BAM - Brookfield Asset Management

[John Hjorth]

PERE [April 29^th 2019] : Bruce Flatt: Oaktree offers relevance at every point in the cycle.

[John Hjorth]

Ref. the exchange between Rod, Castanza and I a couple of days ago in this topic, here, I'll just mention the existence of a huge Brookfield website called Brookfield Properties, which is actually a virtual telescope and visualization, where it is possible to take a look at most of the properties owned by BPY/BPR around the world, with building specifications etc., marketing material and so on for each property - I have actually noticed that some of all those properties even have their own separate websites [not only the malls].

 

I think a friendly caution is appropriately in place here : If you suffer just the least of having an attraction to these kind of assets / "soft spot" for these thingies - which I personally do - then there is an event horizon around the website - so you need to fasten your seat belt before entering the website so you avoid getting sucked in! [ ; - D ] - To me, it's just a real estate portfolio soo impressive owned by BPY & BPR.

[ValueMaven]

wow - not a single comment on the quarter/letter by Mr. Flatt

[John Hjorth]

wow - not a single comment on the quarter/letter by Mr. Flatt

 

Now you asked, so I'll give you one, ValueMaven,

 

Mr. Flatt is to me too promotional. [i'm still a buyer going forward, so there's a reason why I think so.]

[Wabash02]

re: no post's on the letter, I'll go...

 

The biggest thing that got me was that over the past two years they have taken 7 companies private and in doing so acquired over 55B of assets.  I've been mostly aware of each individual deal but somehow didn't realize they added up to that much.

 

The second most notable was the "cash available for reinvestment" growing from 2B today to 5B in 2023.  Wow!  It's like they've hit a punctuated equilibrium or power law type growth in cash generation.  If that's the case it would be hard to overestimate the how quickly that could continue to grow.

 

I'll admit I have somewhat of a 'leap of faith' as far as some of the accounting and corp. structure with BAM but I do have strong belief that the management is really focused on value per share creation and I'm really happy to have Bruce and Co. scouring for deals for me.

 

 

 

 

[John Hjorth]

ValueMaven,

 

Here we go :

 

... The second most notable was the "cash available for reinvestment" growing from 2B today to 5B in 2023.  Wow!  It's like they've hit a punctuated equilibrium or power law type growth in cash generation.  If that's the case it would be hard to overestimate the how quickly that could continue to grow.

 

This comment from Wabash02 is an example of Mr. Flatt being promotional - this particular projection is exactly that ... - a projection - and no, I back out of that again, and try to firm and narrow it in further here : a 2023 projection. Personally, I have no spreadsheets anywhere reaching out to 2023 on anything.

 

If you think Flatt is too promotional, how promotional do you think Warren Buffet is?

 

IMO Flatt is anything BUT promotional. He controls a business into which he and shareholders have extraordinary visibility because the assets they own are stable, cash flow generating, and BAM knows what levers they can pull to create value. The AM business is largely mgmt. fees, which are also very predictable. [b)His projections are perfectly reasonable, if not conservative.

 

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Again, some of us here on CoBF may be invested in the same thingy, but the perception of risk among us may not be identical, nor even comparable. We all have our own choices to make, based on our personal perception of expected return vs. risk.

 

This is what makes this discussion interesting.

[ValueMaven]

Great point all.  Also the comments on leverage not at BAM parent was interesting as well...he went into depth about that.  I also really do enjoy reading the subs letters as well.  I do not own BPY (I dont want the LP hence the REIT) - however if and when it pulls back it could be very interesting. 

 

 

[vince]

re: no post's on the letter, I'll go...

 

The biggest thing that got me was that over the past two years they have taken 7 companies private and in doing so acquired over 55B of assets.  I've been mostly aware of each individual deal but somehow didn't realize they added up to that much.

 

The second most notable was the "cash available for reinvestment" growing from 2B today to 5B in 2023.  Wow!  It's like they've hit a punctuated equilibrium or power law type growth in cash generation.  If that's the case it would be hard to overestimate the how quickly that could continue to grow.

 

I'll admit I have somewhat of a 'leap of faith' as far as some of the accounting and corp. structure with BAM but I do have strong belief that the management is really focused on value per share creation and I'm really happy to have Bruce and Co. scouring for deals for me.

 

The 2 billion of current fcf does not include any carry where the 2023 fcf target does include carry.  They say that currently they are, or should be earning 1 billion in carry but because many of the funds are early in their lives there is still the chance of clawback.  In 5 years out carry will be more of a run rate number.  So basically fcf is growing from 3 billion to 5 billion, at least that's how I understand it, which is a conservative estimate imo.

[John Hjorth]

Somehow, ValueMaven got me started,

 

How about this?

 

In private equity, real estate and infrastructure, where both Brookfield and Oaktree are active, we intend to retain two premier brands in the marketplace – Brookfield as the mega-transaction brand (with $10 billion to $25 billion funds) and Oaktree as the boutique brand (with funds up to $5 billion). Similar to Volkswagen, which owns both Porsche and Lamborghini, we believe there is a market for these brands to co-exist, as they offer our clients different strategies delivered in funds of different sizes.

 

Personally, I just hope Mr. Flatt has mutually reconciled with Mr. Marks about publicly calling Oaktree a "boutigue". To me, a client is a client, unless you graduate clients by their investment capacity [= minimum requirements for capital commitments to funds].

[villainx]

When you comment too promotional, is that intended to be criticism of fluff talk, or positive that he's showing company capacity?

 

BAM, and subs, consistently have been giving 5-ish year projections for many years.  I don't have the skills to review if they consistently achieved their targets (plus all the moving parts of the spinoffs), but roughly remembering, they've been.

[peterHK]

If you think Flatt is too promotional, how promotional do you think Warren Buffet is?

 

IMO Flatt is anything BUT promotional. He controls a business into which he and shareholders have extraordinary visibility because the assets they own are stable, cash flow generating, and BAM knows what levers they can pull to create value. The AM business is largely mgmt. fees, which are also very predictable. His projections are perfectly reasonable, if not conservative.

[John Hjorth]

I'm sorry for a late reply to peter & villainx here,

 

Personally, I have used the word "promotional" recently in this topic about Mr. Flatt's & BAM's interaction with investors, and my intent for using the word was only about that. I'm sorry for not being specific enough. To me, it's certainly OK to go at great length in explaining the business and its prospects for the future. Here we have an example of an estimated price of the stock about - was it 5 years from the last Investor Day? - in a Power Point presentation - stating it as roughly a double. - Can somebody please tell me about the underlying assumptions for that? - I haven't been able to find them.

 

I agree, that there is some kind of stability related to the asset management business - some. The total asset management gross income is basically in two parts : Management fees [to me, the stable component] and carried interest [realized & non-realized] - the non-realized component of carried interest is based on IFRS valuations of assets, based on expected future realized gains on assets to be sold in the future. All I know is that if asset prices goes down going forward, for the asset classes that BAM & subs invest in, BAM & subs will try to take advantage of that by gathering more assets.

 

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The above is not to be confused with that I personally think BAM is a bad investment. I don't, and I'm still buying, slowly. [Perhaps I'm also annoyed by what I perceive as Mr. Flatt "talking the stock up", because I want to buy more. [ ; - ) ]]

 

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To me personally, BAM is a bet on continued overall low interest rates for a prolonged period, combined with satisfactory price development in assets classes BAM & subs invest in.

[John Hjorth]

Intense discussion about BAM in the TOO topic during the last couple of days.

 

Here is a post by Spekulatius, also containing a quote by Greg :

 

Yup, the scoundrels pounce. It amazes me how many people think they will print money "investing alongside" these type of companies. The same applies to the logic bending narratives with BRK and Warren doing all these benevolent things just to be an amazing person and make shareholders rich. Dudes who produce outsized returns do it because they maximize what they can extract from an investment. Not because they make everybody super rich by passing around free lunch tickets. These types of guys/groups almost never act in the interest of ALL shareholders.

 

It’s GGP all over again. Investing alongside BAM means one needs to buy BAM stock, nothing else. BAM tries to obtain control as cheaply as they can, nothing else.

The whole discussion made me go back to the two SIRF reports on BAM, and after carefully reading again [after years have passed], I found this : BPY Form 20-F/A of February 15^th 2013 - p. 10 & 11:

 

We may be subject to the risks commonly associated with a separation of economic interest from control or the incurrence of debt at multiple levels within an organizational structure.

 

Our ownership and organizational structure is similar to structures whereby one company controls another company which in turn holds controlling interests in other companies; thereby, the company at the top of the chain may control the company at the bottom of the chain even if its effective equity position in the bottom company is less than a controlling interest. Brookfield is the sole shareholder of the BPY General Partner and, as a result of such ownership of the BPY General Partner, Brookfield will be able to control the appointment and removal of the BPY General Partner’s directors and, accordingly, will exercise substantial influence over us. In turn, we often have a majority controlling interest or a significant influence in our investments. Even though Brookfield will initially have an effective economic interest in our business of approximately 92.5% as a result of its ownership of our units and

 

10

 

Table of Contents

the Redemption-Exchange Units, over time Brookfield may reduce this economic interest while still maintaining its controlling interest, and therefore Brookfield may use its control rights in a manner that conflicts with the economic interests of our other unitholders. For example, despite the fact that our company has a conflicts policy in place which addresses the requirement for independent approval and other requirements for transactions in which there is greater potential for a conflict of interest to arise, including transactions with affiliates of Brookfield, because Brookfield will be able to exert substantial influence over us, and, in turn, over our investments, there is a greater risk of transfer of assets of our investments at non-arm’s length values to Brookfield and its affiliates. In addition, debt incurred at multiple levels within the chain of control could exacerbate the separation of economic interest from controlling interest at such levels, thereby creating an incentive to leverage our company and our investments. Any such increase in debt would also make us more sensitive to declines in revenues, increases in expenses and interest rates, and adverse market conditions. The servicing of any such debt would also reduce the amount of funds available to pay distributions to our company and ultimately to our unitholders.

 

Bon appetite, & food for thought.

 

[Saluki]

I sold about 1/2 my Brookfield position today.  Although I still think it's a great company and I did a lot of research on it before I invested (including reading a couple of books from it's origins as Brascan), I will probably be forced to sell my holdings when the Oaktree merger happens because of a conflict at my employer. So I figured it would make sense to sell now when the price was good instead of taking a chance on having to sell when the market dips.

 

One of my only concerns about the company is that they keep buying troubled assets (at great prices) but turnarounds are hard.  As they keep growing and adding more assets, I wonder if they will spread themselves too thin.  As I read Corporate Catalyst by Tony Griffiths (because some of the deals involved Brascan/Bronfman entities) as part of my research, I asked myself what i would do in a similar situation in a lot of these cases. I won't spoil the ending, but if you had invested in any of those entities you should thank your lucky stars that I never got involved in turnarounds because all my instincts are terrible. 

 

I didn't like Teekay, GGP or the idea of buying an overpriced building from Jared Kushner, but if turning these donkeys into racehorses is a rare skill, then how many more big deals can they do with the players they have on their bench?  If it's not a rare skill, then why do people need Brookfield? 

 

 

[petec]

A list of books people have found useful for understanding BAM would be super useful.

[Saluki]

A list of books people have found useful for understanding BAM would be super useful.

 

The excerpt above from BPY gives a clue. It looks like the same structure that Buffett used in the Blue Chip Stamps days that he had learned from Gurton Wattles before him.  Schroeder describes it like those russian nesting dolls, one inside the other. 

 

The Brass Ring by Patricia Best gives a good understanding of the interconnected Bronfman entities (Jonlab, Edper, Brascan) up until the 1980s (before Bruce Flatt and before they got into trouble in real estate). Then Corporate Catalyst by Tony Griffiths (who is on the board of Fairfax) has a few deals he worked on with the Bronfman entities too.  Bruce Flatt is mentioned favorably, in passing, in the book.  Other than that, there is not a lot out there except for news articles and corporate filings.

 

It seems like the playbook since the '70s is to find a company in trouble and going down, then loan them some money in exchange for operational control, then go to the other creditors and renegotiate and maybe seek money and incentives from the government too.  If they put in, say $20 million as a loan, they would agree to invest another $50 million as equity if they can get the other creditors and government to play ball. That's the carrot, and the stick is that if they can't get it, they will shut the operation down and just get in line with the other creditors to try to get their initial money back.

 

I think they learned their lesson on the debt from their near death experience in the '80s and now (for real estate) my understanding is that the debt is held at the asset level, not the corporate level, so it insulates the parent from the sick child.

[xo 1]

A list of books people have found useful for understanding BAM would be super useful.

 

The excerpt above from BPY gives a clue. It looks like the same structure that Buffett used in the Blue Chip Stamps days that he had learned from Gurton Wattles before him.  Schroeder describes it like those russian nesting dolls, one inside the other. 

 

The Brass Ring by Patricia Best gives a good understanding of the interconnected Bronfman entities (Jonlab, Edper, Brascan) up until the 1980s (before Bruce Flatt and before they got into trouble in real estate). Then Corporate Catalyst by Tony Griffiths (who is on the board of Fairfax) has a few deals he worked on with the Bronfman entities too.  Bruce Flatt is mentioned favorably, in passing, in the book.  Other than that, there is not a lot out there except for news articles and corporate filings.

 

It seems like the playbook since the '70s is to find a company in trouble and going down, then loan them some money in exchange for operational control, then go to the other creditors and renegotiate and maybe seek money and incentives from the government too.  If they put in, say $20 million as a loan, they would agree to invest another $50 million as equity if they can get the other creditors and government to play ball. That's the carrot, and the stick is that if they can't get it, they will shut the operation down and just get in line with the other creditors to try to get their initial money back.

 

I think they learned their lesson on the debt from their near death experience in the '80s and now (for real estate) my understanding is that the debt is held at the asset level, not the corporate level, so it insulates the parent from the sick child.

Wow.  Thank you.  So helpful.

[peterHK]

BAM's method for a lot of what they do is to buy things with contracted/recurring revenue that's in financial/operational distress, and turn it around. They've got a TON of operating experience, and if you look at say GrafTech as an example, they took a cyclical business that provides an essential part to something, simplified its operations, and contracted out a bunch of the business to stabilize the cash flow and make the quality of the business higher.

 

Westinghouse is a contracted business; TOO is contracted; the Johnson Controls battery unit isn't, but they're essential parts to a car. I personally think they've very clever in what they buy because they know if the CF is there, and all the issue is bad cost management or a bad capital structure, they have all the levers they need to clean up shop and create a lot of value. These aren't cases where you've got a broken brand (KHC for example): those are almost impossible turnarounds to do.

 

I find the above really helps me understand them. Usually BAM will buy something and my first response is "why the heck are they doing that?" and then I'll take a closer look and see the BAM playbook scribbled all over it.

[John Hjorth]

There is an exchange between BG2008 and Jurgis in the GrafTech topic relevant for BAM discussion starting here [2 posts].

[Pondside47]

In light of BBU's recent low bid for the remaining 27% of TOO they do not own for $1.05 a share, there has been a discussion on the TOO thread that I'm moving here, regarding the takeover threshold of Brookfield sponsored entities such as BBU, BPY. TOO is a limited partnership controlled by Brookfield controlled GP. BBU and BPY unit holders are essentially in similar boats. What Brookfield is doing to TOO unit holders could happen to BBU, BPY holders as well, theoretically. The question is the likelihood of that happening.

 

From a legal and technical standpoint, the takeover thresholds of BBU and BPY are much higher. The protection against a take under bid seems to be very solid.

 

To answer my own question, the take over bid requirement of Brookfield sponsored entities are much higher. 90% of the shares not owned by the offerer and its affiliates need to agree.

 

Sooooo...what’s the issue here? That’s a very strong protection for minorities. One could even put a positive spin on the situation and say that Brookfield are offering minorities liquidity on the same terms they offered it to the original parent. Large holders looking to exit might view that as a good thing - effectively a tagalong right.

 

I’m being deliberately provocative here, but only because I’m interested. No offence intended. What am I missing?

 

However, as Buffett said, what's written in the contract is only part of the picture. It's about the person on the other end of the deal. If Brookfield is willing to abuse their control, as in the case of TOO, even for such small financial gain, some of us need to start changing our perception of Brookfield and Bruce Flatt.

 

 

 

[Gregmal]

While interning at a small brokerage firm in my early 20's, I saw two guys, each making $1M a year plus, get into a fist fight over who was responsible for paying a $75 ticket charge.

 

When it comes to money, people are animals. Especially in the financial world. I have no clue why people go into investments thinking they are owed anything or going to be treated specially. Self interest rules the day, whether its Fast Eddie plundering Sears into bankruptcy, the Oracle of Omaha refusing to put capital to work via buybacks or paying dividends almost solely because he wants to make one last big acquisition for legacy purposes, or BAM and their subs forcing a below market takeover through. Even if you do find an awesome and generous manager, you'll never get hurt being skeptical. You will get flattened thinking Fast Eddy has your back though.

[Spekulatius]

While interning at a small brokerage firm in my early 20's, I saw two guys, each making $1M a year plus, get into a fist fight over who was responsible for paying a $75 ticket charge.

 

When it comes to money, people are animals. Especially in the financial world. I have no clue why people go into investments thinking they are owed anything or going to be treated specially. Self interest rules the day, whether its Fast Eddie plundering Sears into bankruptcy, the Oracle of Omaha refusing to put capital to work via buybacks or paying dividends almost solely because he wants to make one last big acquisition for legacy purposes, or BAM and their subs forcing a below market takeover through. Even if you do find an awesome and generous manager, you'll never get hurt being skeptical. You will get flattened thinking Fast Eddy has your back though.

 

As ai keep reminding everyone, TOO wasn’t the first one. GGP was a much larger and way more public screw job than TOO. I also think there were other instances like this, but my memory fails mRNA. it’s not a reason not to invest in BAM, imo. If anything, it is a reason to invest in BAM.

 

As far as the other entities are concerned, if prices get too depressed, expect a bear hug too. they surely can come up with some financial engineering - buying up depressed units, selling IDRs back to the LP, then putting them under self directed management and reissuing units again for a higher price.

 

Heads up, BAM wins, tails up BAM find a way to win too.

[gokou3]

While interning at a small brokerage firm in my early 20's, I saw two guys, each making $1M a year plus, get into a fist fight over who was responsible for paying a $75 ticket charge.

 

When it comes to money, people are animals. Especially in the financial world. I have no clue why people go into investments thinking they are owed anything or going to be treated specially. Self interest rules the day, whether its Fast Eddie plundering Sears into bankruptcy, the Oracle of Omaha refusing to put capital to work via buybacks or paying dividends almost solely because he wants to make one last big acquisition for legacy purposes, or BAM and their subs forcing a below market takeover through. Even if you do find an awesome and generous manager, you'll never get hurt being skeptical. You will get flattened thinking Fast Eddy has your back though.

 

As ai keep reminding everyone, TOO wasn’t the first one. GGP was a much larger and way more public screw job than TOO. I also think there were other instances like this, but my memory fails mRNA. it’s not a reason not to invest in BAM, imo. If anything, it is a reason to invest in BAM.

 

As far as the other entities are concerned, if prices get too depressed, expect a bear hug too. they surely can come up with some financial engineering - buying up depressed units, selling IDRs back to the LP, then putting them under self directed management and reissuing units again for a higher price.

 

Heads up, BAM wins, tails up BAM find a way to win too.

 

Forest City, BPO, and Rouse are arguably other recent examples.  That said, I doubt they will screw the Brookfield LPs (BPY BEP BIP BBU).  It is to their benefit to keep them listed and valuation high to provide additional low-cost funding sources and to earn IDR from them.

 

 

[Pondside47]

While interning at a small brokerage firm in my early 20's, I saw two guys, each making $1M a year plus, get into a fist fight over who was responsible for paying a $75 ticket charge.

 

When it comes to money, people are animals. Especially in the financial world. I have no clue why people go into investments thinking they are owed anything or going to be treated specially. Self interest rules the day, whether its Fast Eddie plundering Sears into bankruptcy, the Oracle of Omaha refusing to put capital to work via buybacks or paying dividends almost solely because he wants to make one last big acquisition for legacy purposes, or BAM and their subs forcing a below market takeover through. Even if you do find an awesome and generous manager, you'll never get hurt being skeptical. You will get flattened thinking Fast Eddy has your back though.

 

I agree with a lot of what you said but I take issue with your over simplified cynical generalization. Nobody thinks we are owed anything or being treated specially. Every investment we make is a bet on the future behavior of the controlling parties, whether its management or controlling shareholder.  We do expect to be treated fairly. What happened to fiduciary duty? I don't want to turn this into a TOO thread, but what pissed people off was the bait and switch. Brookfield posted as a strategic sponsor and have people spent two years invested with them. Now that things are much improved, they decide to take advantage of the low stock price to get a bit more return. They changed narrative and bent facts to justify their low bid. They have totally forgot about their fiduciary duty as the GP of the partnership. Saying self-interest rules the day, you have no clue why people go into investment thinking they are owed anything is not conducive to the discussion. Every single investment we make, we think we are owed at least ethical behavior. Otherwise, theoretically every management can bankrupt a company on purpose and get themself a better deal out of the bankruptcy process by siding with the vulture fund.

[chrispy]

With regards to GGP, if the share price won't reflect fair value and is a bargain then anyone can buy the units. It just so happens that BAM/subs can buy all of the units.

 

That is what I have struggled with here. Brookfield hyped GGP for like 7 years but the world was terrified of malls going under. No one in the market was buying up GGP so whats the big deal that Brookfield did?