BAM - Brookfield Asset Management

[John Hjorth]

'This cash flow is now over $2 billion annually and growing. This amount, based on our estimates, should be over $5 billion in 2023 and with no specific use for the capital, it may be returned to shareholders.'

 

Oh-noo, please no more "spread-sheet-talk" in this topic. We have been exactly there before, where I asked for somebody shedding some light on the assumptions, to which question I got the reply "Mr. Flatt's assumptions are absolutely reasonable" [or something like that] [i couldn't find them anywhere, so I asked, and after the "absolutely reasonable"-answer just : silence].

The $5 billion cash flow number is stated in last September's Investor Day BAM presentation page 111, linked below.  See the rest of the file for derivation of this number.  Just putting out the info, I do not necessarily agree with the assumptions.

 

http://www.2018-brookfield-ir-day.com/

 

Gokou,

 

What are you really talking about? -Where are the BAM assumptions, that you "not necessarily agree with"? -I still can't find them.

[gokou3]

That presentation provides the path to $5B distributable cash in 2023.  Whether the assumptions - AUM growth, LP asset growth, returns, etc. - make sense, I have no idea.

[Jurgis]

http://www.2018-brookfield-ir-day.com/

 

Thanks.

 

 

 

The interface is so painful though... No 2x speed. No saving the slides or video. If you pause, at some point the player expires and you have to restart from beginning. Trying to move to the point you were is a pain with the slider covering 428 minutes and you trying to move it 1 minute or less. I just gave up.

 

Not your fault.

[gokou3]

Sorry didn't realize the Brookfield link didn't have the presentation PDF for download. Try this one:

 

https://www.dropbox.com/s/c0orm25274vv5oh/Investor%20Day%202018_BAM_F.pdf?dl=0

[Jurgis]

Sorry didn't realize the Brookfield link didn't have the presentation PDF for download. Try this one:

 

https://www.dropbox.com/s/c0orm25274vv5oh/Investor%20Day%202018_BAM_F.pdf?dl=0

 

Thank you again.  8)

[investmd]

Sorry didn't realize the Brookfield link didn't have the presentation PDF for download. Try this one:

 

https://www.dropbox.com/s/c0orm25274vv5oh/Investor%20Day%202018_BAM_F.pdf?dl=0

 

Thanks for sharing pdf of 2018 presentation.

Question: Presentation lists common equity at $56B with close to $30B invested in BPY, BIP, BEP, BBU & "other".  What is remaining $26B invested in? Does BAM have assets of its own outside of its subsidiary spinoff companies?

[John Hjorth]

... Question: Presentation lists common equity at $56B with close to $30B invested in BPY, BIP, BEP, BBU & "other".  What is remaining $26B invested in? Does BAM have assets of its own outside of its subsidiary spinoff companies?

 

investmd,

 

I suppose when your referring to the USD 56 B figure, you're talking about the numbers on p. 76, right? If so, that number is the value of BAM at "plan value", which is defined at p. 68. Basically, this is an estimation of the economic value of asset management business based on multiples to which is added invested capital. The economic value of the asset management business is not in the BAM group balance sheet, because it's [in materiality] built up internally over the years.

 

Here is a link to the investor presentation on the BAM website [link], scroll down to the September 2018 Investor Day under "Past events", expand, and you'll find the Presentation in pdf-format. [Direct download link].

[John Hjorth]

Economic Times [June 24^th 2019] : Suzlon offers to sell majority stake to Brookfield for settling loans .

Economic Times [August 7^th 2019] : Brookfield no longer in race for Suzlon Energy stake as talks fail.

 

There has for quite some time been rumors and writings in the Danish press, that Vestas Wind Systems A/S has been interested in acquiring Suzlon. I suppose this bid from Brookfield has been in competition with Vestas to find a sustainable solution for Suzlon.

[jsgcapital13]

can someone help me understand the delta between fee-earning capital and AUM? I believe the difference is explained by the assets owned by the listed entities that are separate from the LP investments? for example, Forest City assets (under BPY) would count towards the AUM total but not the fee-earning capital total? If that is correct, it seems confusing since BAM earns management fees based on the market capitalization of its listed entities.

[jfan]

can someone help me understand the delta between fee-earning capital and AUM? I believe the difference is explained by the assets owned by the listed entities that are separate from the LP investments? for example, Forest City assets (under BPY) would count towards the AUM total but not the fee-earning capital total? If that is correct, it seems confusing since BAM earns management fees based on the market capitalization of its listed entities.

 

There are definitions of these items in the 2018 annual report starting on page 108.

 

Fee bearing capital is all the capital that BAM manages for others and including its portion of their public and private funds. Therefore, fee-related earnings includes the base management fees it earns on it's OWN invested capital. This would appear to be double counting, however, the nets out in the end, as it reduces the total capitalization of its funds by either reducing the cash available on the balance sheet or dilutes the total equity by issuing unit shares or redemption-exchange units (that can be later paid out in cash or units). This proportionate capitalization is added back to its plan value calculation.

 

With respect to AUM, it essentially is 100% of anything they have to consolidate on their balance sheet (eg PPE line represents their infrastructure investment) and the proportionate amount of everything else that is non-consolidated (eg partial interests in public securities).

 

Hope this helps.

[John Hjorth]

Brookfield Asset Management - Press Release [August 8^th 2019] : Brookfield Asset Management Reports Second Quarter 2019 Net Income and FFO.

 

[The quarterly shareholder letter by Mr. Flatt is released, too, but not the Quarterly Report 2019Q2 yet. Supplemental information is available, too.

 

It looks OK to me - still great business momentum.

 

Same situation with regard to available information for BPY, BPR & BIP, while BEP & BBU have released their quarterly financials. I wonder if this is normal? [i haven't noticed it before, less the first quarterly for BPR under the BAM umbrella last year.]

 

I've sent an e-mail to Linda Northwood, BAM IR, today about it.

[ValueMaven]

Hi John  - Would  you mind commenting a bit more?  I've always appreciated your insights re: BAM + subs.  One interesting point I think Mr. Flatt continues to build on is 1) FCF yield story and 2) returning capital back to shareholders via buybacks.  It really is amazing to me the amount of bolt-on acquisitions they are making even now !!

 

Sincerely,

ValueMaven

[ValueMaven]

Can someone tell me why the subs are still LPs?  Some of these companies are extremely cheap, and should convert to C'-Corps.  Which of the Sub's do you like the most?  For me its Business Partners

[John Hjorth]

Reply to me from Linda Northwood - just received, & ref. my e-mail to her mentioned above :

 

Hi John,

 

We are filing our Q2 Interim Report this Wednesday, and will be posting on our website later that day.

 

In the interim, below is a link to our Supplemental Information book for Q2:

 

https://bam.brookfield.com/reports-and-filings/financial-reports/supplemental-information

 

With best regards,

 

Linda

 

- - - o 0 o - - -

 

Valuemaven,

 

Thank you for your posts and you kind words. I will get back to you here. BAM is rumbling inside my head nowadays - I just need some time to get some structure on my thoughts and try to do my best to elaborate.

[wisowis]

https://business.financialpost.com/news/fp-street/brookfield-to-buy-57-in-genworths-canada-unit-in-1-81-bln-deal

 

Genworth Financial Inc. agreed to sell its Canadian unit to Brookfield Business Partners LP for $2.4 billion as it works to win regulatory approval for its acquisition by China Oceanwide Holdings Group Co.

 

Brookfield Business Partners LP will purchase 48.9 million shares, or a 57 per cent stake, at $48.86 apiece in Genworth MI Canada Inc., giving it majority control of Canada’s largest private-sector residential mortgage insurer. That’s a 5.1 per cent discount to Genworth MI’s closing price Monday.

[John Hjorth]

The Globe and Mail [August 19^th 2019] : David Berman, investment reporter : Which Brookfield should you own? Here’s a simple solution.

[ValueMaven]

Thank you John!! 

 

Would still love to get youre take on the current business, valuation etc -- honestly the more I study this - this is turning into my single favorite long-term investment idea....

[Packer16]

I like this complex also.  I like BIP best as this where BAM has the largest competitive advantage vs. others.  These advantages include having assets that can be accretive to potential purchases and relationships in EM they have developed.  This characteristic is not present in real estate or renewables.  BIP BTW is the group of funds the Brookfield has the largest % of 3rd-party (institutional) investors and the longest track record.  They also have beaten the LT expected returns vs. lower performance from BPY & BEP.

 

BAM is interesting but IMO is not cheap.  The value build-up assumes a 15x earnings & no discount on the underlying holding.  Holding companies like BAM rarely trade a NAV, so the question is how much of a discount should there be.  Based upon the current price the implied discount is about 25% not unreasonable given the corporate costs (equates to a 5% discount - corp costs caped at 10%) plus size of BPY & BRE vs. BIP & BBU.

 

Packer 

[ValueMaven]

Given all of the LPs (MLPs and P/E Firms) converting into C-Corps -- what benefit do the subs have at this point as LPs?  Why not convert

[vince]

I like this complex also.  I like BIP best as this where BAM has the largest competitive advantage vs. others.  These advantages include having assets that can be accretive to potential purchases and relationships in EM they have developed.  This characteristic is not present in real estate or renewables.  BIP BTW is the group of funds the Brookfield has the largest % of 3rd-party (institutional) investors and the longest track record.  They also have beaten the LT expected returns vs. lower performance from BPY & BEP.

 

BAM is interesting but IMO is not cheap.  The value build-up assumes a 15x earnings & no discount on the underlying holding.  Holding companies like BAM rarely trade a NAV, so the question is how much of a discount should there be.  Based upon the current price the implied discount is about 25% not unreasonable given the corporate costs (equates to a 5% discount - corp costs caped at 10%) plus size of BPY & BRE vs. BIP & BBU.

 

Packer

 

Not that I necessarily disagree with you, and I wouldn't bet a lot of money on it buy I think their is a very good probability that Bam outperforms each of the partnerships over time.  And the article made the best argument that I completely agree with....Bam's value is shifting more and more to the asset mgmt business, which in my mind is a better business model.  And the partnerships pay a pretty hefty price, on top of terms (the fees increase with total capitalization) that virtually guarantee a growing stream to Bam that isn't perfectly correlated to increased partnership value....at least that's how I understand it but wouldn't mind being shown that I'm wrong here. 

[Packer16]

While in theory I agree with you, I think in practice what most folks fail to realize is that most likely the estimated NAV will never be realized.  Once you see that & understand the assumption used to build up the NAV are not conservative but middle of the road, the SOTP story becomes less appealing.  In reality there should be a discount on the sub that BAM holds because you do not have the option to sell them.  The only way to reduce the SOTP discount is to spin off the subs & let the market value the AM by itself.  I do not think this will happen & thus I like the most advantaged sub BIP.  If I thought the spin-off was going to happen, I would invest in BAM also.  BTW if you look at the past returns, BIP has outperformed BAM quite significantly which I think will continue.

 

I would not let the partnership fees bother you are you are only paying about 18% of the appreciation in fees for BIP while you are paying more as percentage of return for the less advantaged subs.  For most alt managers, 20% of the return is low.

 

Packer

[vince]

I'm not totally convinced that the NAV discount has/will hold at all times.  I'm almost positive that BAM was trading much closer to intrinsic value in early 2015 relative to today.  But even if we assume you are right and also assume the future discount stays roughly constant with today's, then their stock market value should proportionally increase in line (obviously not a straight line) with intrinsic value going forward.  Additionally, going forward, Bam's invested capital value is going to continue to diminish as a % of total value which would also diminish the discount as a percent of total value.  I also want to point out that I haven't done as much work on BAM as I do for many other investments so my argument could be factually wrong and I want to be clear that I like the partnership that you prefer, over the others, and It's still a close call compared to BAM in my mind.  Could you also be so kind and explain how you are only paying 18% of the appreciation? Thanks.

[Packer16]

In terms of discount, BAM has never traded at a premium & only rarely do any companies trade at premium.  There is no reason to trade at NAV or a premium due to the disadvantages of not being able to sell the components & also there are holding company costs (for BAM if we capitalize these cost at 10% it implies about a 6% discount).  Even companies with great allocation like Exor trade a discount which in theory should be able to offset some the discount.  I take this as a fact of life.  I think the assumption of a constant discount is not something you can take for granted (especially if the firm has a low distribution yield).  The discount could increase but we do not know.  A distribution yield IMO will put a floor on the price when a shock happens due to interest rates also going down when a shock hits. 

 

The 18% (should be 16% if from inception) is equal to total costs/total returns.  So for BIP total historical costs have been 3% of NAV per year & its total after-fee return has been 18.5% since inception (2018) which is about 16.2%.  BAM has increased by about 12% over the same period of time. 

 

I also considered whether BIPs performance was repeatable vs. BAMs.  Given, the advantages BIP had I thought that BIP would do better than BEP & was not sure about BBU.  Given that BBU has more of the risky deals & has changed it expected returns from 15 to 20% to 15% & BIP had higher historical returns than 15% (a proven track record), I favored BIP.  Now BAM may return more than BIP but a few thing have to go right for that to happen.  First, the discount has to decline or at least not increase.  Second, the assumed multiples for recurring fees of 20x and 10x for carry have to stay the same or increase. Thus for BAM to do better more things have to hold than for BIP to repeat history.  IMO the more things that have to go right for an investment to do well, the less confidence I have in the thesis.  I also look at infrastructure as Brookfield's core competence & where I would make a bet that they would do better going forward.  Just my 2 cents.

 

Packer 

[vince]

In terms of discount, BAM has never traded at a premium & only rarely do any companies trade at premium.  There is no reason to trade at NAV or a premium due to the disadvantages of not being able to sell the components & also there are holding company costs (for BAM if we capitalize these cost at 10% it implies about a 6% discount).  Even companies with great allocation like Exor trade a discount which in theory should be able to offset some the discount.  I take this as a fact of life.  I think the assumption of a constant discount is not something you can take for granted (especially if the firm has a low distribution yield).  The discount could increase but we do not know.  A distribution yield IMO will put a floor on the price when a shock happens due to interest rates also going down when a shock hits. 

 

The 18% (should be 16% if from inception) is equal to total costs/total returns.  So for BIP total historical costs have been 3% of NAV per year & its total after-fee return has been 18.5% since inception (2018) which is about 16.2%.  BAM has increased by about 12% over the same period of time. 

 

I also considered whether BIPs performance was repeatable vs. BAMs.  Given, the advantages BIP had I thought that BIP would do better than BEP & was not sure about BBU.  Given that BBU has more of the risky deals & has changed it expected returns from 15 to 20% to 15% & BIP had higher historical returns than 15% (a proven track record), I favored BIP.  Now BAM may return more than BIP but a few thing have to go right for that to happen.  First, the discount has to decline or at least not increase.  Second, the assumed multiples for recurring fees of 20x and 10x for carry have to stay the same or increase. Thus for BAM to do better more things have to hold than for BIP to repeat history.  IMO the more things that have to go right for an investment to do well, the less confidence I have in the thesis.  I also look at infrastructure as Brookfield's core competence & where I would make a bet that they would do better going forward.  Just my 2 cents.

 

Packer

 

All fair points.  We still have some differences in thought, I really believe that in 7-8 years, and more so afterwords the asset management business will represent the lions share of earnings, cash flow, and intrinsic value making NAV much less relevant.  I'm pretty sure you have seen the supplementals showing the 5 year "value plan" trajectory comparing the 2 components.  It is striking...and absolutely consistent with their intentions going forward. I am also certain that Bam's ownership interests in the partnerships will get diluted in time.  However, I have a much better understanding, and appreciation of holding company discounts that I lacked before reading this thread and especially some of your earlier posts that went into detail regarding NAV discounts, much appreciated.

[Spekulatius]

While in theory I agree with you, I think in practice what most folks fail to realize is that most likely the estimated NAV will never be realized.  Once you see that & understand the assumption used to build up the NAV are not conservative but middle of the road, the SOTP story becomes less appealing.  In reality there should be a discount on the sub that BAM holds because you do not have the option to sell them.  The only way to reduce the SOTP discount is to spin off the subs & let the market value the AM by itself.  I do not think this will happen & thus I like the most advantaged sub BIP.  If I thought the spin-off was going to happen, I would invest in BAM also.  BTW if you look at the past returns, BIP has outperformed BAM quite significantly which I think will continue.

 

I would not let the partnership fees bother you are you are only paying about 18% of the appreciation in fees for BIP while you are paying more as percentage of return for the less advantaged subs.  For most alt managers, 20% of the return is low.

 

Packer

 

Even if you spin off the subs , the discount will persist, because they are limited partners and don’t control their destiny (the GP  BAM does). To eliminate the discount you would also have to eliminate the cash stream to the GP. In this case, the GP would ask for compensation in more LP units, just like IDR were eliminated in certain midstream LP’s (MPLX, PSPX). The GP/LP structure is worse for the  LP from a governance structure compare to a c-Corp or self managed REIT and deserves to trade at a discount.