BAM - Brookfield Asset Management

[John Hjorth]

.

[racemize]

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.)

 

I've been tracking the 5 year projections vs reality for a while now.  It is interesting.

 

Generally, the Asset Manger outperforms the predictions and the invested capital lags.  A primary reason the invested capital lags is that IFRS value of BPY has not been stellar.

 

Here is an example.  The 2014 investor day projected for 2019:

$44 billion net capital

$1.565 annualized fee+carry

"plan" value of: $70.16

 

2019 YTD is:

$33 billion net capital

$2.23 annualized fee+carry

"plan" value of: $66

 

Another interesting note:  This is the highest projected growth in plan value (ignoring the price of BAM) yet.  17% per annum.

 

Personally, I prefer BAM to trade at a discount to plan value.  Makes capital allocation tools more effective.

[no_free_lunch]

Thanks for the notes racemize.  I am concerend that maybe those two numbers can't always diverge.  Another way to look at it, I wonder if the so-so returns of the stubs will allow them to continue to grow the AM business as they have.  It is still my second biggest position but I am looking for other investments to redeploy some of that capital.

[peterHK]

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.)

 

I've been tracking the 5 year projections vs reality for a while now.  It is interesting.

 

Generally, the Asset Manger outperforms the predictions and the invested capital lags.  A primary reason the invested capital lags is that IFRS value of BPY has not been stellar.

 

Here is an example.  The 2014 investor day projected for 2019:

$44 billion net capital

$1.565 annualized fee+carry

"plan" value of: $70.16

 

2019 YTD is:

$33 billion net capital

$2.23 annualized fee+carry

"plan" value of: $66

 

Another interesting note:  This is the highest projected growth in plan value (ignoring the price of BAM) yet.  17% per annum.

 

Personally, I prefer BAM to trade at a discount to plan value.  Makes capital allocation tools more effective.

 

I think what's underappreciated is that the asset manager should trade at a higher multiples than any of the LP's, so the growth in the asset manager is accretive to BAM's valuation over time.

[Packer16]

One issue IMO here is complexity.  Combining best in class assets like BIP & the AM business with more "commodity" type assets (others can do this & there are not obvious advantages versus other managers) in BPY, BEP and BBU, you dilute 2 great businesses (BIP and the AM business) with 3 less great businesses (BPY, BEP & BBU).  With all these asset together, IMO I do not think it is realistic to expect the market to value this package close to FV unless there is some unwinding of this package.  From my observation, this unwinding is not in the cards today so the discount will persist. 

 

Packer

[ValueMaven]

complexity and leverage are BAM's biggest issues ...

 

With that said, I look like a loser selling the stock at $51 ...

 

Also, has anyone noticed that over the last 6M's BAM's correlation to low vol factor has materially increased ...

 

Watching from the sidelines - looking for a pullback to get back in

[peterHK]

One issue IMO here is complexity.  Combining best in class assets like BIP & the AM business with more "commodity" type assets (others can do this & there are not obvious advantages versus other managers) in BPY, BEP and BBU, you dilute 2 great businesses (BIP and the AM business) with 3 less great businesses (BPY, BEP & BBU).  With all these asset together, IMO I do not think it is realistic to expect the market to value this package close to FV unless there is some unwinding of this package.  From my observation, this unwinding is not in the cards today so the discount will persist. 

 

Packer

 

If you look into BBU, and BEP, I think you'd find they definitely aren't commodity type assets. Some of the wind/solar yes, but assets like Isagen, Graftech, Westinghouse, Clarios etc. are one of a kind.

 

BPY's assets are one of a kind as well, but the economics of office suck, so even trophy assets like Canary Wharf aren't spectacular.

[Rod]

One issue IMO here is complexity.  Combining best in class assets like BIP & the AM business with more "commodity" type assets (others can do this & there are not obvious advantages versus other managers) in BPY, BEP and BBU, you dilute 2 great businesses (BIP and the AM business) with 3 less great businesses (BPY, BEP & BBU).  With all these asset together, IMO I do not think it is realistic to expect the market to value this package close to FV unless there is some unwinding of this package.  From my observation, this unwinding is not in the cards today so the discount will persist. 

 

Packer

 

Stocks are also commodity type investments in that nobody has a competitive advantage in buying them, but there are still people who manage to outperform on a long term basis. I would say the opportunities to outperform are even greater in real estate. There are plenty of value oriented real estate investors who have outperformed over long periods. Sometimes the edge is just superior capital allocation.

[Packer16]

By commodity asset (I probably used the wrong term here as I was referring to the competitive advantage Brookfield has versus the asset itself) I mean there is little competitive advantage that Brookfield has over other firms.  In the case of PE and real estate, buying cheap is not an advantage that others do not also have.  For BBU, private equity firms like KKR, Fortress or Blackstone can provide similar services the same is true for BPY (there are other good real estate investors out there).  So for those types of assets, you have a top tier firm but there are other top tier firms out there & I would expect the results to mirror other large PE and real estate investment results.  BIP (due to the assets BIP already has) is in a unique strategic position versus other infrastructure providers.  It also has relationships in capital deprived markets, like India & Brazil where they need large amounts of infrastructure capital, which can enhance returns. 

 

Packer

[John Hjorth]

Brookfield Asset Management Inc. Press Release [september 30^th 2019] : Brookfield Asset Management Completes Acquisition Of 61.2% of Oaktree Capital Management.

 

So I suppose we'll see the OAK investment in the BAM group balance sheet EOP 2019Q3 as a one-line consolidation with no P&L effect.

[John Hjorth]

Ostrich Investing - VLOG post [October 1^st 2019] : Brookfield Asset Management ($BAM) shares fully valued at C$70?.

[John Hjorth]

Eric Sprague on SA [October 2^nd 2019] : Brookfield Asset Management Is Firing On All Cylinders.

 

Eric Sprague's writings about Brookfield on SA has always had appeal to me. To me, this piece is on overall basis, but still based on deep and detailed knowledge of the whole system of companies. What he's doing here is to share his thinking about his personal adjustments to the intrinsic value of BAM as represented by BAM itself. We [the BAM investors here on CoBF] should really pursue this overall line of thinking and method, and discuss it actively with each other here.

 

- - - o 0 o - - -

 

"Firing on all cylinders" is a Viking thingy here on CoBF related BAC, btw! [ : - D ]

[jfan]

As a slight aside on the topic of BAM, is their rationale for publicly stating (marketing?) their intrinsic value. This is very similar to how Berkshire (and Wesco used to) discuss how they want people to think about their intrinsic value.

 

I've wonder if there is a more strategic reason for doing so. I wonder if they are capitalizing on the market's psychological tendencies in order to achieve more stability in their share prices. This, in turn, provides them the optionality to buyback their shares as well as use their shares as acquisition currency.

 

Certainly, by stating their plan value, it may anchor market expectations during normal times and give an appearance of transparency that facilitates trust in its shareholder base. (Everything about investing in BAM is really about trust in management, like most asset managers).

 

Anyways, just a random thought I had to get off my mind.

 

 

[John Hjorth]

BAM and its subsidiaries will deliver.  To an extent it is a black box but no more than Berkshire, or Fairfax.  Bruce goes to great lengths to try to explain the company but it is so vast. 

 

With BAM you can see the real assets (actual pictures) and understand them.  You can see how cheaply they get their debt.  You can see how easily they raise equity and money for their funds. 

 

Bruce Flatt and company is the closest thing I can imagine to a 52 year old Buffett which is when Berk. shifted to owning more and more full businesses. 

 

I think the platform they have built over the last 15 years is just hitting the sweet spot.  The fee income or carried interest is growing at a real quip.

 

But do I understand the whole company.  Not a chance.  They have said they will deilver 20% growth going forward for five years based on existing projects and money raises.  This does not even include larger future raisings. 

 

If you were to try and project economic growth areas, outside tech, I would say that BAM is right on target.  Energy, Urbanization, and Infrastructure would be my choices for future growth. 

 

Between BAM and BEP it is my largest position.

 

Jerome,

 

Uccmal wrote the above now almost two years ago. Al's line of thinking is quite similar to yours. I think of it as BAM mitigating/countering the complexity of the structure by providing guidance how to think about intrinsic value of BAM from a structural/methodical valuation point of view. Furthermore & personally, I think Al's post is still spot on.

[John Hjorth]

Eric Sprague on SA [October 2^nd 2019] : Brookfield Asset Management Is Firing On All Cylinders.

 

Eric Sprague's writings about Brookfield on SA has always had appeal to me. To me, this piece is on overall basis, but still based on deep and detailed knowledge of the whole system of companies. What he's doing here is to share his thinking about his personal adjustments to the intrinsic value of BAM as represented by BAM itself. We [the BAM investors here on CoBF] should really pursue this overall line of thinking and method, and discuss it actively with each other here.

 

- - - o 0 o - - -

 

"Firing on all cylinders" is a Viking thingy here on CoBF related BAC, btw! [ : - D ]

 

Instead of repeating myself here, I just choose to use the "Quote" option:

 

Here, yet another [to me] great piece from Eric Sprague [this time, about BEP] on SA :

 

Eric Sprague on SA [October 11^th 2019] : Brookfield Renewable Carefully Examines Risk.

 

What Eric Sprague is covering in this piece is to me true. I may be wrong, but is there anything listed just about similar to BEP with regard to hydro power on this planet? - Personally, I don't know of any [-And - as always - I may be wrong &/or ignorant about that].

[Packer16]

What he fails to mention is the unregulated power business is a poor business.  BEP has been a laggard & IMO will continue to be due to the poor economics of the IPP business.  Just look at the historical carnage here.  Even Brookfield cannot make a poor business generate good returns.  According to the IR material BIP and BEP have the same expected returns but historically, BIP has over delivered but BEP under delivered.  I would rather invest in better businesses, like those in BIP than in the more commodity ones in BEP.

 

Packer

[John Hjorth]

What he fails to mention is the unregulated power business is a poor business. ...

 

Keith,

 

What are you referring to here? - I'm just trying to relate to your stance here.

[Packer16]

A portion of BEPs revenues are based upon receiving market prices for the power it creates.  This is where the risk lies as the long-term price point for power is declining.  In addition for solar the terminal value could be very low as technology is making many cells obsolete.  Another observation is the claim the comps are making high single digit returns & BEP low teens rate of return in my mind says BEP has some high return projects that over time will approach market rates of return.

 

Packer

[muscleman]

A portion of BEPs revenues are based upon receiving market prices for the power it creates.  This is where the risk lies as the long-term price point for power is declining.  In addition for solar the terminal value could be very low as technology is making many cells obsolete.  Another observation is the claim the comps are making high single digit returns & BEP low teens rate of return in my mind says BEP has some high return projects that over time will approach market rates of return.

 

Packer

 

Do you think the same applies to TERP?

 

[John Hjorth]

Thanks, Keith,

 

I then certainly need to study that condition for BEP.

 

Edit :

 

It's described the BEP 2018 Annual Report, p. 34 & 35 in a separate section called "Contract Profile". The description appears quite transparent to me, so each can make up their own mind.

 

More long term, it's naturally a question about what will happen to the energy mix and energy prices the places where BEP operates, i.e. over the next decade or whatever time horizon is applied.

[Packer16]

They have long-term contracts but as you can see less & less of it becomes contracted over time.  The non-contracted part of the revenues stream is closer to IPP pricing which I consider a commodity.  So short-term they have some nice contracts but longer-term is where the risk is IMO.  You just need to look at the IPP competitors to see how bad a business IPP is in NA.

 

Packer

[ValueMaven]

If you had to own 1 one these two asset managers for the next decade who would you rather invest in?

 

BAM vs. BX ... Brookfield vs. Blackstone. 

 

For me it remains BAM.  The story is much more complex here, while Blackstone (c-corp now) is extremely well understood and much more expensive.  Would be interested in others take on this.

[Gregmal]

If you had to own 1 one these two asset managers for the next decade who would you rather invest in?

 

BAM vs. BX ... Brookfield vs. Blackstone. 

 

For me it remains BAM.  The story is much more complex here, while Blackstone (c-corp now) is extremely well understood and much more expensive.  Would be interested in others take on this.

 

Ive long wasted my time investigating the same question. Ive settled on a simple answer. Divide your allocation by two and buy both.

 

The only relevant fundamental info Ive heard against BX is that you aren't exactly aligned with Schwartzman and the original partners through the BX security. But Ive heard many make similar argument with other securities as well. Both are compounding machines capable of being what Berkshire once was.

[StevieV]

If you had to own 1 one these two asset managers for the next decade who would you rather invest in?

 

BAM vs. BX ... Brookfield vs. Blackstone. 

 

For me it remains BAM.  The story is much more complex here, while Blackstone (c-corp now) is extremely well understood and much more expensive.  Would be interested in others take on this.

 

Why do you say that BX is "much more expensive"?  I'm not sure I'd come to the same conclusion.  FWIW, I own both, and I probably don't give the same premium to FRE versus incentive fees as many analyses do.

[ValueMaven]

Bruce Flatt was on CNBC yesterdat w/Ron Barron.  Nothing new - talked about rates and India globally.  Just thought I would mention this to everyone in case u missed it