BAM - Brookfield Asset Management

[LongTermView]

That slide on page 87 of the first presentation is the one that caught my eye. The footnote says that the estimated total return includes dividends.

[villainx]

BAM predicts a 22% return over the next 5 years.  Current share price is ~$41 and they are estimating $104 in 2022. 

 

The numbers in their presentations documenting the past growth of pretty much every aspect of the company are simply amazing.  We will see what the future holds!

 

https://bam.brookfield.com/en/events-and-presentations

 

It's intrinsic value at 104.  Who knows how that it translate to share price?

[scorpioncapital]

In that $104 slide, they have a line for

carried interest and fee related interest

but no line for the 'distributions received' which is a line item on page 64...Is that included in the first two?

 

I see they generated 1.8 billion free cash flow today.

The 2022 prediction would be (if outflows grow a little slower and the distributions received stay the same) $2.7 billion + $1.4 billion = $3.8 billion - ~$800m outflows = $3 billion/year.

 

At blended average of 15x that's $45 billion in 5 years based on multiple of fcf ($40 billion today's market cap)

or at 20x = $60 billion.

 

It'd be nice to know what they are predicting for the distributions . But it seems but I don't see more than a double in 5 years or an 80 billion market cap either way.

[racemize]

In that $104 slide, they have a line for

carried interest and fee related interest

but no line for the 'distributions received' which is a line item on page 64...Is that included in the first two?

 

I see they generated 1.8 billion free cash flow today.

The 2022 prediction would be (if outflows grow a little slower and the distributions received stay the same) $2.7 billion + $1.4 billion = $3.8 billion - ~$800m outflows = $3 billion/year.

 

At blended average of 15x that's $45 billion in 5 years based on multiple of fcf ($40 billion today's market cap)

or at 20x = $60 billion.

 

It'd be nice to know what they are predicting for the distributions . But it seems but I don't see more than a double in 5 years or an 80 billion market cap either way.

 

Generally, I'd say a two column approach of net invested capital and some multiple of asset management fees is more appropriate.  Using FCF only doesn't give them full credit for compounding invested capital as the increasing value largely doesn't show up in earnings/FCF.

[John Hjorth]

I started yesterday to dive into this investment. It's just daunting. As already posted earlier in this topic, it's a complicated beast. Thanks for all contributions so far in this topic [i have read and studied the whole topic today, back from the original starting post] - they seem to be of great help, to get at least some kind of grip - [perhaps even a firm one] on this thing.

[cubsfan]

Just a suggestion - after reading the BAM thread of course, as you have.

I found the last 2 capital market day presentations to be very helpful.

I think the 2016 is still posted on the BAM website, and the most recent one was done last month.

As you say, understanding BAM financials is indeed daunting, not unlike Berkshire. I just found it easier to see the

Forest from the Trees with the care that BAM management takes to explain their view of BAM's intrinsic value. Whether you

believe or not is another story. But I view BAM, like Berkshire, as somewhat a bet on management and their alignment

with shareholders. BAM is my 2nd largest position next to BRK.

[John Hjorth]

Thank you for guidance here, cubsfan. I'll follow it.

[John Hjorth]

All right, I'm down - laying straight out on the canvas - on technical knock-out.

 

BAM vs me, right now: 1 - 0.

 

Lesson learned [so far]: Start being aware of what kind of fight you are getting into: Is it boxing [, or - perhaps: kickboxing?]? - So far, I have got it really wrong, thereby getting kicked both in my balls, and in my butt.

 

This is the perfect stock to get a lesson about, if there are flaws to your way of work. Mine: I get carried away about what I read - here, there and everywhere - so, I do not take the time to properly document my findings properly, and because the "thing" is so complicated, I simply loose track, and end up out in the weeds, with no properly documented track backwards in my findings, thereby unable to connect the company specific dots.

 

The real question here - to stir your own personal pot - is: How do you define your personal "Too hard pile"?

 

- - - o 0 o - - -

 

This is so embarrasing to me. I hope it's at least entertaining to you.

 

- - - o 0 o - - -

 

- For me, time to get up on the horse again, for a round two, to get it right next time. - Soon [just a few days break]. I'm just as stubborn and persistent as a donkey.

[EricSchleien]

With BAM, I think it comes down to if you trust management or not. Otherwise, a lot of it is very black boxy.

 

For full disclosure, I'm a unit-holder in Partners Value Investments LP which has the majority of it's book value in Brookfield Asset Management.

[cubsfan]

With BAM, I think it comes down to if you trust management or not. Otherwise, a lot of it is very black boxy.

 

 

I could not agree more with what Eric just said.

 

But I do also think you can see the revenue/profit/BV build from funds being raised and LT contractual fee arrangements.

'Bookings' turn into revenues - and the LT recurring nature becomes more obvious if you go at it a few times.

 

And if you believe that management is aligned with you with their 30% stake in the ongoing projects - it raises the comfort

factor on the "black box".

 

If not - then you toss it into the too hard pile.

[EricSchleien]

With BAM, I think it comes down to if you trust management or not. Otherwise, a lot of it is very black boxy.

 

 

I could not agree more with what Eric just said.

 

But I do also think you can see the revenue/profit/BV build from funds being raised and LT contractual fee arrangements.

'Bookings' turn into revenues - and the LT recurring nature becomes more obvious if you go at it a few times.

 

And if you believe that management is aligned with you with their 30% stake in the ongoing projects - it raises the comfort

factor on the "black box".

 

If not - then you toss it into the too hard pile.

 

exactly

[Uccmal]

BAM and its subsidiaries will deliver.  To an extent it is a black box but no more than Berkshire, or Fairfax.  Bruce goes to great lengths to try to explain the company but it is so vast. 

 

With BAM you can see the real assets (actual pictures) and understand them.  You can see how cheaply they get their debt.  You can see how easily they raise equity and money for their funds. 

 

Bruce Flatt and company is the closest thing I can imagine to a 52 year old Buffett which is when Berk. shifted to owning more and more full businesses. 

 

I think the platform they have built over the last 15 years is just hitting the sweet spot.  The fee income or carried interest is growing at a real quip.

 

But do I understand the whole company.  Not a chance.  They have said they will deilver 20% growth going forward for five years based on existing projects and money raises.  This does not even include larger future raisings. 

 

If you were to try and project economic growth areas, outside tech, I would say that BAM is right on target.  Energy, Urbanization, and Infrastructure would be my choices for future growth. 

 

Between BAM and BEP it is my largest position. 

[racemize]

BAM and its subsidiaries will deliver.  To an extent it is a black box but no more than Berkshire, or Fairfax.  Bruce goes to great lengths to try to explain the company but it is so vast. 

 

With BAM you can see the real assets (actual pictures) and understand them.  You can see how cheaply they get their debt.  You can see how easily they raise equity and money for their funds. 

 

Bruce Flatt and company is the closest thing I can imagine to a 52 year old Buffett which is when Berk. shifted to owning more and more full businesses. 

 

I think the platform they have built over the last 15 years is just hitting the sweet spot.  The fee income or carried interest is growing at a real quip.

 

But do I understand the whole company.  Not a chance.  They have said they will deilver 20% growth going forward for five years based on existing projects and money raises.  This does not even include larger future raisings. 

 

If you were to try and project economic growth areas, outside tech, I would say that BAM is right on target.  Energy, Urbanization, and Infrastructure would be my choices for future growth. 

 

Between BAM and BEP it is my largest position.

 

Ditto.  ~20% position.

[longlake95]

I like BAM. A a lot. Big fan of Flatt & Co. But, I think it's fully valued here in the low 50's. For anyone buying at these levels - there's no margin of safety - or am I out to lunch on the fair value of BAM? What do you think it's worth?

 

 

[racemize]

I like BAM. A a lot. Big fan of Flatt & Co. But, I think it's fully valued here in the low 50's. For anyone buying at these levels - there's no margin of safety - or am I out to lunch on the fair value of BAM? What do you think it's worth?

 

Mostly buying on the tailwinds and growth at these price levels.  Cheapest growth stock I know of.

[John Hjorth]

I bought a bit today, to get started. That actually feels good in my stomach.

 

Basically, and at least to me, it's all explained in the post by Al [uccmal] earlier today in this topic. [When I grow up, I hope to be able to do posts like Al here on CoBF, short, comprehensive & cut to the bone].

 

It's all about the understanding of the franchise - as it is right now - and its prospects going forward.

 

You can go on a wild goose chase - like I have within the last few days, and likely you'll just end up confused without any conviction [like I did].

 

We sit as investors and look at this enormous balance sheet and this quite complicated capital structure.

 

The most important asset: The economic value of the client base - by BAM doing its thing - it absolutely nowhere to see in the balance sheet. That is also what makes this thing GARPy [ref. earlier post in this topic by Joel [racemize]].

 

The economic value of the franchise/the client base is booked at zero value, because it's built up internally [not bought] - over many ears. All the costs related to building it up have historically been expensed in the year the cost were spent. Think tons of hours related to meetings, travel expenses, preparations before meetings, representative costs and so on. No actual client to charge, but costs spent to get a new client in the stable.

 

I think I read somewhere - again, poor documentation for my part - that the client base was 450 clients - most likely all with deep pockets, and most likely quite some of them with really, really deep pockets, their clients again asking/demanding for a return on capital.

 

And BAM has already proved its ability to scale up their business materially, during the last years.

 

- - - o 0 o - - -

 

This is also just another way to phrase the guidance I've got from cubsfan earlier in this topic. Again, thank you.

[walkie518]

Have owned shares for a couple of years now on the basis that they have a wonderful platform with fabulous client retention. 

 

The one part with which I struggle is how the company values its real assets. 

 

In theory, BAM should mark everything to market.  In practice, BAM might be marking to cost.  This means that some properties are vastly understated while others might be somewhat overstated. 

 

Where this argument might break down is how much the portfolio has appreciated over time, how Flatt et al. are true bad news buyers, and how well the market has perceived the underlying value of the stock?

[John Hjorth]

walkie518,

 

Stated with all due respect for you, you have to distinguish between market value and fair value for the assets of BAM, according to IFRS. They are certainly not the same - for some certain BAM assets, market value - in the short run - does not even have some kind of concept.

 

The ability to hold on to the asset through thick and thin is absolutely crucial, though.

 

There are some posts by fellow board member WhoIsWarren in this topic covering it.

[walkie518]

By that logic, one trusts management to be honest and fair with the accounting.

 

According to GAAP, when the price of oil goes down, Exxon has to mark an impairment of underground reserves. 

 

According to IFRS, when the price of a real asset goes down, Brookfield can opt not to disclose.  This isn't comforting if I am correct. 

 

Again, I own shares and think they're doing a terrific job, but I'm not sure how to reconcile? 

[Uccmal]

I like BAM. A a lot. Big fan of Flatt & Co. But, I think it's fully valued here in the low 50's. For anyone buying at these levels - there's no margin of safety - or am I out to lunch on the fair value of BAM? What do you think it's worth?

 

Funny, I discussed this with Racemize privately a few months ago.  We sort of concluded that you could buy it at 50 ish, or sit and hope that it gets cheaper.  I just bought it in and around 50 ish.  Sometimes it aint worth the trouble to earn a few extra points when the runway is so long.  In time paying 45 or 52 wont matter when the stock is in the hundreds.

 

I got BEP 25% cheaper a year, year and a half ago. 

[chrispy]

This board turned me onto BAM about a year ago and I held a small position until liquidating it to buy more FFH as I thought one was fairly valued and fairfax was not. 

 

Since then, I have read more of the earnings calls, all of the partnerships presentation and transcripts from last month.  I am slightly in awe of the whole operation and looking to build a substantial position to hold for a very long time.

 

BPY has been buying shares for the past year or two and state that they are undervalued.  They belive their retail holdings are not dead in the water although this is priced in.

 

Similar to what uccmal said, I plan to buy a good amount over the next year or so as the business is going to be worth more in several years.

 

Bruce Flatt follows this logic in his closing statement for the BAM presentation:

 

"

I think what always gets under-estimated in any great business, and when we look at other businesses to buy, what always gets under-estimated, and every one out of four people does the exact same thing, including myself, is that you under-estimate—you look at the business, you see what it’s worth today, but you under-estimate the fact that if it’s growing and it’s a good business, it’s going to be worth so much more in five, 10, 15, 20 years from today. I think the company has that capability and the franchise value is significant. It can’t really be arithmetically calculated in Brian’s calculations, but that’s really the value of what the franchise at Brookfield.

"

[villainx]

For folks investing in the partnership, anyone does it via tax advantaged accounts?  I've read a lot of pros and cons regarding that. Any opinions? 

[villainx]

I'll elaborate with regards to the partnership and pros and cons for different regular vs tax advantaged accounts.

 

Foreign tax issues

 

UBTI - though it might be minimal and partnerships actively seek to avoid it

 

K1 - never had an issue with this, but not sure how it effects tax advantage account.

 

Reduction of cost - I heard that if it's long term hold, is it return of capital might several reduce capital basis? Which would be a reason for inclusion in tax advantage account.

 

I might be missing something.

 

 

 

[racemize]

I'll elaborate with regards to the partnership and pros and cons for different regular vs tax advantaged accounts.

 

Foreign tax issues

 

UBTI - though it might be minimal and partnerships actively seek to avoid it

 

K1 - never had an issue with this, but not sure how it effects tax advantage account.

 

Reduction of cost - I heard that if it's long term hold, is it return of capital might several reduce capital basis? Which would be a reason for inclusion in tax advantage account.

 

I might be missing something.

 

When do you get your K-1s?  I've always been paranoid they will come in late.

[Jurgis]

I'll elaborate with regards to the partnership and pros and cons for different regular vs tax advantaged accounts.

 

Foreign tax issues

 

UBTI - though it might be minimal and partnerships actively seek to avoid it

 

K1 - never had an issue with this, but not sure how it effects tax advantage account.

 

Reduction of cost - I heard that if it's long term hold, is it return of capital might several reduce capital basis? Which would be a reason for inclusion in tax advantage account.

 

I might be missing something.

 

I think UBTI over $1K is the only issue in general for tax advantaged accounts ( https://www.investingdaily.com/18785/avoiding-taxes-on-your-ira ). So if it's minimal, it should be OK. I am not an expert though.

 

Foreign taxes is a cost if they are charged, but not as much pain as UBTI potentially.