BAM - Brookfield Asset Management

[ValueMaven]

Does anyone have any fairly decent NAV estimates for BAM? 

 

I know this is much more of a FCF story ... but would be interested to see what some members think

[Ahab]

I'm always impressed by Bruce Flatt's erudition. Enjoyed today's FT article...along with his recent talk at Google.

[no_free_lunch]

You cant value it on nav alone or if u do its clearly overvalued.  Much of current value is a multiple on the asset management business. If you read the annual report they provide their viewpoint on valuation.

[cubsfan]

You cant value it on nav alone or if u do its clearly overvalued.  Much of current value is a multiple on the asset management business. If you read the annual report they provide their viewpoint on valuation.

 

That is EXACTLY right.

[John Hjorth]

Does anyone have any fairly decent NAV estimates for BAM? 

 

I know this is much more of a FCF story ... but would be interested to see what some members think.

 

ValueMaven,

 

Well, QuesnelCap actually just released a blog post about BAM on his website: Security (in) Securities here. The blog post contains a link to a presentation called "Efficient markets?" about BAM. On page 5 you find QuesnelCap's stab at a SOTP analysis of BAM. It's a one-pager, and one can agree with it, or not. To me it's structure for thinking about it, which makes it great.

 

- If you disagree with it, just start spending the rest of your life making adjustments to it - especially if you start diving down into the subs! [ : - D]

 

- - - o 0 o - - -

 

Edit:: CoBF username for QuesnelCap fixed [from Quesnel Capital [Twitter username]].

[Packer16]

It is a good way to look at except it does not include a discount for lack of control/marketability of the underlying stakes in the partnerships.  These discounts are typically in the range of 10 to 15%.  The reason for this discount is you have no right or option to sell these so why would you pay face value for an entity that holds them which takes away this option.  There are also typically hold co expenses but in this case given BAMs size the are immaterial.  Also the AM multiples IMO are high.  Other Alt managers sell at multiples of 10x recurring fees plus carry fees.  If you make these two adjustment, then BAM is fairly or slightly overvalued.  IMO BIP looks like a better investment & it is in the area of most growth (infrastructure).  BBU is also interesting but is more of a growth play then BIP.  Just my 2 cents.

 

Packer

[EricSchleien]

It is a good way to look at except it does not include a discount for lack of control/marketability of the underlying stakes in the partnerships.  These discounts are typically in the range of 10 to 15%.  The reason for this discount is you have no right or option to sell these so why would you pay face value for an entity that holds them which takes away this option.  There are also typically hold co expenses but in this case given BAMs size the are immaterial.  Also the AM multiples IMO are high.  Other Alt managers sell at multiples of 10x recurring fees plus carry fees.  If you make these two adjustment, then BAM is fairly or slightly overvalued.  IMO BIP looks like a better investment & it is in the area of most growth (infrastructure).  BBU is also interesting but is more of a growth play then BIP.  Just my 2 cents.

 

Packer

 

Well this is what makes a market. I think BAM is very undervalued due to both quality of their asset management business and future runway. I think people will look back in 20 years from now in the value investing world who knew of Bruce Flatt but couldn't pull the trigger on BAM because it never got cheap enough for their liking. BAM's asset management business is not the typical asset management business and there's some incredible competitive advantages here.

 

I've been a shareholder since 2015 and I've added at times and own some of Partners Value Investments LP as well in some tax-exempt accounts I manage.

[Packer16]

I agree Brookfield is a great business & I just think BIP & BBU are better ways to play on the unique aspects of the business given the current valuation.  The discounts applied to internal investments are real & vary rarely do the discounts approach 0 as is implied in the linked valuation.  The AM business is unique but it is also large & IMO the blended AM fee & carry multiple of 15x is high given other AM firms with similar scale sell for 10x.  IMO what is unique is the assets Brookfield invests in & you can get that directly by investing in the funds you like.  I am not excited about BEP or as excited about BRY.  I believe Brookfield's special sauce shines in BIP and BBU.  With BAM I am forced to hold assets I am not as interested in. 

 

I agree the whole family of securities should do well here over the next 20 years, I just have a preference for certain parts of the business at the current valuation.

 

Packer   

[QuesnelCap]

It is a good way to look at except it does not include a discount for lack of control/marketability of the underlying stakes in the partnerships.  These discounts are typically in the range of 10 to 15%.  The reason for this discount is you have no right or option to sell these so why would you pay face value for an entity that holds them which takes away this option.  There are also typically hold co expenses but in this case given BAMs size the are immaterial.  Also the AM multiples IMO are high.  Other Alt managers sell at multiples of 10x recurring fees plus carry fees.  If you make these two adjustment, then BAM is fairly or slightly overvalued.  IMO BIP looks like a better investment & it is in the area of most growth (infrastructure).  BBU is also interesting but is more of a growth play then BIP.  Just my 2 cents.

 

Packer

 

Hey Packer,

 

Thanks for the feedback and maybe the best way to is through the partnership you believe in most like you mentioned. I am of the view that these discounts (be it conglomerate, liquidity, etc) are to be taken advantage of in special circumstances when you come across an exceptional businesses, in addition to an owner/operator like Flatt who indicates a strong intention to close the discount (see Q2 18 letter). I'd contrast that to maybe Buffett, whose view is basically "I'll lay out the information I use to value my company, set a floor (buyback at x of book) and leave the rest to the market". Anyway time will tell. Good points nonetheless

 

Regards.

[leftcoast]

Hi Packer - Do you mind elaborating on what you like about BIP and BBU?  Or conversely, why you're unexcited by BEP and BPY?  Is it mostly about the current valuations, or is it the nature of the assets in each?

[ValueMaven]

Thank You John for posting this!

[ValueMaven]

I wonder if Flatt views AUM fees similar to how Buffett viewed insurance Float??  It's an interesting topic to think about. 

[leftcoast]

Hi Packer - Do you mind elaborating on what you like about BIP and BBU?  Or conversely, why you're unexcited by BEP and BPY?  Is it mostly about the current valuations, or is it the nature of the assets in each?

 

To partly answer my own question, I found this post from April where Packer outlines what he likes about BIP over the other LPs (and the GP):

 

The one observation I have here is BIP has outperformed BAM & and the other subs over time.  It appears there is more profit to be made infrastructure vs. real estate or renewable power assets.  Maybe BIP has a more flexible mandate then the other subs & thus has a larger target set than the other subs.  Also BIP has the largest amount of 3rd party investment in its companies versus the other subs (BAM only owns 30% of BIP vs. a high % of other subs). 

 

BIP is really interesting in that you can invest in a non-correlated asset class to stocks with an about 4.6% dividend yield & a 7.5% growth rate.  Currently the price to AFFO is about 13x, an AFFO yield of 7.6%.  This is a far cry from the Graham Formula estimate P/E of 23.5.  (Note: earnings here are meaningless as there is non-cash amortization in them)

 

Packer

[John Hjorth]

ValueMaven,

 

There is also a good article on SA about valuation of BAM by SA author Eric Sprague from February 28^th 2018. Here is a link to the outlined article. If I remember correctly, Joel has mentioned it on here before, around the time of the release, however I can't right now find Joel's post about it back then.

[Packer16]

I guess our views on the hold co discounts are different. I view them as facts of life versus something to take advantage of because they are so prevalent & zero or premium valuations are so rare.  BAM is like an asset manager with a fund of closed end funds attached.  Now this is not taking anything away from Bruce Flatt & his ability.  He will do the best he can reduce the discount.  I just think the steps to do this are beyond what Bruce can reasonably do & are structural versus operational in nature.  As an example, one way to reduce the discount on the closed end fund side is to reduce the fees but this will reduce the value of the asset manager & Brookfield's institutional investors would not look favorably on this unless they could get a discount also. 

 

Another way is to reduce the discount is to spin-off the fund interests to shareholders.  I have never heard about this being discussed but it would be interesting to see if Brookfield is interested in this way to unlock value as is it doable & will IMO add value.  One question if this takes place is will the publicly traded fund value decline if it is done too quickly.  If so & it has to be done over time then a discount for timing is still applicable. 

 

Another way to look at this is where has the fund customer gotten the most value in the past & why.  If you look at the historical returns for Brookfield's funds you will see the highest returns are in Infrastructure and Private Equity.  IMO the returns are higher here because of Brookfield's unique expertise & assets in infrastructure & specialized PE areas.  There is also less competition in these areas versus real estate and energy.  I also think the underlying economics of energy are much more commodity based versus infrastructure.  These are my views & if relative valuations change then my views would change. 

 

One test of this is to examine the historical returns of BIP versus BAM.  BIP has done better than BAM.  Why?  That in part has led me down this path of reasoning.  I am open to others ideas or thoughts on this matter.

 

Packer

[chrispy]

Interesting points Packer. Thank you for sharing.

 

BIP and BBU are the compounding machines, BPY may be undervalued but like Packer said is in a much more competitive field, and BEP is great but not a compounder. The target returns for each partnership reflect this.

 

The asset management business started out so small relative to the size of BAM that it was going to take years to have a major impact. It seems like we may be getting to the exciting times if the 1bn in fees continues to compound >20%...

 

Investor day is Wednesday and will provide boat loads of commentary and presentations to dig into.

[gokou3]

FWIW, BAM has been very busy buying BPY shares over the past few weeks.  I don't see the same level of buying activities for the other LPs.

 

https://www.canadianinsider.com/node/7?menu_tickersearch=bpy

 

 

[walkie518]

anyone going to the investor day tomorrow?

[racemize]

anyone going to the investor day tomorrow?

 

I'll be there.

[ValueMaven]

The stock has been racing upwards recently...I think there is a lot of buzz around tomorrow's meeting.  Will be very interesting to watch

[bluejoseph]

  I believe Brookfield's special sauce shines in BIP and BBU.  With BAM I am forced to hold assets I am not as interested in. 

 

Packer 

 

For those interested, Credit Suisse recently did a 40 page valuation on BBU using a "Net Asset Value approach that revolves around a sum-of-parts that uses a variety of public references for BBU's private businesses" - https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&sourceid=emgpm&document_id=1080688141&serialid=P3GSX7t%2FaAVVfkJLfKteJLJSkJ5ruLCc2vkkB4UGh5A%3D

 

Side note: Never really posted here before but pretty cool to see that the interface gives me the option to insert an FTP link.  :D

[John Hjorth]

For those interested, Credit Suisse recently did a 40 page valuation on BBU using a "Net Asset Value approach that revolves around a sum-of-parts that uses a variety of public references for BBU's private businesses" - https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&sourceid=emgpm&document_id=1080688141&serialid=P3GSX7t%2FaAVVfkJLfKteJLJSkJ5ruLCc2vkkB4UGh5A%3D

 

Side note: Never really posted here before but pretty cool to see that the interface gives me the option to insert an FTP link.  :D

 

Thank you for sharing, Joseph!

 

Still a plain pdf-file, though. - Please don't be a stranger going forward! [ : - ) ]

 

I'll be there.

 

I really hope you'll enjoy your day in New York, Joel! [ : - ) ]

[villainx]

anyone going to the investor day tomorrow?

 

I'll be there.

 

I plan to be there for some of the presentations.  In the middle of move and renovation, so ... I'll be the one who will look most out of place.

[John Hjorth]

Behind every great company there is a great story. [i.e. for Investor AB, I have access to 100 years of financials on the company website.]

 

[if one has studied Berkshire, perhaps combined with the Buffett Partnership Letters, also perhaps combined with the information in "Snowball", one get a clear line of the whole evolution in Mr. Buffett's wealth].

I have been struggling now for months with "a missing link" about Mr. Flatt & Co's takeover of control of Brascan [now BAM] back then. Found out a bit about it last weekend - the whole thing still appears opaque to me.

I have posted about my findings in the PVF.UN topic here: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pvf-partners-value-investments-inc/msg346184/#msg346184 .

[Cigarbutt]

Behind every great company there is a great story. [i.e. for Investor AB, I have access to 100 years of financials on the company website.]

 

[if one has studied Berkshire, perhaps combined with the Buffett Partnership Letters, also perhaps combined with the information in "Snowball", one get a clear line of the whole evolution in Mr. Buffett's wealth].

I have been struggling now for months with "a missing link" about Mr. Flatt & Co's takeover of control of Brascan [now BAM] back then. Found out a bit about it last weekend - the whole thing still appears opaque to me.

I have posted about my findings in the PVF.UN topic here: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pvf-partners-value-investments-inc/msg346184/#msg346184 .

 

FWIW, I have looked into this a while back. Could not untie the Gordian knot.

It seems that Mr. Cockwell was the mastermind behind the gradual grip of what eventually became BAM.

It also seems that Mr. Cockwell's edge was based, at least partly, on the mastery of complexity and labyrinthine accounting.

We all have to come to our own conclusions and it may end up a matter of trust but, for my humble part, I would say that there is likely nothing to find in terms of improper tansactions or dealings.

 

The historical part of Mr. Cockwell's rise is interesting as he was able to gradually gain control from two famous (in Canada anyways) Bronfman family descendants, using similar complex strategies and using his Pagurian vehicle which ate its parent Edper Group and which eventually became Brascan.

 

Mr. Cockwell firm structure map (which has always looked more or less like a pot of spaghetti dropped on the floor) has always included parallel intertwined funds and partnerships and some have used the nickname "the manipulator". I understand that he was a tough and clever tactician who is now quite involved in charity work which may have more than one meaning.

 

When 1139966 Ontario Limited became Edperpartners and then Partners Limited, Mr. Flatt is listed as one of the 38 investors which includes names of the Brascan family, including Mr. Timothy Price who is a director at Fairfax.

 

I assume that Mr. Flatt gradually increased his ownership over time and cannot figure out precisely the trajectory and the underlying financing. I would say that Mr. Flatt is more a strategist than a tactician, which IMO makes him a better CEO, and the BAM structure has been simplified to some degree over time.

 

https://web.archive.org/web/20060613022727/http://adamcorelli.com/html/edper.html

https://en.wikipedia.org/wiki/Edper_Investments

http://sirf-online.org/wp-content/uploads/2013/02/Partners_list-c-11.pdf