BAM - Brookfield Asset Management

[Saluki]

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

 

 

 

As part of my deep dive into Brookfield, I came across two books that you might find interesting. Corporate Catalyst by Tony Griffiths (also on Fairfax's board) worked on deals with Brascan and a related Bronfmann entity, Edper, and discusses them in his book. 

 

But the book that has a ton of information (I'm only halfway through it now) is called The Brass Ring.  It deals with the history of Brascan and the the other entities (Edper, Hees etc). There is a corporate entity chart in the back of the book which looks like a more complicated version the old setup of Berkshire in the Blue Chip Stamp days.  Cockwell is a key figure in building and transforming the group of entities (so is Trevor Eyton).  The Bronfmann's are portrayed as smart businessmen, but very hands off.  Their role is hiring the best managers they can and giving them room to run.

[John Hjorth]

Thanks a lot Cigarbutt & Saluki,

 

This is great! - I will look into those things. Saluki, I hope that you will consider to start two new topics about those two particular books separately, I do not recall to have seen topics there about them, but I may be wrong about that.

[cubsfan]

The first 2 presentations at the Capital Markets day were terrific.

 

Flatt and company have done a lot to simplify the presentation.  It has historically been tough

to get your arms around BAM, there is so much too it.  Today has been great.

[ValueMaven]

I have a lot of thoughts about today...

 

Does anyone recall the last time management gave these specific guidance metrics and valuation targets?? 

 

Look at BAM slide 108 ... targeting $118 BAM parent price in 2022.

 

the 20x multiple on the Asset Mgmt arm is rich IMHO... but even if its more like 15x, you are still talking about basically a double from here. 

 

You have recession risk overall with BAM - but with $35bn+ of dry powered, they can add to their Real Asset portfolio. 

 

I came away very impressed with todays presentation and will be adding to my position at these levels

[villainx]

I have a lot of thoughts about today...

 

Does anyone recall the last time management gave these specific guidance metrics and valuation targets?? 

 

Look at BAM slide 108 ... targeting $118 BAM parent price in 2022.

 

Don't recall if it was every single investor day, but I've seen targets fairly regularly.

 

I remember a past q&a where someone asking Flatt how BAM performed based on their target (forget which particular one) from 5 years ago.  Flatt didn't have that particular information readily available.

 

The thing to keep in mind is that with the spinoffs, the deeper one goes back to the presentation archives, the harder it is to really see how, say, their price or IV target, has or hasn't been met.

[chrispy]

Last year's or the year before had the same price target info.

 

On BAMs website there is a returns calculator. May this help?

[racemize]

They've had these targets since at least 2012.  They usually hit them overall, but not necessarily exactly how they say they will.

[vince]

I have a lot of thoughts about today...

 

Does anyone recall the last time management gave these specific guidance metrics and valuation targets?? 

 

Look at BAM slide 108 ... targeting $118 BAM parent price in 2022.

 

the 20x multiple on the Asset Mgmt arm is rich IMHO... but even if its more like 15x, you are still talking about basically a double from here. 

 

You have recession risk overall with BAM - but with $35bn+ of dry powered, they can add to their Real Asset portfolio. 

 

I came away very impressed with todays presentation and will be adding to my position at these levels

 

every year

[StevieV]

I believe that BAM is using the same valuation metrics when they say: (1) the stock is worth $56.21 today; and (2) should be worth $118 in 5 years.

 

As I type, BAM is trading at close to $45.  So, given a similar valuation in 5 years, the projection would be about $94.  Basically, a little more than double, without a change in market multiple.  Of course, that's a projection.

[walkie518]

My general impression of the meeting was that (1) BAM is firing on all cylinders and (2) they have training in being great sales people.

 

Sitting through the 8 hours did give me a much better feel for some of the subs and while they didn't advertise any limitations, there are certainly some cracks. 

 

It looks like BAM is putting a lot of money into BBU, which, if I understand correctly, intends to buy commodity-driven businesses and find ways to create stable cash flows from them and use a little leverage to juice returns.  My interpretation is that they are not shy to buy garbage at the right price, and in the case of Graftech, they turned a turd into gold.  How repeatable is the model?

 

On the one hand, Westinghouse appears like an interesting acquisition and plays to Brookfield's strengths.  Teekay looks like a business that might be more hands-off than Graftech was. 

 

The AT&T deal, on the other hand, doesn't look particularly appealing on a number of metrics.  Maybe there's something I'm missing on that one, but I don't think AT&T had a feel for what "scale" meant in the data center business when those properties were developed.

 

The financial engineering underpinning BAM is as deliberate as palpable. 

 

How BAM handled the GGP transaction with a new class of BPY as a US REIT in BPR shows they're willing to pull all the stops.  I'm curious to see how the reporting between the two will be different.

 

The clear benefit to owning BAM is that we can let some of the managers falter while the others do well and across the cycles BAM should continue to outperform. 

 

As for the targets Flatt outlined, they are substantial, but the market doesn't tend to appreciate guidance past a few months. 

 

If Brookfield generates as much cash as they claim they will over the next 5 years, the stock could certainly double.  If Brookfield starts to buy back shares using this cash as well as find new deals with good ROIC, I see no reason not to increase. 

[nickenumbers]

From Bruce Flatt's Google talk

 

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[chrispy]

After watching the BAM presentation only:

 

1) BAM has exceeded their 2018 projections from 2013.

2) While Brookfield estimates real asset allocation to continue to grow enormously, Bruce believes that institutions are most underweight in infrastructure assets. In the q&a he stated that if 20 institutional investors we're polled, all 20 would want to allocate more to infrastructure. The investors are still unfamiliar with infrastructure and trying to find out how to participate. BIPs and their privately listed infrastructure funds show a great track record.

3) BPY has been transformed over the past 5 years with shares continuously being diluted. This is done. BPY is built and ready to earn and reduce, not increase, sharecount.

4) BAM's projection of 5 year future share price assumes all earnings not dividend out sit on the balance sheet. If they are used for share repurchases then price per share will be even larger. Glad to hear Bruce chime in that they are only beneficial if done at the right price or else they destroy value. This flexibility is why they will favor repurchases over a substantial dividend increase.

[wisowis]

 

$BAM thinks their shares are ~25% undervalued, will compound at ~24% IRR over next five years (includes discount closing), will generate enough excess cash to buy back entire market cap over next 10 years.

[Packer16]

The one thing BAM should do is distribute its ownership in the funds.  This would reduce the discount now & not leave the funds locked in with a lack of control discount.  I was not at the meeting.  Did anyone suggest this or did BAM give a rationale for not doing this?

 

Packer

[vince]

 

$BAM thinks their shares are ~25% undervalued, will compound at ~24% IRR over next five years (includes discount closing), will generate enough excess cash to buy back entire market cap over next 10 years.

 

Within the twitter posts responding in that link, one poster said that he cant stand it when bam claims how undervalued the shares are yet they don't buy back shares.  This is the one thing that makes me not buy a shitload more and add to an already large position.  They brag about the large amount of cash and liquidity on hand, they claim strongly qtr after qtr how undervalued bpy and bam are and they also inform us how important shrinkage of equity (or no dilution) is in terms of ultimate value creation for shareholders.  And since 2013, when I bought a large position, they have done very little.  Flatt is way smarter than me, and obviously knows so much more about those assets than I ever will so I want to be careful not critisize too much.  I love the asset and the mgmt here and plan on holding some bam stock for a long time.  But anyone that is not confused by this has to be looking at it thru a different lense.  What am I missing?

[bigbluffzinc]

I don't think my opinion is worth much but if you recall from Flatt's prior transcripts he's talked about share repurchases as a capital allocation decision relative to building out new platforms/transformative acquisitions.  You can argue those haven't happened/opportunities haven't been/there is no opportunity cost but I think for the asset management franchise it's far more accretive to acquire something they can manage and earn fees on if the IRR is even remotely close to what they get on a share repurchase.  Getting something they can really build/subsequently kick out and charge fees on is vastly superior to the repurchase (That is my interpretation of Flatt's comment).

 

They are building out their credit business (which I think will ultimately be huge even though fees will be lower) and might have an eye for opportunities there...  The venture capital business won't tie up capital/see acquisitions/ultimately won't be that meaningful but it will still be a big business...  Nothing relative to what they though have I dont think.

 

I also think in the past they've been rewarded for having a liquid balance sheet with cycles and like like many other investors they haven't reaped rewards because this cycle has only really gone one way...  (It didn't work for Buffett either) So no reward.  I give Flatt credit for being able to judge when liquidity is just inefficient and deploying the surplus into repurchases. 

 

At the same time I'd get warm if all of a sudden I saw massive blocks getting picked up/cancelled.  :)

[John Hjorth]

Could we please go back to discussing BAM et. al. based on facts - not projections, speculations etc.?

[vince]

I don't think my opinion is worth much but if you recall from Flatt's prior transcripts he's talked about share repurchases as a capital allocation decision relative to building out new platforms/transformative acquisitions.  You can argue those haven't happened/opportunities haven't been/there is no opportunity cost but I think for the asset management franchise it's far more accretive to acquire something they can manage and earn fees on if the IRR is even remotely close to what they get on a share repurchase.  Getting something they can really build/subsequently kick out and charge fees on is vastly superior to the repurchase (That is my interpretation of Flatt's comment).

 

They are building out their credit business (which I think will ultimately be huge even though fees will be lower) and might have an eye for opportunities there...  The venture capital business won't tie up capital/see acquisitions/ultimately won't be that meaningful but it will still be a big business...  Nothing relative to what they though have I dont think.

 

I also think in the past they've been rewarded for having a liquid balance sheet with cycles and like like many other investors they haven't reaped rewards because this cycle has only really gone one way...  (It didn't work for Buffett either) So no reward.  I give Flatt credit for being able to judge when liquidity is just inefficient and deploying the surplus into repurchases. 

 

At the same time I'd get warm if all of a sudden I saw massive blocks getting picked up/cancelled.  :)

 

I agree with everything you say except for the irr comparison with new investments.  If they are projecting a 24 percent return to Bam shareholders, there isnt much they could do to reach those types of returns.  Remember, an investor in the stock doesnt have to borrow to buy shares so thats a cash on cash return (at least thats how i see it).  If Bam even gets close to those numbers on their capital, there will be lots of borrowed money involved to juice their returns.  I realize they get a nice royalty that you may want to include in their asset returns.  I'm not saying they have to bleed their balance sheet and get very aggressive.... but to pound the table about how cheap their stock is, to consistently and clearly demonstrate their case, slide after slide while in the same presentation remark how strongly they feel about "buybacks for value" and then barely keep the share count constant just doesnt make sense to my ears and then brain.  There is an obvious contradiction there that to my knowledge has never been addressed properly or truthfully.  And if a 25 percent discount (with future growth that increases present value over and above) isnt enough then i dont believe they will ever do it properly because the only chances that they will get are likely to be at times where everything else is cheap. 

[bigbluffzinc]

I agree that at 20%+ returns they get tough to explain away.  To date the liquidity would have absolutely been better utilized repurchasing shares

[bigbluffzinc]

On speculation & projection...

 

Don't we attribute the growth in FRE to the franchise?  The growth in FRE to date has been a derivative (at least in part) of their ability to spinoff vehicles like BBU in 2016 or BEP in 2011 from their own balance sheet into unique vehicles and subsequently charge public investors for access to it.

 

Do you ignore these types of events taking place subsequently when you model the company?  I think it's reasonable to consider growth in adjacent businesses and is the way I ascribe value to the brand.  I think an investment hinges on believing the brand has value. Flatt has spoken directly and emphatically about the credit business and how large it would be.  I think it makes sense considering the sectors BAM is in..

 

The viability of their entry into credit is important both to handicapping management (if it's hopeless why are they wasting resources) and to a valuation.  I view credit as a 1-foot hurdle to be honest.

 

Private credit will be a 1T$ market by 2020 and I think BAM can have an edge in the segments they operate in.  Blackstone has 123B in AUM in private credit & I don't see anything preventing BAM from reaching a comparable height.  It's the same thesis for private credit that you apply to the other businesses BAM operate in.  They have operating expertise so they know the assets better, they know the cycles/currencies better, and government credit around the world wont present acceptable investments for most institutions looking forward. 

 

I think it's part and parcel to investing in a brand to consider where the brand can go...

[Packer16]

I am not sure buy-backs would help as much as spinning off funds.  With buy-backs you are buying back an entity composed of 50 to 75% of a closed-end fund with a discount that is not unjustified & 25 to 50% of an asset management company.  If you spin off the funds you remove the discount first then buyback shares if the residual is undervalued.

 

Packer

[chrispy]

Bruce has said they are building the credit business to take advantage of the next cycle.

 

Packer, are the consistent dividends from the LPs along with the semi-predictable fees from the AUM what makes management believe they have a very predictable outcome 5-10 years from now?

 

With regards to always presenting that the company is undervalued; I like that they present how they value the company, do it the same way each year,  and reflected on what they projected in 2013 and how they have performed in comparison. BAM has a very unique structure that was quite difficult to understand up until recently. Their consistent valuation method has made it understandable. Growing the business with asset purchases, their way of organic growth, is much better then simply buying back shares. If cash piles up though, buy em up.

[Packer16]

IMO it does not matter what management thinks in regards to the hold co discount.  The spin-off will remove the discount from holding the funds & we can see if the market will truly misprice the asset manager.  I am taken the discount as a given versus trying find ways to reduce it because I have never seen one reduced for an extended period of time.  Why try to fight the market when with a spin-off you do not have to.

 

Packer

[bizaro86]

The big stakes in the subs give them the ability to take huge leverage at the hold co based on the value of those stakes. Provides them extra optionality if the markets freeze up again.

 

And they always have the option to do a spin, so any time they decide to capture that value they could. There is a time value argument against waiting, because capturing the money later isn't as good as capturing it now.

 

I think it would probably be value maximizing to spin off the subs, at least partially. But I understand why they don't...

[Spekulatius]

Doesn’t having a stake in the subs or event them from losing control over them? I think at least theoretically, it is a possibility to lose control, if an activist came in.