BAM - Brookfield Asset Management

[John Hjorth]

Just a question for Keith here,

 

When you are mentioning "holding company costs", are you then referring to:

 

"Corporate costs" in the BAM Financials [2018 Annual Report, p. 31 & Income statement], disclosed as :

 

2018 : USD 104 M,

2017 : USD  95 M &

2016 : USD  92 M?

[vince]

One other thought that popped up last night, many of the alternative asset managers are undervalued right now (kkr being one) and I dont believe they have a similar to Bam NAV component.  And many of the executives of these undervalued entities have blamed the undervaluation on the carried interest stream.  Not saying they are right necessarily, but it seems like a possible alternative reason that can be applied to Bam? Just thinking.

[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

 

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.

 

The discount I was referring to was the discount between the publicly traded LP price and what the market is attributing to the investment in the subs.  If BAM spun off its subs, the spun off subs what sell for what the publicly traded LPs sell for & thus reduce the discount associated with not being able to sell any of the subs when you want to.

 

Packer

[John Hjorth]

One other thought that popped up last night, many of the alternative asset managers are undervalued right now (kkr being one) and I dont believe they have a similar to Bam NAV component.  And many of the executives of these undervalued entities have blamed the undervaluation on the carried interest stream.  Not saying they are right necessarily, but it seems like a possible alternative reason that can be applied to Bam? Just thinking.

 

vince,

 

Are your thoughts here about accumulated unrealized carried interest? [According to the BAM 2019Q2 Supplemental Information p. 4 disclosed at USD 2.537 B.]

[cmlber]

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. 

 

Packer, curious how you think about the future returns of BIP.  Paying a ~4.5% distribution, and if they grow FFO 6-9% (management target), that's 4.5-6.75% net to the unit holder since BAM takes 25% of the growth in distributions, so 9-11% total returns.  Seems pretty good but nothing exceptional.  If they hit their 5yr plan targets, even without the holding company discounts narrowing, you do better than BIP. 

[Packer16]

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. 

 

Packer, curious how you think about the future returns of BIP.  Paying a ~4.5% distribution, and if they grow FFO 6-9% (management target), that's 4.5-6.75% net to the unit holder since BAM takes 25% of the growth in distributions, so 9-11% total returns.  Seems pretty good but nothing exceptional.  If they hit their 5yr plan targets, even without the holding company discounts narrowing, you do better than BIP.

 

The target growth rate for distributions is 5 to 9% (pg 20 of Q1 2019 supplemental info).  So the pre-fee growth rates are 7 to 12% per year.  Historically, with the 25% carry, BIP has generated 9% distribution growth (11.6% per-fee) rates.  Given the deal pipeline & history, the amount may be towards the high-end of the range.  So if we use the mid-point to be conservative, I get a total return of 4.5% + 7% = 11.5% or a range of 9.5% to 13.5% with the high-end being more probable.  You also need to consider that the asset included in BIP become more valuable if interest rate stay or become lower as they are more like high-yielding bonds.  This is why BIP has outperformed their targets (returns of 15 - 17% vs. targets of 10 - 14%) by about a 4% premium above the target.  If you include 50% of this return then the returns are 11.5% to 15.5% closer to BAMs returns with the downside protection of the infrastructure assets.  This additional amount is a speculative but reasonable amount (IMO similar to the asset growth assumption for BAM).

 

Packer

[vince]

One other thought that popped up last night, many of the alternative asset managers are undervalued right now (kkr being one) and I dont believe they have a similar to Bam NAV component.  And many of the executives of these undervalued entities have blamed the undervaluation on the carried interest stream.  Not saying they are right necessarily, but it seems like a possible alternative reason that can be applied to Bam? Just thinking.

 

vince,

 

Are your thoughts here about accumulated unrealized carried interest? [According to the BAM 2019Q2 Supplemental Information p. 4 disclosed at USD 2.537 B.]

 

I'm not sure what particular stage of carried interest the market is not appreciating, never really thought that specifically about it.  But I have definitely heard comments from multiple mgmt's where they thought the perceived variability of that earnings stream, and lagged financial statement realization were likely reasons for the undervaluation. 

[vince]

For those that havent really studied BAM, carried interest is basically performance income based on a performance hurdle.  "Target' carried interest is the amount BAM expects to make if they hit their target returns for that private fund.  Accumulated unrealized carried interest is what they would earn if the fund was unwound today as that is compensation for already hitting specific hurdles.  However it's not realizable yet cause if the fund starts doing badly there is a chance of clawback of the accumulated amount.  It becomes realizable (for financial statements) when there is a very high chance of no clawback and that tends to happen towards the end of the fund life....it's back-end loaded.  Soooo, in more than 1 way it is susceptible to misunderstanding but if BAM's future fund performance is similar to their historical performance, a ton of money is going to eventually pour in, and the market really isnt appreciating the probabilistic amounts. 

[cmlber]

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. 

 

Packer, curious how you think about the future returns of BIP.  Paying a ~4.5% distribution, and if they grow FFO 6-9% (management target), that's 4.5-6.75% net to the unit holder since BAM takes 25% of the growth in distributions, so 9-11% total returns.  Seems pretty good but nothing exceptional.  If they hit their 5yr plan targets, even without the holding company discounts narrowing, you do better than BIP.

 

The target growth rate for distributions is 5 to 9% (pg 20 of Q1 2019 supplemental info).  So the pre-fee growth rates are 7 to 12% per year.  Historically, with the 25% carry, BIP has generated 9% distribution growth (11.6% per-fee) rates.  Given the deal pipeline & history, the amount may be towards the high-end of the range.  So if we use the mid-point to be conservative, I get a total return of 4.5% + 7% = 11.5% or a range of 9.5% to 13.5% with the high-end being more probable.  You also need to consider that the asset included in BIP become more valuable if interest rate stay or become lower as they are more like high-yielding bonds.  This is why BIP has outperformed their targets (returns of 15 - 17% vs. targets of 10 - 14%) by about a 4% premium above the target.  If you include 50% of this return then the returns are 11.5% to 15.5% closer to BAMs returns with the downside protection of the infrastructure assets.  This additional amount is a speculative but reasonable amount (IMO similar to the asset growth assumption for BAM).

 

Packer

 

Thanks Packer, my error was only factoring in organic growth.  I wasn't factoring in M&A which has been very accretive over time.  Their ROIC is 14%, but assuming with lower rates they can only acquire businesses at 12% IRRs in the future and they fund them with equity that costs ~9% (blended for some capital recycling), they earn a 3% spread on ~$1.5B/yr in acquisitions which adds ~3.2% to FFO growth, so if you add that to the 6-9% organic FFO growth target, you get 9-12% before IDRs or 6.75-9% after IDRs, which is at the higher end of their 5-9% distribution growth target.  So I agree with you, this does look interesting, especially given the trend in global interest rates right now.  It's mind boggling that someone would put money in TIPS at 0% when you can buy BIP with a 4.5% current yield + inflation protection + upside from what seems to be very strong capital allocation.

[chrispy]

BBU has had wild price swings since being spun off. Trading close to the same price it did during the sell off in December

[vince]

BBU has had wild price swings since being spun off. Trading close to the same price it did during the sell off in December

 

Anyone care to share an investment summary of BBU, including what it's earning power is likely to be 5 years out?  I don't spend much time looking at the partnerships but the BBU model is very interesting IMO.  Would love to know some of the critical metrics/drivers to focus on before digging in to save some time.

[John Hjorth]

Anyone care to share an investment summary of BBU, including what it's earning power is likely to be 5 years out?  I don't spend much time looking at the partnerships but the BBU model is very interesting IMO.  Would love to know some of the critical metrics/drivers to focus on before digging in to save some time.

 

To me, a bit funny, vince,

 

What should be your basis for estimating earnings power five years from now for a PE entity? [To me, there is no way for you to estimate it.]

 

[peterHK]

Anyone care to share an investment summary of BBU, including what it's earning power is likely to be 5 years out?  I don't spend much time looking at the partnerships but the BBU model is very interesting IMO.  Would love to know some of the critical metrics/drivers to focus on before digging in to save some time.

 

To me, a bit funny, vince,

 

What should be your basis for estimating earnings power five years from now for a PE entity? [To me, there is no way for you to estimate it.]

 

Take the current businesses and figure it out. It's the best you can do. Over and above that you can add a platform value if you wish, but I'd argue net of fees it's safer to assume there is no platform value here.

[vince]

Anyone care to share an investment summary of BBU, including what it's earning power is likely to be 5 years out?  I don't spend much time looking at the partnerships but the BBU model is very interesting IMO.  Would love to know some of the critical metrics/drivers to focus on before digging in to save some time.

 

To me, a bit funny, vince,

 

What should be your basis for estimating earnings power five years from now for a PE entity? [To me, there is no way for you to estimate it.]

 

Take the current businesses and figure it out. It's the best you can do. Over and above that you can add a platform value if you wish, but I'd argue net of fees it's safer to assume there is no platform value here.

 

My bad, didn't think about it before asking. 

[John Hjorth]

The Economist - Finance and Economics [August 29^th 2019] : Tower grab : How a Canadian firm has taken on Wall Street's private-equity titans.

[John Hjorth]

Financial Times - Opinion FTfm [August 30^th 2019] : Brookfield’s $8.4bn railroad deal prompts questions over its record.

[villainx]

Financial Times - Opinion FTfm [August 30^th 2019] : Brookfield’s $8.4bn railroad deal prompts questions over its record.

 

Anything meaty in the opinion piece?  I saw it bullet pointed in a short Seeking Alpha article, suggesting that BAM or BIP was trying to short cut a regulatory review.  But there wasn't enough in the summary to show real harm or point. 

[ValueMaven]

Anyone have any thoughts on the investor day?  Looks like they are creating another structure for the renewables business 

[villainx]

Anyone have any thoughts on the investor day?  Looks like they are creating another structure for the renewables business

 

Similar to what they are doing with BIP.

[John Hjorth]

Financial Times - Opinion FTfm [August 30^th 2019] : Brookfield’s $8.4bn railroad deal prompts questions over its record.

 

Anything meaty in the opinion piece?  I saw it bullet pointed in a short Seeking Alpha article, suggesting that BAM or BIP was trying to short cut a regulatory review.  But there wasn't enough in the summary to show real harm or point.

 

I'm sorry for a late reply here, villainx,

 

The article was certainly not positive on the matter at hand, and what you read on SA pretty much summed it up. It appears as this stuff got no traction in the press. I think I got access to the full article by clicking on a FT tweet.

[John Hjorth]

As per suggestion by villainx here :

 

I have been sitting on the sideline waiting for a good entry point. I am wondering what the forecasts you have for unappreciated profits in the future.

 

Specifically, did you get the sense that they might be hiding any plans to profit at the expense of minority shareholders or minority unit holders? That is clearly where the future lies for some of their sub-managers. For some of these managers they don't have a chance of making their numbers and getting their bonuses they have grown accustomed to through new investment opportunities, so takeunders are their best opportunities. Anyone have a sense of the future profitability of their take-under opportunity set?

 

I suggest throwing your question to BAM in investment ideas.

 

Read the Footnotes,

 

Maybe I may have misunderstood your post quoted above, but the way I read it, I perceive the whole incentive situation materially different than you.

 

To me, there is no risk of being taken under by investing in BAM directly [i consider BAM a controlled entity] or by investing in the listed LPs [bPY, BEP, BIP & BBU]. But there's a risk of being taken under, if you invest alongside the listed LPs. GGP, Teekay & Westinghouse are real examples of this.

 

It has been discussed in this topic before.

[Packer16]

I depends upon how much you can differentiate how you treat fellow shareholders vs. those who invest in your funds.  This line has historically been enforced but when new generations of managers take the helm these lines may become more fuzzy.  I think the lines are crossed more in distress versus other areas as in most areas of investing cooperation gets you more than taking.  Cooperation in distress may lead to sub-optimal short-term returns and thus the mindset is different than in more cooperative areas of investing.  I would like it if they treat fellow shareholders the same as they treat investors in their funds so you know there no way that they would hose their investors.  The question IMO is whether the distressed mindset will become predominate at Brookfield.  You can see this mindset at BBU & to some extent at BPY.  If that is the case, I would not be surprised to see them take BPY private especially if BAM gets more cash & cannot find a place to deploy it.

 

Packer

[Read the Footnotes]

Thank you both for your earnest answers. I was actually trying to joke about the propensity of managers at the subs to treat minority shareholders poorly. I guess I was a little too subtle.

 

Packer's comments seem pretty close to my actual thinking on the subject.

 

As per suggestion by villainx here :

 

I have been sitting on the sideline waiting for a good entry point. I am wondering what the forecasts you have for unappreciated profits in the future.

 

Specifically, did you get the sense that they might be hiding any plans to profit at the expense of minority shareholders or minority unit holders? That is clearly where the future lies for some of their sub-managers. For some of these managers they don't have a chance of making their numbers and getting their bonuses they have grown accustomed to through new investment opportunities, so takeunders are their best opportunities. Anyone have a sense of the future profitability of their take-under opportunity set?

 

I suggest throwing your question to BAM in investment ideas.

 

Read the Footnotes,

 

Maybe I may have misunderstood your post quoted above, but the way I read it, I perceive the whole incentive situation materially different than you.

 

To me, there is no risk of being taken under by investing in BAM directly [i consider BAM a controlled entity] or by investing in the listed LPs [bPY, BEP, BIP & BBU]. But there's a risk of being taken under, if you invest alongside the listed LPs. GGP, Teekay & Westinghouse are real examples of this.

 

It has been discussed in this topic before.

[John Hjorth]

After some heavily editing, weeding out the text from villainx and I, I get this :

 

Thank you both for your earnest answers. I was actually trying to joke about the propensity of managers at the subs to treat minority shareholders poorly. I guess I was a little too subtle.

 

Packer's comments seem pretty close to my actual thinking on the subject.

 

I have been sitting on the sideline waiting for a good entry point. I am wondering what the forecasts you have for unappreciated profits in the future.

 

Specifically, did you get the sense that they might be hiding any plans to profit at the expense of minority shareholders or minority unit holders? That is clearly where the future lies for some of their sub-managers. For some of these managers they don't have a chance of making their numbers and getting their bonuses they have grown accustomed to through new investment opportunities, so takeunders are their best opportunities. Anyone have a sense of the future profitability of their take-under opportunity set?

 

Read the Footnotes,

 

Joking or not, your post provides a good basis for further constructive discussion.

 

- - - o 0 o - - -

 

Entry point : I can't imagine a more frustrating stock for the last period in time to be on the sideline with. BAM on NYSE is up ~41 percent YTD. Personally, I'm up even more, because of currency gains. Personally, I haven't added for months now, but I want to. So basically, we're in the same boat on that going forward.

 

The question is : Has the stock got ahead of the economic performance of the company? -Personally, I don't know. On the Brookfield 2019 Investor Day yesterday Mr. Flatt released a calculation indicating an actual discount of 22 percent ["Plan value" compared to market price].

 

Again, personally, next I'll try to pick up some more at the end of October, hoping for some volatility, perhaps also non-rational market behavior related to Brexit, naturally depending on how that soap opera plays out from here.

 

-This is not traditional, old fashion value investing, it's GARP investing.

[villainx]

On the Brookfield 2019 Investor Day yesterday Mr. Flatt released a calculation indicating an actual discount of 22 percent ["Plan value" compared to market price].

 

I actually made a note during investors say on how some folks here* were already dubious of the last plan value forecast, and Flatt just ups the ante by increasing it.  And possibly even adding even further to the increase with a low interest rate spike.

 

I half considered him just using investor day to troll some on this thread. 

 

(*this is not to say that anyone here is right or wrong, only that a discussion - in fact - took place on BAM's forecast.)