Brookfield Asset Management: A Strong Total Return Play

BAM - BrookefieldWhen thinking about the iconic Canadian companies, Brookfield Asset Management TSE:BAM.ANYSE:BAM certainly comes to mind.

They are the world’s leading alternative asset manager, specializing in the management of real assets. With 115 years of experience managing investor money and more than US$250 billion of current AUM, this company has an impressive size and scope that is difficult to fully understand.

Brookfield also has many of the characteristics of a solid dividend investment.

This post will analyze the investment prospects of Brookfield Asset Management (and listed subsidiaries) in detail.

BAM – Business Overview

Aside from their primary asset management business, BAM is also a part owner of four separately listed entities bearing the Brookfield name. These entities are:

  • Brookfield Renewable Partners (TSE:BEP.UN, NYSE:BEP)
  • Brookfield Infrastructure Partners TSE:BIP.UNNYSE:BIP
  • Brookfield Property Partners TSE:BPY.UNNYSE:BPY
  • Brookfield Business Partners (TSE:BBU.UN, NYSE:BBU)

BAM owns a significant stake in each of the separately listed entities, in accordance with the following diagram:

BAM - Company Structure
Source: Brookfield Asset Management Investor Presentation, slide 20

For Brookfield, listing these entities separately on the TSX and NYSE has two main advantages.

First of all, it grants Brookfield access to a new pool of capital. Certain investor may not want to purchase BAM shares directly, but would be very willing to bet on the growing infrastructure movement (through Brookfield Infrastructure Partners) or the transformation to sustainable energy (through Brookfield Renewable Partners).

Investors also benefit from the increased transparency and regulatory scrutiny of having BAM invested in listed securities. Each listed entity is required to make regulatory filings with the SEC, which helps investors understand the business (a long-time complaint of BAM investors was the unnecessary complexity of their business model, which is now rectified).

A massive proportion (85%) of BAM’s capital is invested in these listed securities.

BAM - Business Ratios
Source: Brookfield Asset Management Investor Presentation, slide 57

I will now briefly outline the business operations of each of these listed entities

BEP – Brookfield Renewable Partners

Brookfield Renewable Energy Partners (TSE:BEP.UN, NYSE:BEP) is one of the largest pure-play renewable energy businesses in the world. They have ~10,700 MW of installed energy generation capacity and a market cap of ~US$9 billion.

BEP - Business Assets
Source: Brookfield Renewable Partners Investor Relations

Looking forward, BEP is poised to benefit from some favorable industry dynamics.

Most important is the global transition from fossil fuels to renewable energy. Many consumers are concerned with the damage that fossils fuels have on our environment. This has spilled over to the world of investment management as well – more than $5.2 trillion of investment funds have committed to divesting from fossil fuel investments.

With their proven track record, BEP should continue to be a leader in this growing industry.

BIP – Brookfield Infrastructure Partners

 Brookfield Infrastructure Partners TSE:BIP.UNNYSE:BIP owns and operates a globally diversified portfolio of high-quality infrastructure assets, generating sustainable and growing distributions for investors.

Their asset portfolio includes utilities, energy, telecommunications, and transport infrastructure of high quality with stable cash flow profiles. Brookfield’s access to capital and expertise in this industry gives them a distinct competitive advantage when transacting in this illiquid market.

Of all of the listed entities in the Brookfield family of companies, BIP has had the best long-term track record of creating value for shareholders.

BIP Unit Performance
Source: Brookfield Infrastructure Partners Investor Fact Sheet

Total returns of 18% and 23% (for the NYSE and TSX respectively) are very impressive.

The infrastructure industry is also well-poised to grow due to favorable debt dynamics. Government balance sheets are highly leveraged, perhaps more so than ever before. Because of this, sovereign entities are looking to deleverage by selling assets.

BIP will likely be the counterparty on many of these transactions, helping them to grow their portfolio of quality real estate assets.

Because of this trend, BIP investors should continue to be rewarded for years to come. 

BPY – Brookfield Property Partners

Brookfield Property Partners TSE:BPY.UNNYSE:BPY provides investors with exposure to the real estate markets, and the ability to invest with one of the most successful investors in real estate through the public equity markets.

The size and scope of BPY is very impressive. The security has $145 billion of AUM and a very globalized operations base.

BAM Global Reach
Source: Brookfield Property Partners Investor Presentation, slide 7

For investors looking for exposure to the real estate industry, BPY offers the opportunity to invest with the experience and expertise of Brookfield. 

BBU – Brookfield Business Partners

Brookfield Business Partners (TSE:BBU.UN, NYSE:BBU) is the newest listed entity among the Brookfield family of companies.

In May, Brookfield Asset Management announced that it would be spinning of BBU. BAM shareholders would receive 1 share of BBU for every 50 shares of BAM, and cash would be received in lieu of any fractional ownership. Shares were deposited into my brokerage account on June 20th, 2016.

BBU’s operations are divided into two segments: Business Services (subdivided into Construction Services and Other Business Services) and Industrials (subdivided into Energy and Other Industrials).

BBU - Brookfield Business Partners
Source: Brookfield Business Partners Investor Presentation, slide 6

While this entity is still rather new, it is led by Cyrus Madon – a longtime Brookfield executive. This security will likely provide substantial upside for investors who decide to continue holding the security.

BAM – Investment Prospects

Now that we have a sense of the business operations of Brookfield Asset Management and its listed subsidiaries, I will now go on to explain the company’s investment prospects. My investment thesis is centered around the following points:

  • Growth in Assets Due To Industry Dynamics
  • Geographic Diversification
  • An Asset-Light Business Model
  • Excellent Management Team

Growth In Assets Due To Industry Dynamics

Now more than ever, BAM is experiencing explosive growth in their fee-bearing capital. There are two primary drivers behind this growth.

First of all, institutional investors are increasingly seeking out alternative asset classes to boost their investment returns. We live in a world where the 10-year US government bond yield is less than 2.5% and the S&P 500 is trading well above its historical averages. Returns in traditional asset classes like stocks and bonds are expected to be subdued in the near future because of this, which leads investors to search for alternative sources of alpha.

Secondly, Brookfield remains the manager of choice when it comes to real assets. They are the first name that comes to mind for many institutional investors who are looking for exposure to the world of real assets.

Overall, Brookfield expects substantial growth in the allocation to real assets over time.

BAM - Investment Prospects
Source: Brookfield Asset Management Investor Presentation, slide 17

All of this led to Brookfield reported record fee-bearing capital of $111 billion at the end of Q3, up 23% from the year previous. 23% annual growth is very impressive and will absolutely reward investors over the long run.

Geographic Diversification

Brookfield operates a tremendously diverse business model. They own high-quality real assets across the globe.

Consider the following diagram for an example of this diversification.

BAM - Geographical diversification
Source: Brookfield Asset Management Corporate Profile

This geographic diversification insulates BAM from any regional economic downturns and benefits the business on a long-term basis. As an investor, this is very nice to see. 

An Asset-Light Business Model

Brookfield Asset Management’s business model allows them to skillfully employ leverage to produce investment returns. This results in an asset-light business model that allows BAM to “punch above their weight,” so to speak.

Say BAM wants to purchase in full a $5 billion water dam for its BEP subsidiary. Rather than having to commit $5 billion of its own equity via cash or issuing shares (and diluting current investors), BAM can issue debt or raise cash from existing or new investors.

Historically, they have had no problem raising capital, growing their total AUM at a CAGR of 11% in recent years.

BAM - Asset under Management
Source: Brookfield Asset Management Investor Presentation, slide 10

This gives them significant purchasing power when attractive deals are presented to them.

Excellent Management Team

Given their track record, it is no surprise that Brookfield has a skilled management team.

This starts at the top with Bruce Flatt, the Chief Executive Officer of Brookfield Asset Management. He has held this role since 2002, and investors have happily watched the company’s stock appreciated more than 1000% since.

The management of BAM is value investors at heart. They have three key characteristics that help them to stand out from their competitors:

  1. A long-term orientation, which they often speak about in interviews and company conference calls.
  2. The ability to raise AUM at a rapid rate via their listed entities.
  3. Their willingness to invest a sizeable amount of capital alongside their investors.

For investors looking to learn more about Brookfield’s investment philosophy, I encourage you to read this insightful interview with CEO Bruce Flatt.

I am confident that BAM’s management team will succeed in leading the company in the times ahead.

Final Thoughts 

Brookfield Asset Management has many of the characteristics of a solid long-term dividend growth investment.

While their current yield of ~1.5% isn’t the largest, they have a proven track record of total returns, delivering total returns of 1000%+ since 2002. They also have a growing base of fee-bearing capital and a strong pipeline of future opportunities.

BAM is definitely a buy in my books.

Investors who desire higher yielding investments but still want exposure to Brookfield’s management team can also choose to purchase shares of listed subsidiaries BEP or BIP (with distribution yields of ~6% and ~4.5%, respectively).

Disclosure: Financial Canadian is long BAM.A, BEP.UN, and BIP.UN.


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