a 10% premium above the undisturbed price.

 

Seems to me TERP and BEP are trading on a comparable EV/EBITDA basis (mid-teens?).  I owned both last year but exited based on valuation concern (on both the issuers and on the overall market).  Their good growth prospect and skilled operation may warrant this valuation though.

 

The fact that BAM is issuing BEPC shares (Corp, no K1) for the TERP buyout is a smart move too IMO.  Instantly boosting BEPC shares outstanding instead of having only 1/10 of the original O/S as they spelled out earlier.

[villainx]

This is from couple of years ago, interviewing the heads of Bain Capital LP, Brookfield Asset Management, Providence Equity Partners and The Carlyle Group.

thought would be interesting given the discussion here

 

 

Thanks for this!

[John Hjorth]

 

Brookfield Renewable Partners Press Release [January 13^th 2020] : Brookfield Renewable Submits Proposal to Acquire TerraForm Power on an All Stock Basis; Announces a 5% Distribution Increase.

 

This reminds me a bit about the GGP transaction for BPY, however here for BEP and not a cash consideration.

 

Terraform Power Inc. website.

 

Does this seem to be a fair transaction? I'm not in BEP, though I've always been looking to get in.

 

villainx,

 

In what context "fair"? It's capitalism. A premium offered of ~11 percent according to market price, by a share/share swap between TerraForm shares and BEPC shares.

[villainx]

In what context "fair"? It's capitalism. A premium offered of ~11 percent according to market price, by a share/share swap between TerraForm shares and BEPC shares.

 

I was trying to find the right word.  But I think mostly in the context that gokou3 elaborated.  Where all the stakeholders are more or less okay with the deal.  Not to combat disgruntle minority shareholders, just more in terms of Brookfield's reputation as being "fair" partners, and continuing to get into the door and deals as "fair" partners. 

 

Brookfield has done what seems to be quite a bit of these type of deals, GGP, TOO, more, so just wondering about it.

[John Hjorth]

In what context "fair"? It's capitalism. A premium offered of ~11 percent according to market price, by a share/share swap between TerraForm shares and BEPC shares.

 

I was trying to find the right word.  But I think mostly in the context that gokou3 elaborated.  Where all the stakeholders are more or less okay with the deal.  Not to combat disgruntle minority shareholders, just more in terms of Brookfield's reputation as being "fair" partners, and continuing to get into the door and deals as "fair" partners. 

 

Brookfield has done what seems to be quite a bit of these type of deals, GGP, TOO, more, so just wondering about it.

 

I simply do not understand your line of thinking here, villainx.

[villainx]

In what context "fair"? It's capitalism. A premium offered of ~11 percent according to market price, by a share/share swap between TerraForm shares and BEPC shares.

 

I was trying to find the right word.  But I think mostly in the context that gokou3 elaborated.  Where all the stakeholders are more or less okay with the deal.  Not to combat disgruntle minority shareholders, just more in terms of Brookfield's reputation as being "fair" partners, and continuing to get into the door and deals as "fair" partners. 

 

Brookfield has done what seems to be quite a bit of these type of deals, GGP, TOO, more, so just wondering about it.

 

I simply do not understand your line of thinking here, villainx.

 

Mainly from TOO where some online places had shareholder claiming BAM was bullying or doing a take under. I meant fair in the sense that most shareholders are content and BAM shows to be good partner. It’s more fair in the capitalist sense that Brookfield can continue to have reputation of good partners to continue getting good deals.

 

Edit: I'm also not saying Brookfield are blood thirsty PE vultures, just that being viewed as preferred partners should have value. 

 

[ValueMaven]

Good recent interview w/ Flatt ... although the guy interviewing him doesn't understand basic net income calculations ... (he said something like: $500bn in AUM at 10% = $50B of net income .. not a lot of firms out there doing that) ...

 

[cubsfan]

Great interview - thank you for posting.

[Xerxes]

great interview, … kind of surprised why the head of OMERS would make that mistake about net income.

and there is part where he says net income is greater the all of Canadian banks.

 

that aside, great stuff

[ValueMaven]

Yes - I thought the same thing actually ... also the IRR comment

 

'We made 17% on this deal w/BAM' ... Flatt replied 'that's 17% IRR'

[ValueMaven]

FRANKFURT, Jan 20 (Reuters) - Thyssenkrupp has shortlisted three private equity consortia in the auction of its prized 15 billion euro ($16.62 billion) elevator business, people close to the matter said, adding that peer Kone could still submit a bid later this month.

 

A consortium of buyout groups Advent and Cinven, which are working with Germany's RAG Stiftung remain in the running as does a bidding team led by Carlyle and Blackstone, and a third group led by Brookfield, the people said.

 

Kone, which is working with private equity firm CVC, has been given time until January 27 to submit an offer, the sources said.

 

Thyssen and the bidders declined to comment or were not immediately available for comment.

 

Thyssenkrupp, under pressure after numerous profit warnings, needs to rake in cash by selling all or part of its elevator business, the world's fourth-largest industry player and by far the group's most profitable asset.

 

The group has launched a dual-track process for the division, which could result in a sale or a listing, but chances for the latter are seen dwindling as proceeds from a partial flotation might not be sufficient. ($1 = 0.9024 euros) (Reporting by Arno Schuetze, Christoph Steitz and Matthias Inverardi Additional reporting by Tom Käckenhoff Editing by Michelle Martin)

[Rod]

great interview, … kind of surprised why the head of OMERS would make that mistake about net income.

and there is part where he says net income is greater the all of Canadian banks.

 

that aside, great stuff

 

When he said 10% of $500B, I thought he might have been giving a rough estimate of the total return including BAM's clients, not just BAM.